Quick Market Update
Pan Orient Energy (POEFF.PK) released news yesterday (January 23, 2013) announcing a new oil pool discovery in its L53 concession in Thailand. This discovery is in a new fault compartment in the L53-D structure, which was discovered about one year ago. The well encountered 55 meters of oil pay over six separate sandstone reservoirs. The full details can be read in the company's press release. To summarize briefly, this is a positive development for the story, and should reinforce the investment thesis from my prior article on the company.
Some key points worth noting:
1) Pan Orient's development/appraisal/exploration wells in Thailand typically cost $2 million or less, each. This is what makes Thailand such a good cash flow engine for the company. With netbacks in the most recent reported quarter in the $75/bbl range, even a 300 bopd well would pay out in a matter of a few months.
2) This new pool discovery should go a long way toward re-assuring investors that Pan Orient's reserve life index makes it worthy of a higher multiple, as the company has consistently traded at a low EV/CF multiple, despite the "company maker" upside optionality offered from its exploration portfolio. More discussion on the company's valuation can be found again in my previous article, linked above.
For a company with this much upside optionality, I have seen comparables trade at 5-8x EV/CF. EV/CF multiples should roughly be in line with a company's reserve life index, so a quick "gut-check" would be to look at how many barrels of reserves would be needed to maintain production of 1500 bopd, which generates roughly $0.50/sh in cash flow per year. At 1500 bopd, Pan Orient produces roughly 500,000 barrels per year, so to justify a 5x EV/CF multiple, the company should have at least 2.5 million barrels of reserves. Given the results to date from the L53-D field, I don't think that's a stretch, so my "gut-check" feels about right. In my estimate, cash is currently approximately $2.10 per share. Pan Orient has no debt.
3) An additional well is expected to be drilled shortly into the same fault compartment in order to better assess the size of the find and test for deeper reservoir potential at the same time.
4) The Indonesian drilling program on the company's most prospective Batu Gaja block (77% POE), is expected to begin in 1-2 weeks.
5) The company recently dismissed the drilling rig and crew from the unrelated Citarum Block, where drilling will now be pushed to mid-2013 on those 400 BCF targets.
To summarize, Pan Orient has reinforced its status as a skewed risk-reward situation and investors should take comfort that the "backstop value" has been increased based on today's news. For those interested in learning more about the corporate asset base, Pan Orient has uploaded a new corporate presentation to its website.
Looking ahead, the next major catalysts for the company are 1) additional appraisal of the L53-D field onshore Thailand, and 2) the drilling of the Shinta-1, Buana-1, and Kemala-1 back-to-back exploration targets onshore Indonesia. Shinta-1 is targeting 137 million barrels recoverable, and will be the first to be drilled starting in 1-2 weeks. They say the best place to look for oil is where it has been found before, and given that maps from the Pan Orient corporate presentation show PetroChina fields basically on all sides of the upcoming targets, it appears Pan Orient is looking in a good place indeed.
Disclosure: I am long POEFF.PK.