There is a crucial component to success of a business that cannot be quantified on the balance sheet – it’s a thing called experience.
In oil E&P, for example, it helps to have a team that has been through periodic industry booms and busts and can hold its nerve when others are unsure.
A deep well of knowledge also helps with problem solving and finding creative solutions.
Led by Leslie Peterkin, the senior team has a collective 120 years in oil and gas. I’ll say that again in case you didn’t hear me …. 120 years.
It’s why the former Shell man and his team were taken seriously by mid-tier Aussie operator Carnarvon Petroleum, which chose Advance as its 50-50 partner for the Buffalo farm-in (of which more a little later).
The strategy of Peterkin, chairman Mark Rollins and technical guru John Battrick is a simple, but elegant one – and speaks to experience mentioned above.
Advance is only interested in existing reserves or resources where there is the ability to unlock value “through insights from original technical work, commercial acumen or advantaged relationships”.
It has no hankering to be the operator, but, where it does farm in, it will do so with a single credible operating partner, rather than being part of a consortium.
That allows it to exert a significant degree of influence in the relationship. As Peterkin says: “We want to constructively engage with our operators to ensure that the joint venture always follows the path of maximum asset value.”
“That's what it is about, from my point of view. As a two-party joint venture that means we can bring our value-adding ideas to the table.
“We might spend our own money to be able to table detailed concepts for our Operators to consider in the context of maximising value.”
Advance is targeting assets in the eastern hemisphere that have a short timeline (three to five years) to reaching a significant inflexion point. It will keep the overheads low by outsourcing much of the work.
The strategy has been put into practice with the Buffalo farm-in, an offshore re-development concept in Timor Leste that was one of the leads brought in by the management team when they established the company.
Advance has firm criteria in terms of targeting proven resources and existing or near-term cash flow, but is otherwise relatively agnostic with regards to gas or oil, onshore or offshore, and specific jurisdictions. As Peterkin pointed out, a non-operating strategy means Advance can ‘parachute’ into a new jurisdiction at any time, and has no need to build a portfolio of assets in any jurisdiction. Value is all that counts for Advance.
The company recently raised US$30mln via a share placing, which provided it with the US$20mln required to farm into a 50% share of Carnarvon Petroleum Timor by funding the drilling of the B-10 appraisal well.
In the latter part of the year, Carnarvon will drill the undrilled crest of the structure on the acreage with the aim of recertifying resources to reserves. Currently, the certified contingent resource sits at 34mln stock barrels.
This is not virgin territory and as the field was developed and operated by BHP and Nexen from 1999, producing 21mln barrels of crude over five years until it was shut in. At its peak output was a very respectable 45,000 barrels of oil a day from 2 wells.
Advance believes that with a three-well, four-slot wellhead supported by a jack-up rig and floating storage facility (FSPO), Buffalo could be ramped back up to 40,000 barrels a day.
What’s being extracted is a very light crude (53-degree API). The recovery factors would be up around the 60% mark based on the performance of surrounding abandoned fields – which is very much in the upper echelon.
Here’s where you start to understand the scale and potential of the opportunity – not to mention that quick payback.
Based on the economics laid out in the competent persons report (CPR), year-one gross free cash flow would be in the order of US$276mln at US$50 oil, and oil prices are well above $60 today..
Advance has negotiated a position whereby the capex costs are repaid before either of the partners draws a dividend from the production proceeds.
Under the financial scenario outlined above, project payback would take less than 12 months.
Based on the B-10 appraisal well being drilled at the very end of this year, the final investment decision could be made in the first quarter of next year (all things being in equal).
Realistically, this means first oil would be produced in late 2023. By oil industry standard, that’s Usain Bolt fast, but typical for the type of development contemplated by the newly formed joint venture.
The rosy picture painted thus far omits one major slice of reality – the project is likely to cost in the order of US$125mln with a likely split of 70%-30% debt to equity.
But remember the payback, the fact that 63% of the field’s reserves will be produced over the first two years of the five to six-year life of the field. Such economics will appeal to even the most risk averse lenders ensuring project finance should not be an issue.
It is unlikely that Advance will be a one-hit wonder, single-asset investment. Indeed, Peterkin and his team were looking at “five or six opportunities” before they focused on Buffalo.
“We're chasing three different assets at the moment. One of them is very similar to Buffalo in shape,” says Peterkin
“Another one is a production asset that we're very keen to get hold off because we'd like to underpin the company's finances.
“That conversation has gone well, but it might take some time to finalise it for a variety of reasons. None of them are finalised or sorted.”
In a sector that has been long on problems and short of good news recently, Advance promises some real excitement.