ENI

This links directly with what I have been saying about GALP, but as ENI is the biggest single benefactor of what is being discovered offshore Mozambique, here is an update from the ENI angle.

The Rovuma File: ENI, Galp, Anadarko & Cove Energy

Facts so far

• During 2010/11 a consortium led by Anadarko drilled a series of six wells in Area 1, offshore Mozambique: all six wells encountered high quality gas bearing sands, one with shows of oil. During H2 2011 it has become increasingly clear that the scale of the gas find was globally significant, with Anadarko making an initial recoverable reserve estimate of 6tn cu feet (1bn boe) on the back of the first appraisal well of one of the discoveries. By the end of November that estimate had been increased to a range of 15-30tcf (2.7-5.4 bn boe).
• Alongside the Area-1 licence area is Area-4, with a consortium led by ENI of Italy.  This consortium completed its first well in November and announced a gas discovery in an exploration well (named Mamba South) that lies 400m to the east of one of the main Anadarko finds (Langosta).  The Anadarko well had encountered a massive 550 feet of net pay in the Oligocene and upper Eocene sands.  The ENI discovery, less than two kilometres due east of the Langosta well intercepted 690 feet of pay-zone (gas-rich sands) in the Oligocene strata and ENI stated that their estimate of scale was in the order of 15 tcf (2.7 bn boe).  ENI continued to drill and just one week later announced a further discovery deeper in the same well, with 315 feet of pay-zone in the Eocene sands.  The company promptly increased its initial recoverable gas-in-place estimate by another 7.5tcf to 22.5tcf i.e. 4 billion Boe. 
• Both consortium leaders have acknowledged the continuity of these discoveries: that is to say the sands discovered in the Lagosta well run through to the sands in the Mamba South well.  Combining the two zones makes an overall recoverable gas find of almost 50 tcf and suggests that the Mozambique field is just short of being in the top-10 gas fields in terms of volume, globally.

• The two maps show the co-joined field.  The upper left-hand corner of the seismic chart (right hand chart) shows the initial discovery (Windjammer and slightly to the north east of it the Barquentine discovery).  Sixteen miles to the south lies the Langosta-1 well and just its northeast - the Mamba South well.  The important issue with these two maps is that they show clearly that the larger extent and volume is apparently in Area-4, the ENI block.  In geological terms we are talking about turbidite fans that fall from north northwest to south southeast and from the data given by ENI seem to deepen from west to east.  This implies that in volumetric terms that the Area-4 field will end up being considerably larger than Anadarko’s projected 15-30 tcf of recoverable gas.  Both consortiums have started the process to declare commerciality.  ENI has now spudded its second well, Mamba North, which is probably more important to the overall picture than the Mamba South well as it will likely prove-up the scale of the larger ENI find considerably.  This second well will be completed by end December.
• All of the above has been stated by the companies publically: what hasn’t been ‘caught’ by the market is a statement by Fred Olsen Energy, owner of the Belford Dolphin drillship that Anadarko has on contract in Area-1.  On November 18^th, a full ten days before Anadarko doubled its estimate for the size of possible gas in place in Area-1, Fred Olsen announced that Anadarko had extended its contract on the Belford Dolphin for another four years; and that furthermore it would take a four year contract on the Fred Olsen new-build drillship from Q1’13.  Both drill-ships will be focussed on further drilling and exploration offshore Mozambique.  Added to this it should be noted that Anadarko is about to have the Deepwater Millennium drillship arrive on the block for appraisal well drilling and flow & interference testing (i.e. to prove-up reserves of existing discoveries and prove continuity between the various wells).  Small wonder Anadarko came through ten-days later with a doubling of resource estimate and subsequently a $4Bn (+12%) upward move in its market cap as various brokers upgraded.
• Morgan Stanley value the lower end of Anadarko’s estimated recoverable volume at $4.7bn assuming 95% gas, a decline rate of 15% and $90/bbl oil price.  Anadarko has a 36.% working interest in the field: AIM quoted Cove Energy (COV LN) has an 8.5% working interest, which implies a value to Cove of their stake of $1,1Bn vs its current market cap of $776mn (GBP 495Mn).  It suggests that the overall 15Tcf is worth $12.9Bn. The working interests in Area-4 are ENI 70% and Galp of Portugal 10%. 
• Taking into account that ENI’s estimate of recoverable gas is based on one well (that admittedly was very close into the Anadarko well and has identifiably continuous sands) the initial estimate on the Area-4 find would be worth on Morgan Stanley’s model (15tcf = $12.9bn) $19bn with ENI having 70% of that and GALP of Portugal $1.9bn.  This is where two factors come into play in the short term: the ongoing drilling by Anadarko and perhaps more importantly ENI’s current well, Mambo North.  In a recent conversation with John Craven, CEO of Cove Energy, his expectation is that the overall level of recoverable gas is possibly 100Tcf: if that is correct then the Mozambique find ranks as the world’s fifth largest alongside Gazprom’s giant Shtokman field in the Barents Sea – with two big differences in that the Mozambique gas is easy to get out and closer to the key Asian markets.
• On the assumed 22.5tcf in Area-4 having a current value of $19bn, ENI’s stake would be worth E13bn and GALP’s 10% stake just short of E2bn or 20% of GALP’s market cap and 16% of ENI’s.  Since ENI announced the 50% increase to its reserve estimate on October 27^th its share price has fallen by 2% and Galp’s (for other reasons) from E15 to E12.5 per share.

WHERE IT GOES FROM HERE

• There are indications as to future direction of news-flow appearing in various blogs and unregulated sources, and these indications are currently not published on the various company’s websites nor mentioned in brokers reports.
•             Trade websites announced the hiring of the additional drill-ships by Anadarko 10 days before the reserve increase was published.  Trade sources need to be monitored for ENI who will need to contract multiple rigs for the area.
•             ENI has stated that they will drill three more wells: Mamba North, now in progress; Mamba South -2, an appraisal well: and either a Mamba North Appraisal well or second Mamba South appraisal.  The rig they currently have is on contract for four wells, but it seems there is an extension clause as in a recent interview in the Mozambique press, Scaroni referred to a total of six wells.
•             Barcap recently upped their estimate of recoverable gas in place in Area-4 to a range of 25.5tcf – 32.5 tcf, ie the upper estimate being 50% higher than the current ENI estimate.  But BarCap value these reverves at an oil-equivalent rate of $2,9/boe but acknowledge that this will climb as more wells get drilled and the reserves are de-risked.  Morgan Stanley’s valuation is based on $9.58/bbl which they had upped from $5.50/bbl.  The difference here is that Anadarko have six well drilled and static pressure continuity assumed, whereas ENI is still at the one-well stage.  QED Mambo North is a critical well in the proving-up process.

KEY INVESTMENT PLAYS:

• The two cleanest plays on the new finds are COVE ENERGY with its 8.5% working interest in Area-1; and GALP with its 10% of Area-4, although ENI is probably the biggest single winner in overall terms, with 70% of Area-4.
• COVE ENERGY: Taking the MS valuation of Anadarko, the Cove stake in Area-1 is worth 1.4x its current market cap.  Anadarko will be drilling at least a dozen wells on the block in 2012 and by early-2013 will have three rigs full-time on the block.  Apart from the current finds, the company has at least 15 further leads and judge the block to have “significant additional resource potential”.
• GALP: Galp has just monetized the value of its Brazilian offshore assets at E10 per share vs a current share price of E12.32. The EV of the group ex these Brazilian assets is E3.7bn: its Angolan E&P assets are worth E1.7bn, leaving an EV of E2.0Bn for the rest.  That rest is two recently upgraded refineries in Portugal, plus marketing network worth E2bn, and its regulated gas and power business worth another E1.7bn.  So the Mozambique offshore assets are currently being valued at a negative E1.7Bn, whilst as per the Morgan Stanley valuation of Anadarko, they are possibly worth US$1.9bn – or more.
• The results from the imminent Mamba North -1 are likely to be a major catalyst for ENI and GALP – timeline late December 2011.