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Is Iraqi Kurdistan the next Saudi Arabia?
25.6.2009
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June
25, 2009
The
Kurdistan region of Iraq is a geological extension
of the world’s richest petroleum fairway, which
extends from Saudi Arabia to Syria. It is estimated
to have around 45 billion barrels of oil reserves
making it sixth largest in the world, mostly
recently discovered (even excluding Kirkuk and Mosul
which are essentially controlled by the federal
government). Due to geo-political conflicts,www.ekurd.net
the
resources in Kurdistan have been essentially
untapped. Upon the overthrow of Saddam Hussein’s
regime in Iraq, however, Kurdistan began to open
itself to foreign investment (the tapping of the
Kurdistan keg). Currently about 25 companies have
been granted the Profits Sharing Contracts (PSC)
from the Kurdistan Regional Government (KRG). Some
of the publicly traded companies are listed below.
Companies that have made
discoveries and/or are producing
• Addax Petroleum Corporation (AXC CN): Addax has a
45% working interest in Taq Taq, a currently
producing oil field, and another 26.67% interest in
the Sangaw North PSC. Starting June 1st, 2009, Addax
began exporting oil from Taq Taq, a historic event
for Kurdistan.
• DNO (DNO NO): DNO entered into a PSC with the KRG
as early as 2004. It has a 55% working interest in
the producing Tawke field. Just like Addax, DNO was
also granted permission to export oil from its
Kurdistan oilfield.
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Chart 1 PSC Blocks in Kurdistan source WZR company |
•
Heritage Oil (HOIL LN): The company announced a
major oil discovery in early May 2009 with an
estimated oil-in-place of 2.3-4.2 billion barrels.
Pre-production: Large
International E&P Companies
• Talisman Energy (TLM)
• Niko Resources (NKO CN)
• OMV Aktiengesellschaft (OMVKY)
• MOL Magyar Olaj-es Gazipari NyRt (MOL, listed in
Hungary)
• TNK-BP (TNBP, listed in Russia)
• Reliance Industries (500325, listed in India)
Pre-production: Junior E&P
Companies
• Gulf Keystone (GKP LN or GUKYF)
• Sterling Energy (SEY LN)
• HKN Inc. (HKN)
• WesternZagros (WZR CN or WZGRF)
• Vast Exploration (VST CN or VSTFF)
Investment Theme I: M&A
M&A activities involving Kurdistan-related E&P
companies have been heating up over the past several
weeks. After a rumored bidding war among Chinese,
Korean and Indian companies, Addax was acquired by
Sinopec on June 13th with a price tag of around $8.5
billion (including debt), implying a $6.3/boe or CAD
7.3/boe (3P). On June 9th, Heritage Oil announced
its acquisition of Turkish oil company Genel for
$5.5 billion. Genel is the working partner of both
Addax and DNO in Kurdistan. Last time we heard any
meaningful M&A news about Kurdistan assets was back
in 2Q07 when DNO received and subsequently rejected
an unsolicited offer ($700 million) for its
Kurdistan assets from an unidentified international
oil company. Based on DNO’s reserve data as of 2Q07,
the offer represented a valuation of $7.3/boe or CAD
8.3/boe (3P).
The biggest X factor in Kurdistan is actually China.
Recently, China has been very vocal regarding its
concerns of the safety of the US dollar and its
holdings of US treasuries. There are a lot of signs
that China is channeling its gigantic foreign
currency reserves into commodities through overseas
acquisitions. China has a decent track record of
acquiring assets in South America, Africa and the
Middle East where political sensitivity is less of a
barrier than in the developed countries such as
Australia. Additionally,www.hawlati.net
after
China was outmaneuvered and walked away from Rio
Tinto deal, China was left with a $19 billion
additional war chest for overseas acquisitions
(assuming the money is still earmarked for the
original purpose). China is no stranger to Iraqi
oilfields: China National Petroleum Company set its
foot on Iraq in 1997 and has just signed a
development service contract of Al-Ahdab oilfield.
Kurdistan oil assets could be an ideal target for
China though it has shied away from them to avoid
offending Baghdad. Sinopec’s aquisition of Addax
provides anecdotal evidence of a possible strategy
shift. Besides Addax, Niko Resources could also make
an ideal acquisition target for Chinese oil
companies. NKO has a market cap of CAD 3.8 billion,
large enough to be on China’s radar screen, and a
portfolio of assets primarily located in the
developing countries where China seems to have a
diplomatic edge.
Investment Theme II:
Kurdistan Pure Plays
There are only two Kurdistan pure plays in the
Kurdistan universe: WesternZagros and its “mini”
neighbor Vast Exploration. They share many of the
same attractive investment characteristics.
Highly attractive
risk/reward profile.
We believe that the fair value of WZR (click here
for valuation details) is conservatively about
C$3.60, or roughly 2.5X its current price. There are
many cheap lottery tickets in the E&P universe, but
what makes this one unique is its high likelihood of
success. It is hard to make a forecast of VST’s NAV
due to the earlier stage in its exploration efforts.
However, NKO, one of the larger E&P companies in
Canada with a market cap of CAD 3.6 billion, is not
only VST’s business partner (36% working interest)
in the PSC block, but also VST’s largest shareholder
(17% ownership). Combining both, NKO’s actual
working interest in the block is over 42%
(36%+36%*17%). Therefore, buying VST stock is
essentially buying a call option on NKO’s Kurdistan
business or the eventual consolidation into NKO.
High scarcity value.
Kurdistan holds one of the world’s most coveted oil
fields, which up until recently was off limits,
protected from foreign ownership. WZR and VST were
among the first movers, and because they took large
risks as foreign investors at such an early stage,
their potential reward is sky high.
Kurdistan is actually safe.
Kurdistan is no tropical island for the long
distance traveler, but it is arguably a true
“security oasis” within the war-battered Iraq, and
it is ranked “secure” by the US military. Over 20
E&P companies have been operating in the region over
the past several years with no major interruptions,
which makes this a safe haven among prospective
untapped oil reservoirs. Click here for detailed
blog on geo-political issues in Kurdistan region.
“Elephant” potential.
An “elephant” oil field is one whose recoverable
reserves are at least 100 million barrels. According
to the well respected oil and gas consultancy
Sproule and Associates, as of March 31, 2009, WZR’s
exploration block has P90 prospective resources of
1.6 billion barrels. P90, for those unfamiliar with
the industry jargon, refers to reserves that have a
90% certainty of actually being produced. WZR’s
find, if “proved” would count among the 100 largest
producing oil fields in the world. VST’s block is
bordering both the WesternZagros block and the
Heritage Oil (HOIL LN) block,www.ekurd.net
which
are considered among the 2 most promising blocks in
Kurdistan (and in the world for that matter).
Heritage Oil announced a major oil discovery in its
Miran West-1 well early May with estimated
oil-in-place of between 2.3 to 4.2 billion barrels.
In early February 2009, VST started a seismic
acquisition program for a minimum of 350 km of 2D
seismic data. The process will take 4-5 months, and
at its conclusion, VST will be able to generate an
initial reserve estimate for its block – this
creates potentially very market moving news flow
this summer.
Terrific takeout potential.
WZR, although well capitalized for a “junior” oil
exploration company, with $130 million in cash and
no debt, is extremely unlikely to remain independent
long term. Its exploration partner, Talisman Energy
(TLM CN), with $8 billion of revenue and a $16
billion market cap, is better suited to take on this
elephant, and may wish to increase its stake by
acquiring WZR itself. Other large oil companies who
either have been waiting on the sidelines due to
lack of a clear regulatory framework or who already
have small stakes, are undoubtedly eying WZR’s
prized oil fields hungrily. NKO is VST’s exploration
partner and its largest shareholder. The likelihood
that NKO eventually acquires VST in whole is
arguably quite high, which provides another very
direct catalyst.
Disclaimer: The author is long WesternZagros WZR and
Vast Exploration.
Copyright, respective
author or news agency,
seekingalpha com
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