A new assessment of Europa Oil & Gas’s (LON:EOG) prospects offshore Ireland marks the explorer out as a takeover target, according to chief executive Hugh Mackay.
Mackay told Proactive Investors there is a potentially massive prize for Europa in Irish waters and he believes there is the opportunity for a ‘Cove Energy style' reward.
Invoking Cove, a throwback to 2011’s US$1.9bn takeover, Mackay is reminding downhearted oil investors of happier times.
Cove, a popular Africa-focused explorer, was also based upon a high-impact offshore play, and it became the toast of the City as it found itself at the centre of a tug-of-war between Shell and eventual buyer Thailand’s national oil company.
It is presently a very different market for small explorers, of course, given the fall in crude oil prices and the resultant austere mind set of big oil companies.
Nevertheless, Mackay’s is positive and confident after blue-chip consultant ERC Equipoise outlined 1.5bn barrels of oil potential in the company’s 15%-owned exploration project in the waters off Ireland’s west coast.
The near 50% rally in Europa’s share price, up to around 9p by Friday, certainly appears to haved added a degree of confirmation to the oil exec’s confidence.
Moreover, Mackay’s enthusiasm is echoed by broker finnCap, which lifted its already bullish price target to 44p from 16p. The upgrade came as finnCap analyst Dougie Youngson added the Irish venture to his valuation of Europa following the release of the new ERC report.
Mackay welcomed finnCap’s assessment. Indeed, for the first time since 2011, he finally agrees with what City analysts are saying about his company.
“If we reach anywhere close to the finnCap target price then investors might be very happy,” he said. “I think for the first time, since I’ve been here, that we’ve got a target price that I actually buy into.”
Mackay believes investors will continue to warm to Europa’s Irish proposition should it advance to exploration drilling.
With the competent person's report (CPR) complete, Europa’s job is largely done for the time being.
The next steps will be those of Kosmos, which plans to sell down a portion of its 85% stake to a new partner. Those plans are, however, on hold for a number of months so investors are likely facing a wait for any drill plans to be announced.
It is not the case that Kosmos’s appetite is wavering because of oil prices - the American explorer & producer (E&P) is actually one of very few to increase spending amid crude’s downturn.
Ireland’s government is currently in the process of taking applications for a new licensing round, which will see up to 256,700 square kilometres of prospective areas handed out to oil companies.
Mackay expects competition to be high, but he believes Europa and Kosmos have a strong advantage thanks to the technical work they’ve done since 2013.
Specifically, he says a 3D seismic exploration programme last year has delivered a key competitive edge.
“Like night and day” is how Mackay describes the difference between the new 3D and the more readily available 2D data.
This valuable proprietary data is the reason that Kosmos won’t pursue a farm-out until after the licensing process is over, as any marketing process would involve a ‘data-room’ and allow any interest parties or, indeed, window-shopping rivals access to the valuable 3D.
“We don’t want any of this to leak out because it is dynamite. The insights you get from detailed interrogation of 3D data that you will never get with the 2D,” Mackay explained.
“There are things that we can see now on the 3D that we would simply be unaware of. Neither of us wants to give that technical edge, that competitive edge away.”
Ireland’s Petroleum Affairs Division has set a September 16 deadline for licence applications, so licence awards could potentially follow about six months later.
One could assume then that a farm-out, well planning and permitting could be the focus through much of 2016, which falls in line with Kosmos’s suggested plan for a drill programme in 2017.
So, investors will have to wait a while, but that’s not to say there won’t be catalysts for Europa’s shares in the meantime.
Europa has its own plans for the Irish licensing round and, over on this side of the Irish Sea, preparations will soon be underway for a flow testing programme at the Wressle discovery in Lincolnshire.
Wressle, drilled in 2014, encountered four oil horizons – all of which were successfully tested - and the partners will soon put the well on a longer term production testing phase.
Europa owns a 33% stake in the new British oil field, which will be flowed for around two months in order to evaluate the project’s longer term economics.
The company also plans to continue its other drilling activities in the UK, and there’s always the possibility that there may be movement for projects in France.
The British oil projects represent a much smaller opportunity compared to the offshore Irish assets, though until very recently the English portfolio accounted for almost all of Europa’s market value.
So, the apparently vast potential offshore Ireland could, in theory, be described as being for ‘free’.
In the end, Mackay sums up in the investment proposition quite succinctly, saying: “Things like Wressle keep the scoreboard ticking over, but Ireland could be the real home-run for Europa.”