============lia=m^oh=i^kb=`^mfq^i H =

Transcription

1 liam^ohi^kb`^mfq^i H LENI GAS & OIL PLC 1.33p Partnership with Range Resources in Trinidad 26 January 2012 Recommendation BUY Sector: Oil & Gas Exchange & Ticker: AIM: LGO Shares in issue: 1,259.5m Fully diluted equity: 1,440.6m Market cap: 16.8m Indicative target price: 4.5p ANALYST: CORPORATE BROKING: Barney Gray +44(0) [email protected] Luca Tenuta +44(0) [email protected] Leni Gas & Oil (LGO) has established a partnership with Range Resources whereby the companies will jointly develop their interests in the Eastern Fields Area onshore Trinidad. In a binding Heads of Agreement (HOA), both parties have agreed to jointly develop their interests in the Goudron (LGO: 100%) and the Beach Marcelle (Range: 100%) fields. Under the HOA terms, Range will acquire 30% of Goudron for US$4.0m at completion of the deal. Range will increase its interest in Goudron to 50% for a further US$4.0m during the first 12 months after completion. LGO will operate the Goudron field during an initial well workover phase. However, upon Range acquiring 50% of Goudron, Range will become operator and subsequently recover its investment of US$8.0m through an accelerated return of 75% of the revenue interest until its initial investment is recovered. In return for this, LGO will have the option to acquire a 15% interest in the Beach Marcelle waterflood project by contributing a 22.5% share of the development costs up to a ceiling of US$7.0m. We believe that the deal makes sense given that Goudron is immediately adjacent to Beach Marcelle and although nearly five times larger in area; it has had fewer wells drilled upon it and considerably less cumulative production. Goudron holds estimated P2 reserves of 8.0mmbbls. However, P3 reserves are estimated to be 21.8 mmbbls representing significant upside. An initial work programme on Goudron will consist of well workovers and infill wells in order to bring production up to bopd in the short term. This is expected to be funded by the initial consideration of US$8.0m in the agreement. The partners anticipate that additional infill drilling and hydraulic fracturing of wells could increase production to 4,000 bopd as P3 reserves are brought into play over the longer term. We believe that this is a great deal for LGO. For a modest sum, the company has secured an option to acquire an interest in Beach Marcelle at a significant discount to our valuation of the field. In addition, the tie up with Range on Goudron attributes a preliminary valuation to LGO s eventual interest given that initial development funding will be in place. Aside from LGO s assets in the US, Spain and southwest Trinidad, our preliminary estimates indicate that this deal could be worth over $103m to LGO, equivalent to 4.5p per share on a fully diluted basis. A marketing communication from Old Park Lane Capital, research consultant to Leni Gas & Oil plc liam^ohi^kb`^mfq^imi`qv_bohbibvpnr^obiilkalktngr^wqwhqqemfomtqvpunuucwhqqemfomtqvpprtstk

2 LGO and Range form partnership in Trinidad Leni Gas & Oil (LGO) has formed a partnership with Range Resources (AIM: RRL, ASX: RRS)) to jointly develop their interests in the Eastern Fields Area in the onshore region of southern Trinidad. This area includes LGO s Goudron field (LGO: 100%) and Range s Beach Marcelle field (Range: 100%). In a binding Heads of Agreement (HOA), LGO and Range have agreed terms subject to full legal and technical due diligence. The key conditions of the agreement include: The passing of shareholder resolutions as may be necessary by LGO and Range The execution of the formal agreement by both parties LGO acquiring the Goudron Field IPSC (Incremental Production Service Contract) through its vehicle GEPL (Goudron E&P Limited) LGO and GEPL procuring any necessary third party consents to the transaction Receipt of all necessary ministerial, government and regulatory approvals for the transaction Receipt of all applicable waivers of any pre-emption rights in respect of the assigned interests GEPL is a wholly owned subsidiary of LGO and holds the exclusive rights to purchase the existing IPSC for the Goudron Field. The assignment of the Goudron IPSC requires approval by the Trinidad and Tobago Ministry of Energy and Energy Affairs and the partners expect to conclude this process during the next few months. Range holds its 100% interest in the Beach Marcelle IPSC through its subsidiary Trincan Oil Limited, where the redevelopment of the existing field production by means of a water-flood has been approved. Key terms of the agreement Under the terms of the HOA, Range will acquire a 30% interest in Goudron E&P Limited (GEPL) in return for contributing US$4.0m upon completion of the deal. For a further US$4.0m during the first 12 months following completion, Range will increase its holding in GEPL to 50%. LGO will operate the Goudron field during the initial workover phase. However, if Range exercises its option to acquire a total of 50% in GEPL, Range will become operator during the infill drilling and water flood phases. Additionally, Range will obtain an accelerated return through 75% of the revenue interest until their initial investment of US$8.0m is recovered. In return for this, LGO will have the option to acquire a 15% interest in the Beach Marcelle waterflood project by contributing a 22.5% share of the development costs up to US$7.0m. Range and LGO have also agreed to work together to optimise and extend their joint interests in the Eastern Fields Area in Trinidad. The Goudron field LGO's Goudron Field was originally developed by Texaco with over 150 wells drilled to date. The field holds proven and probable reserves of 8.0mmbbls. However, P3 reserves are 21.8 mmbbls representing significant upside particularly in the event of a waterflood programme. We estimate that cumulative production to date is only 5mmbbls of oil. am^ohi^kb`^mfq^imi`rrm^ohi^kbiilkalktnhnk^qkhqqemfomtqvpunuuckhqqemfomtqvpprtstk m^dbo

3 The licence covers an area of 2,875 acres and produces from the Goudron and Gros Morne (Cruse equivalent) sandstone formations at depths between 300 and 3,500 feet. Current production on the licence averages below 100 bopd. Near term work plan for Goudron An initial work programme on the Goudron field will consist of existing well workovers and selected infill wells in order to bring production up to bopd. This is expected to be funded by the initial consideration of US$8.0m paid by Range in the agreement. The partners anticipate that additional infill drilling and hydraulic fracturing of wells is expected to increase production to as high as 4,000 bopd. There is also potential upside in deeper reservoirs and the application of secondary recovery techniques, such as a waterflood, as is already planned for Beach Marcelle. Production from Goudron will commence on assignment of the IPSC and the partners expect output to increase appreciably over the first six months of operations. Location of LGO s and Range s assets in the Trinidad Eastern Fields Area Source: Leni Gas & Oil plc am^ohi^kb`^mfq^imi`rrm^ohi^kbiilkalktnhnk^qkhqqemfomtqvpunuuckhqqemfomtqvpprtstk m^dbp

4 The Beach Marcelle field Beach Marcelle is a small licence located immediately east and adjacent to Goudron. It covers an area of only 624 acres (0.975 sq miles), approximately one fifth the size of the Goudron licence. However, it is a considerably more intensively drilled field with approximately 230 wells drilled on the block to date. This represents an average of one well per 2.7 acres compared to one well per 19 acres on Goudron. Like Goudron, Beach Marcelle was originally developed by Texaco and it is estimated that over 30mmbbls of oil has already been produced from the field from depths ranging down to 5,000ft. At present, production from Beach Marcelle is negligible at less than 20bbls per day. Beach Marcelle contains proven (P1) reserves of 12.8 mmbbls believed to be recoverable through secondary production techniques involving a field-wide waterflood of the producing Forest and Cruse age sandstones. Range has committed to expenditure of US$12m over the first months of the project which will commence in the early part of the current year. Range expects production from Beach Marcelle to commence in 2013 and to peak at a level of approximately 5,000 bopd in Access to rigs The partnership has excellent access to rigs with which to progress its drilling programmes. As stated in previous reports, Range owns and operates a local drilling company which counts five onshore rigs, three production/workover rigs and a swabbing unit amongst its hardware. LGO also has access to five further work-over rigs through its association with Altech Services Limited, a local drilling company. A good deal for Leni Gas & Oil We believe that this is a very good deal for LGO. Primarily, it provides the company with the means to develop its primary production asset in Trinidad whilst retaining a material interest in the property over the long term. Although Range will derive a disproportionate share of revenue in the early stages of production in order to recoup its US$8.0m of development expenditure, we anticipate that this phase will last less than 12 months even assuming average production of only 400bopd over that time at current oil prices. Valuation indicators The proposed deal with Range provides LGO with the option to acquire an interest in the highly promising Beach Marcelle waterflood project on very attractive terms. We have previously attributed an NPV of US$255m to Beach Marcelle implying a value of US$38.25m for a LGO s 15% option stake. Given that LGO s outlay will be only US$7.0m towards development costs, we feel that this represents very good business for the company. Aside from newfound means to develop the Goudron Field, LGO also has the potential to generate efficiencies through increased utilisation of Range s wholly owned drilling company which has five onshore rigs, three production/workover rigs and a swabbing unit. am^ohi^kb`^mfq^imi`rrm^ohi^kbiilkalktnhnk^qkhqqemfomtqvpunuuckhqqemfomtqvpprtstk m^dbq

5 We believe that LGO s eventual 50% interest in Goudron could be worth at least US$72m based on an NPV per barrel of approximately US$20 for the company s share of P2 reserves. This number is derived from our valuation per barrel for Beach Marcelle reserves in our note on Range Resources entitled Beach Marcelle reserves boost target price dated 5 December Our basic valuation also crudely accounts for the recoupment of Range s initial US$8.0m investment over an as yet unspecified timescale. We have not discounted this value at this stage given that it is likely to be recovered over a relatively short period of time. The upside potential of LGO s residual interest in Goudron could be up to US$218m for a 50% interest in the P3 reserves based on the same assumptions. Given that Goudron has a considerably lower concentration of wells drilled on it compared to Beach Marcelle, we are confident that a programme of infill drilling, well workovers and waterflooding is likely to have an immediate impact on reserve estimates and bring much of the P3 reserve into P2 and P1 categories within a relatively short time period. Indicative conclusion We have calculated that this deal could be worth approximately US$103m net to LGO. This is equivalent to 4.5p per share on a fully diluted basis. Given that LGO also has producing assets in the US Gulf of Mexico and Spain which we have not considered at this early stage of our analysis, it is clear that the current share price has been factoring in LGO s perceived lack of development options in southeast Trinidad until now. Indicative valuation for LGO s Eastern Fields Area, Trinidad Item US$m m Eventual 50% interest in Goudron field US$80.0m 50.0m Less Range development costs recovered (US$8.0m) ( 5.0m) Option on 15% of Beach Marcelle US38.3m 23.9m Less option price (US$7.0m) ( 4.4m) Indicative value US$103.3m 64.5m No. of shares in issue Fully diluted equity 1,259.5m 1,440.6m Value per share (basic) 5.1p Value per share (fully diluted) 4.5p Source: OPL estimates Longer term synergies Both Range and LGO hold additional interests in Trinidad with future potential for cooperation. Range holds 100% interests in the Morne Diablo and South Quarry fields where it is engaged in a 21 well drilling programme to expand production and explore the deeper Lower Cruse potential in these fields. Also, LGO holds a significant exploration acreage position in the Cedros Peninsular in southwest Trinidad where the company participates in the Icacos Field (LGO: 50%). LGO also has an option to farm-in to the North Moruga Field and associated exploration leases where it will earn up to a 49% interest and where drilling is hoped to commence in am^ohi^kb`^mfq^imi`rrm^ohi^kbiilkalktnhnk^qkhqqemfomtqvpunuuckhqqemfomtqvpprtstk m^dbr

6 DISCLOSURES AND RISK WARNING The recommendation system used for this research is as follows. We expect the indicated target price relative to the FT All Share Index to be achieved with 12 months on the date of this publication. A Hold indicates expected performance relative to this index of +/-10%, a Buy indicates expected outperformance of >10% and a Sell indicates underperformance of >10%. This Marketing Communication is provided for information purposes only. It does not constitute a personal recommendation and should not be construed as an offer or solicitation for investment. This publication is not intended to be an offer to buy or sell any securities of any of the companies referred to herein and any opinions expressed are subject to change without notice. Recommendations may not be suitable for all recipients of this publication and if you have any doubt you should seek advice from a financial adviser. Except for any liability owed under FSMA 2000 or the regulatory system, Old Park Lane Capital plc (OPL) accepts no liability for any losses which may be incurred by the client acting on such recommendation. Companies mentioned in this research/document may be corporate finance clients of OPL. The analyst(s) responsible for this document may receive compensation based either directly or indirectly on profits derived from fund management activities. OPL its directors and employees may have a position or holding in any of the above investments or in a related investment, therefore OPL is not holding out this research as being impartial or objective as set out in our conflicts of interest policy and procedures. This document has been prepared, approved and issued by OPL on the basis of publicly available information, internally developed data and other sources believed to be reliable. All reasonable care has been taken to ensure the facts stated and opinions given are fair and not knowingly misleading in whole or part. Prices and factual details are deemed to be correct at the time of publication. However, OPL offers no guarantee as to the accuracy or completeness of any such information or data. The views expressed are as at the date stated and are subject to change at any time There is an extra risk of losing money when shares are bought in some smaller companies including aim, sometimes alternatively known as penny shares. There can be a big difference between the buying price and the selling price of these shares. If they have to be sold immediately, you may get back much less than you paid for them. The price may change quickly and it may go down as well as up. Past performance of investments referred to above is not necessarily a guide to future performance and the value of the investment may go down as well as up. Some investments are not readily realisable and investors may have difficulty in selling or realising the investment or obtaining reliable information on the value or risks associated with the investment. This publication may not be reproduced or copies circulated without authority. Old Park Lane Capital plc is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority. (FSA no ). Registered address: 49 Berkeley Square, Mayfair, London, W1J 5AZ. am^ohi^kb`^mfq^imi`rrm^ohi^kbiilkalktnhnk^qkhqqemfomtqvpunuuckhqqemfomtqvpprtstk m^dbs