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Pura Vida Energy (ASX:PVD) is to farm out part of its interest in the 2.7mln acre Mazagan permit area offshore Morocco.
Plains Exploration & Production, the NYSE quoted oil and gas company, is paying US$15mln to farm in to Pura Vida’s 75% working interest in the highly prospective exploration play.
Plains Exploration will earn a 52% working interest and will act as operator in exchange for funding 100% of the costs of certain specified exploration activities.
Plains Exploration has committed to fund and drill at least two wells and, subject to agreement, may fund various other exploration operations, subject to a maximum outlay of US$215mln.
The additional operations to be funded by Plains Exploration (PXP) may include: any sidetrack of either of the two wells initially drilled; any deepening of either of the two wells; and any 3D seismic survey, over an area of up to 2,500 square kilometres.
Pura Vida said the drilling programme will test multiple play types, including the giant Toubkal prospect, which has a mean resource potential of 1.5bn barrels.
The first exploration well is expected to be drilled in 2014.
“PXP brings extensive offshore exploration and development experience to the venture, and has made a firm commitment to fund and drill two exploration wells. This will allow us to test independent play types, which significantly increases our chance of success. These wells will test the multi-billion barrel potential of Mazagan. This transaction secures the funding and expertise required for drilling in our deep water block. This is a giant leap forward for Pura Vida,” claimed Damon Neaves, Pura Vida’s managing director.
“Amongst the Mazagan joint venture and our nearest neighbours, we expect at least five exploration wells in the locality of Mazagan to be drilled in 2014. This represents an unprecedented investment in exploration offshore Morocco which will target significant resources and has the potential to alter the energy landscape in Morocco,” Neaves added.
Broker Argonaut said the farm-out deal was on better terms for Pura Vida than it had expected.
The broker had been thinking Pura Vida (PVD) would get cash back of less than US$10mln, one well paid for with an option on a second, with a retained working interest of 25 to 30%.
“Given this, the deal has beaten our expectation significantly, despite the slightly reduced working interest. To put this into context, success at the 1.5 billion barrel Toubkal prospect represents ~$35/s upside net to PVD at 23% working interest,” Argonaut analyst Dave Wall said.
Wall also noted that, back in November 2012, the company revealed it is in advanced discussions to acquire more acreage in Africa. “We are backing management to achieve a value accretive deal that does not require dilution to shareholders in the near term, especially given the quantum of cash to be received as part of the farm-out deal,” Wall said.
The broker rates the shares a buy and has a target price of A$2.27, giving massive upside to the current share price of around A$0.82.
“We retain our view that the company will trade in excess of $250mln market capitalisation (~$2.50/s) prior to the drilling of Toubkal, which should occur in 12-15 months. The uptick in share price usually starts around 6 months out from drilling as visibility on the schedule becomes higher. Given the quality of the farm-out and the continued news flow relating to growth of the portfolio, we would expect a new base in the share price well in excess of $1.00/s,” Wall suggests.
UK broker N+1 Singer had assumed Pura Vida would retain somewhere around a 37.5% working interest (WI) in the permit area, “and while the deal reduces PVD’s equity to 23% WI the Toubkal prospect alone has 350mln barrels of net prospective resources.”
“In terms of read across, the $230mln max investment for 52% implies c.$102mln of value for PVD’s retained stake – around half its market cap,” N+! Singer notes.
“The market has reacted negatively (perhaps due to the larger than expected drop in WI), but we would suggest that this presents a buying opportunity. PVD is now fully funded for two potentially company-making wells and today’s news should de-risk its investment case in the eyes of investors. It is also worth noting that at least five exploration wells are expected to be drilled on and around the permit in 2014,” the broker concluded.