UBS analysis of Tullow hints at the massive potential in Guyane for Northern Petroleum and Wessex

Heavyweight City broker UBS today put out some very interesting research on Tullow Oil (LON:TLW), which has some implications for two of the market’s smaller and more speculative E&P stocks.

It looked in particular at the Zaedeyus propect off the coast of Guyane.

Tullow’s partners include Shell (45 per cent) and Total (25 per cent) – so the prospect has some fairly heavyweight interest. 

Almost forgotten in all of this are Northern Petroleum (LON:NOP) and Wessex Exploration (PLUS:WX.P), which own a combined 2.5 per cent of the exploration block which contains Zaedeyus. Success will have a real material impact on their pair’s prospects. 

Tullow, which, which has 27.5 per cent of the block, draws a comparison with its own Jubilee field in Ghana, where it brought the country’s first oil to production in 2010.

Drilling is now underway on the GM-ES-1 exploration well. The target is a 700 million barrel P10 prospective resource. The well is about 50 kilometres away from the offshore boundary with Brazil.

GM-ES-1 will be drilled to about 6,500 metres subsea, to target one of several prospects in a major undrilled Late Cretaceous deep water channel fan system.

Northern’s technical director Graham Heard said this morning: "(We) we are very excited that drilling operations have commenced on this first exploration well on the Guyane Maritime Permit.

“This is an unusual opportunity for us as a company to participate alongside a successful explorer such as Tullow and two major oil companies, Shell and Total, in the first well targeting a new exploration area of importance.” 

“This basin has significant exploration potential and we keenly anticipate the results from the Zaedyus prospect which will determine future exploration activity in the area."

A meeting with management following Tullow’s prelims yesterday devoted some time to Zaedyus and its potential impact. 

Tullow highlighted five prospects which would be de-risked if Zaedyus is successful, said Melanie Savage, the oil and gas analyst at UBS.  

“While management refrained from hinting at prospect sizes, the aerial extent of these prospects suggests they are larger than the 230-700 million barrels of oil Zaedyus prospect, which itself could add 153 pence to the company’s net asset value if successful on the P10 case, with a result expected in May, or June.”

Northern’s share price was down a penny at 134 pence, but is up 23 per cent in the year to date. Wessex, meanwhile, was up 0.5 pence, or 12.5 per cent, at 4.5 pence on PLUS. 

Wessex, which also owns 70 percent of the Juan de Nova Est permit in the Mozambique Channel, northwest of the island of Madagascar as well as onshore gas assets here in the UK, is expected to make switch to AIM later this year.

It was a case of the post-results for Tullow as its shares fell 54 pence or almost 4 per cent to 1,360 pence.

UBS’s Savage repeated her buy advice, but tweaked the valuation down to 1,620 pence a share from 1,650 pence, reflecting a small reduction in the net asset value of the company.

However the analyst said drilling later this year in Tanzania and Kenya could pump the NAV back up. One Uganda she added: “While Tullow has reached an agreement with the government, it is now finalising the memorandum of  understanding which will allow it to progress with the asset sale.

“However, despite this delay, Tullow is working in the background with up to five rigs to be contracted this year to target the 1.5 billion barrels of oil equivalent of exploration potential in the lake.”