Optiva Securities has raised its core valuation for United Oil & Gas PLC (LON:UOG) to 17.1p per share from 15.7p, on a fully diluted basis, following last week’s awards of new North Sea assets to the explorer.
The City broker noted that the UK Oil and Gas Authority awarded UOG a 95% interest in the UKCS Licence P2366 in the Central North Sea, which includes blocks 15/18d and 15/19b which contain multiple hydrocarbon targets.
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However, Optiva analyst Barney Gray said, of primary interest is the Crown oil discovery, made by well 15/19-9 drilled by ConocoPhillips (NYSE:COP) in 1998, which could contain recoverable reserves of up to 16.0 mmbbls (million barrels) of oil.
He pointed out that the licence term for P2366 commences on 1 October 2018 and the company is now poised to commence discussions with potential farm-in partners in order to expedite the future development of the asset.
The analyst said: “We understand that there were a number of competing bids for the acreage. However, United was awarded the blocks on the basis of a work programme focused on seismic reprocessing in order to reduce the uncertainty of the estimated oil volumes and also to optimise the location of a future development well.
“We estimate that the initial costs for this work will be modest for United and unlikely to exceed £150,000.”
Gray pointed out that he thinks that the Crown find would have been considered too small for development upon discovery.
However, with significant advances in technology since 1998, the analyst believes that Crown “could be suitable for a single horizontal well development and a subsea completion tied back to an existing platform, the closest of which is located less than 12km away.”
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Gray added that with confirmation of the award of the licence to UOG, it is possible to ascribe a preliminary valuation to the Crown discovery.
He said: “Using a conservative oil price assumption of US$65/bbl over the life of a 9.0 mmbbls development as described above, we arrive at net valuation of US$80.9m for United’s 95% interest. We expect that United will ultimately hold a smaller equity interest which could still be subject to a funding requirement in the event of a partial carry.”
However, the analyst added, for the purposes of illustrative value, he has assumed that UOG will retain a 20% carried interest which represents 3.7p per share on a fully diluted basis – “a very sizable asset to the company”.
Gray said that the inclusion of the estimated value of a 20% carried in Crown accounts for the increase in Optiva’s core valuation for UOG shares to 17.1p. UOG shares are currently changing hands at 5.20p each.
He said: “This uplift also incorporates the impact of a significantly weaker Sterling/US dollar exchange rate since May which has provided a supplemental boost to our target price.
“At this pre-farm out discussion stage, we reserve the right to adjust our valuation of United’s interest in P2366 upon the completion of a farm-in agreement.”
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Gray also pointed out that in a previous note on UOG, dated 24 May 2018, he highlighted the inclusion of an initial indicative valuation for the firm’s 20% interest in the Walton-Morant licence in Jamaica within its core valuation.
The analyst noted that Walton-Morant’s operator, Tullow Oil PLC (LON:TLW) has now delivered fast-track 3D seismic data following the 2,250 km2 survey over the licence and the high graded Colibri exploration target (200 mmbbls+) is clearly identified on the dataset.
He concluded: “This survey is the first to be acquired in Jamaica and constitutes an early stage of the programme to de-risk this potentially multibillion frontier hydrocarbon play.”