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Europa Oil & Gas (Holdings) Plc: THE INVESTMENT CASE

Europa Oil & Gas in the spotlight as Inishkea is promoted to ‘flagship’ project

A 'high priority' exploration area is being advanced offshore Ireland, production growth is still on the cards onshore UK, and the company recently said it was looking at potential new opportunities.
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INVESTMENT OVERVIEW: EOG The Big Picture
Exploration catalysts could potentially send Europa shares much higher

Europa Oil & Gas Holdings Plc (LON:EOG) added some extra focus and rationale to its business during the first quarter of 2018.

The Ireland-focussed oil and gas junior has now prioritised an area in the vicinity of the Corrib gas field, the country’s largest commercial source of hydrocarbons, and, this is now seen as the ‘flagship’ asset in what is a large and varied portfolio.

This area, referred to as ‘the Inishkea prospects’, is located in Licensing Option 16/20 and exploration work to date has provided positive findings.

Efforts are presently underway to establish a prospect inventory for Inishkea. The work is expected to be complete during the first half of 2019, ahead of exploration drilling which is potentially slated for 2020.

Europa reckons each of its seven exploration areas offshore Ireland can become “company makers”, but, with the proximity to Corrib, the Inishkea areas deemed to be the closest to commercial success (figuratively and literally).

Earlier this month, Europa boss Hugh Mackay said: “In the Slyne Basin next to the Corrib gas field we have been impressed with the results to date and are therefore fast tracking further work on our Inishkea prospects in LO 16/20 so that we are in a position to drill a well targeting ‘company-making’ gas resources in a proven play close to existing infrastructure as early as 2019.”

At the same time, Europa in March told investors that it was now looking to possible new opportunities, which would add a third area of interest on top of the offshore Ireland and onshore UK assets.

Offshore Ireland: A catalogue of prospects are advancing

Europa has interests in seven exploration project areas off Ireland’s west coast, in the Atlantic margin, and through desktop work the company has already detailed a catalogue of prospects that it believes could be host to some 4.7bn barrels of oil across its inventory of 32 prospects.

The idea is to bring in bigger explorers who can help fund wells to test these big numbers. In the meantime, the hope is that third party drilling can provide the kind of breakthrough that can spur new investments into the very promising but as yet unproven Irish oil frontier.

A slew of big oil firms took new exploration areas back in a 2016 auction by the Irish government with ExxonMobil, Statoil and the Chinese National Offshore Oil Company (via its Nexen vehicle).

Onshore UK: Production growth pending

In the UK, the prize is smaller but far from immaterial. Europa has a collection of interests in production, development and exploration assets - at the end of December it had 1mln barrels of gross proved and probable reserves, and 3.1mln barrels of gross 2C resources.

Beyond that, it has some 13mln barrels of prospective oil resources 27mln barrels oil equivalent.

Europa’s share of production from onshore UK amounted to 97 barrels oil equivalent per day during the year, allowing the company to generate positive cash flow over the course of the year.

For investors, much of the recent attention has been on Europa’s 30% stake in the Wressle field, which has been held up in a planning dispute, but, in a practical sense at least, could still be on the verge of production.

Wressle, if and when it comes, could double Europa’s current production profile.

Financial results for 2017, saw Europa generate £1.6mln for the year, up from £1.3mln in the previous twelve months, and it marked a pre-tax loss £0.7mln.

Similarly, Europa’s 20% owned Holmwood project has also been impacted by UK planning delays.

Here, there have been expectations for drilling operations to get underway at Holmwood during the first six months of next year, and the regulatory process is ongoing.

In February, Europa told investors that the UK Environment Agency has indicated in a draft decision advertisement that it is inclined to award a bespoke environmental permit for drilling and testing for the Holmwood exploration well. It was followed by a public consultation process.

A well at Holmwood will target the conventional Portland reservoir and it will also examine the deeper Kimmeridge zones - it is seen essentially as a follow up to the nearby Horse Hill discovery.

FinnCap sees massive upside

Analyst Jonathan Wright has a 43p price target for Europa, versus the current target price of 3.36p.

“Europa shares have been buffeted by frustrations with the UK planning process, as its Wressle development and Holmwood exploration well have both been held up by delays to application approvals.

“However, this has masked real progress offshore Ireland, where new and reprocessed seismic is expected to lead to increased prospectivity and reduced risk across its large exploration portfolio.”

Wright reckons Europa is set to relaunch its farm-out efforts for offshore Ireland in the next quarter, and, he highlighted that at least two wells could be drilled next year by third parties in the Atlantic.

“Some 30 prospects have been identified containing over 5Bboe of unrisked prospective resources,” the analyst said. “Our 43p target price includes just three of these, heavily risked geologically and commercially.

“As progress is made on prospect definition and well funding, these should gradually derisk. Fully derisked, and assuming EOG gives away 75% of its stake to fund drilling, these three prospects alone would be worth £1.50/sh.”

He added: “At the current share price, valuation is underpinned by its UK assets, meaning investors get Ireland for free.”

All things considered, there’s no shortage of catalysts for investors in Europa.

Now with plans to expedite exploration at Inishkea and hopes for progress onshore UK, the company is certainly one for investors to watch.

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