Niko Resources: A Tsunami of Cash from Indian O&G

Oil and gas exploration and production companies have been out of favor since the price of oil dropped from its high of $147 per barrel in July 2008. Many oil and gas companies' stock prices have collapsed up to 80-90%, and former investor favorites like Oilexco, which leveraged up during the price boom, dried up and blew away when oil prices collapsed and credit became unavailable.

While the general liquidation in oil and gas stocks may have been warranted due to the collapse in oil prices, one company has become the classic baby thrown out with the bathwater. Niko Resources Ltd (NKRSF.PK) is a Canadian based oil and gas exploration company with an extremely interesting story that is being overlooked by the market.

Niko currently has oil and gas production in India and Bangladesh that totaled, as of the end of last quarter, around 90 MMcfe/d. The big story for Niko, however, is the commencement of production from the company’s D6 block in which it holds a 10% interest. The D6 block is a major oil and gas filed off the east coast of India. Niko is partnered with Reliance Industries on this field. According to a presentation the company made March 12, 2009 at the First Energy/Societe Generale Canadian Energy Conference in New York, production from the D6 block should begin around the first of April. Production on Phase 1 of the project is projected at 2.8 Bcf/d of natural gas (280MMcf/d net to Niko). The gas is to be sold into the Indian market at $4.20 per thousand cubic feet. I would also note that the D6 field is already producing oil at a rate of around 10,000 bbls/day (1000 bbl net to Niko). These production figures are projected to increase over the next few years to approximately 4.2 bcf/d (420 MMcf/d net to Niko).

What is interesting about this for the country of India is that the D6 block will single-handedly double India’s domestic gas production. Another fact is that this production is only coming from around 4.5% of the block so there is a lot exploration potential. The company has virtually no commodity risk and its cost of production is less then $.43 cents per mcf. As production jumps fourfold, the company will experience a wave of cashflow.

This cashflow will be put to use in order to grow production and to continue exploration on the company’s other blocks in India and elsewhere. The company is partnered in the NEC-25 block where they have had nine exploration successes with an 8.3 TCF resource in place. The company has applied for approval of a development plan on this block. The company is also committed to drilling three wells in the D4 block which has quite a few geological similarities with the company’s D6 block.

Outside of India the company has acquired exploration rights to around 2.4 million acres of offshore blocks in Pakistan and 4.2 million acres offshore Madagascar. The company has also partnered with Vast Exploration in Kurdistan on the 209,000 acre Qara Dagh concession. The company is elephant hunting here as they are on a trend of previous adjoining discoveries and if one has been following the news, several companies have had excellent success exploring in Kurdistan. The company should be drilling there in 2010.

The company is particularly excited about the recent acreage acquisitions in Indonesia’s relatively unexplored deep water region. The company has been awarded five blocks that are in areas where there has been a tremendous amount of adjacent exploration and production success.

In summary, I believe that because it is a Canadian company and off the radar screen of many US investors, Niko is fundamentally undervalued based on the cashflow stream that is soon to come online from its D6 block. In addition, the company has a tremendous amount of upside as the company deploys this cashflow into its outstanding portfolio of exploration targets in both India and at its other concessions in the Indian Ocean rim.

Disclosure: I am long Niko resources (NKRSF.PK)

Comments

[Vishal Verma:]

Only point is that Reiliance has 90% and Niko has 10 % stake in D6. Better to invest in Reliance.

Mar 20 10:34 AM