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VSA Morning Flow - Columbus Energy Resources and Egdon Resources

Columbus Energy Resources (AIM:CERP)# Columbus Energy Resources (AIM:CERP) has provided a detailed update on the successful well result and subsequent flow testing which has taken place recently in the South West Peninsula (SWP). CERP has confirmed that it has made successful discoveries in the Lower and Middle Cruse, the former being the primary target of the well...

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Columbus Energy Resources (AIM:CERP)#

Columbus Energy Resources (AIM:CERP) has provided a detailed update on the successful well result and subsequent flow testing which has taken place recently in the South West Peninsula (SWP). CERP has confirmed that it has made successful discoveries in the Lower and Middle Cruse, the former being the primary target of the well, with six intervals of interest within a broad interval of 2,363ft (720m) accounting for 47% of the interval.

The Lower Cruse was the primary target for CERP from the outset and it is positive that the next stages of development are now being progressed with the original assumptions largely confirmed by drilling both for CERP’s development and realising our forecast valuation. Production will be targeted from two intervals of 316ft (96m) which confirm the 11.5mmbl target (STOIIIP 70mmbls) and implies that the assumptions underlying the project which delivers an NPV of US$90m at US$60/bbl WTI are unchanged but derisked. Encouragingly, high quality light oil with an API of 40˚ has been recovered to surface from the Lower Cruse while in line with other wells drilled in Trinidad reservoir pressures are high on initial drilling. This potential has already been recognised by the drilling contractor who has now agreed terms to drill a second well in Q3 2020 on a fully carried basis for an as yet undisclosed share of production. Timing assumes that the WTI oil price is sustained above US$35/bbl within a stabilised price environment.

In terms of our valuation, our model was calculated on the basis of long term US$60/bbl WTI pricing with a risk factor applied. Recent oil price volatility is clearly a caveat to our current target price. With few details on the carry terms it is perhaps the wrong time to adjust the 45% risk factor as the lower risk is likely to be in part offset by the terms of the carry. To be clear this is not an estimate of the farm out percentage but there are a variety of possible structures which would have differing impacts on the economic return to CERP. However, the fact CERP is able to advance to the next stage of Lower Cruse development is a positive and the buy in from the driller which takes away a funding risk from CERP is a significant positive and validation of the asset.

The work since Q4 2019 has confirmed proof of concept for the SWP and CERP is now working towards realising that value. Production testing is underway and 340bbls have been sold from the Middle Cruse, although we note that this oil is not as high quality as that from the Lower Cruse, given an API of 17-20˚, and currently there is a high water cut. There are two further intervals to be tested at this level and there are measures that CERP can undertake to improve the ratio of oil:water. 

Given the recent volatility in the WTI benchmark contract, in addition to the recently announced measures, the company is developed capability to develop in field storage to avoid realising revenue in possible future periods of deeply depressed pricing.

Despite the challenges arising from the oil price volatility, CERP has continued to make progress in Suriname, and the team are now assessing the seismic, well log and petrophysical datasets ahead of the STOIIP review which is due to be completed in H1 2020. CERP plans to carry out extended well testing to understand whether abandoned wells can be re-entered; an attractive low cost option if feasible. These are likely to take place in H2 2020.

The potential for a cash flow generative near term project has been confirmed by the well testing at Saffron and with a roadmap for further derisking and development we continue to believe that the SWP remains a highly attractive development option for CERP. We also recognise that Saffron is the first of a number of targets within the SWP and that the broader transformational value remains untapped.

We reiterate our Buy recommendation and 20.1p target price.   

Egdon Resources (AIM:EDR)#

Egdon Resources (AIM:EDR) has announced the completion of the second tranche of the previously announced fund raise structured to allow Directors to participate following the closed period associated with EDR's H1 2020 interim results.

Following the issuance of Tranche 1, Tranche 2 sees EDR raise a further £84.8k through the issuance of 2,800,000 new ordinary shares to the Directors at a subscription price of 2p and 1,441,780 shares to EDR’s largest existing shareholder Petrichor Holdings Coöperatief U.A. who provided further support at a subscription price of 2p to ensure they hold their existing 33.99% position over the two tranches.

As previously announced on 14 April 2020, the combined tranches result in gross proceeds of approximately c.£500,000 which will enable EDR to progress near term cash generative projects such as Wressle in addition to providing working capital to assist the company whilst oil and gas prices are at historically low levels.

In line with our estimates, post subscription, EDR's enlarged issued share capital will comprise 328,315,625 ordinary shares and consequently we reiterate our Buy recommendation and 36.2p/sh target price.

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