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Camac Energy Inc (NYSEMKT:CAK) is an independent energy company focused on expanding Africa exploration opportunities in both the East and West African region. While the company previously held projects in China, and has recently sought projects in Gambia and Kenya, the main project has been the offshore oil fields of Nigeria. While the company has ownership of the OML 120 and 121 blocks, the focus has been on the OYO field with its certified 626 M - 2.2 B Bbls of oil.

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Dr. Kase Lawal is the President and CEO of CAK, and through his holdings and family members controls several other business entities associated with CAK. In the spirit of disclosure, the company has laid out the relationships in recent presentations:

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With a market cap of just over $100M, Dr. Lawal established a partnership with Allied Energy for the development of the OYO fields and drilling of additional wells. The company currently owns 6 wells that are producing oil, and has plans for 3 additional wells that will be drilled through this year and into next. The current wells have experienced problems that have kept production low, in spite of a costly work over. However the company believes that properly drilled wells can unlock additional oil and potential for partner investments. If there truly is certified 626 M - 2.2 B Bbls of oil there, at $100 a barrel, that would represent $62.6B - $220 B. If the company takes a 10% profit, that would represent a low estimate of $6.2B and a high of $22B. The following is my assessment of the timeline the company should follow, absent any breakdowns or other incidents.

Short term (3 months): CAK has contracted with TransOcean (NYSE:RIG) for the drilling of the Oyo Rig #7. The intent for the well is to drill into the Pliocene reservoir to increase current production, and then continue to drill down into the larger Miocene reservoir, and prove access to the larger reserve. Once it has hit the Miocene, and proved access, the company will cap it off, back up to the Pliocene, and drill directionally. Unfortunately, drilling that was supposed to begin on July 6th, has been delayed twice so far.

Assuming there are no more delays, it should arrive on site and begin drilling around the first part of September. The Sedneth 701, an older rig owned by RIG, is scheduled for a 60 day assignment there. The company should also be releasing information on the assignment of a rig to drill the #8 and #9 well, scheduled for 2014. Assuming there are no more delays, the #7 well will spud in the next three months. The one caution is the age of the rig. It was built in 1973, and upgraded in 1994 and 2001, but has been experiencing unknown delays from the previous project. This could be related to a number of things, one of which could be maintenance and breakdowns on the rig.

Figure : Sedneth 701, from RIG page

The SEDNETH 701 is an Earl & Wright Sedco 700 design semi-submersible drilling unit capable of operating in water depths up to 1,500 ft using 18¾in 10,000 psi BOP and 21in OD marine drilling riser.

Rig Type

Midwater Floater

Year Built

1973; Upgraded 1994 & 2001

Classification

ABS Class +A1 EM Column Stabilized Drilling Unit +AMS

Flag

Liberia

Max Drill Depth

25,000 ft / 7,620 m

Max Water Depth

1,500 ft / 457 m

Operating Conditions

Wave: 40 ft @ 14 sec; Wind: 50 knots; Current: 2.4 knots

Storm Conditions

Wave: 110 ft @18.8 sec; Wind: 100 knots; Current: 2.4 knots

Short term (6 months): Following the spudding, the company will hook up to the Floating Production Storage and Offloading network. Originally the plan was to bring in a separate drill to finish #7, and then spud #8 and #9. During the 2Q13 conference call the company announced plans to contract a drill rig for all of 2014 to finish #7, #8, #9, and potentially drill an additional well. CAK will then begin to ramp up the production. I would expect some comments on the daily production potentials as it begins to ramp up production. I would also expect a press release about this time for the drilling of the #8 and #9 wells. Dr. Lawal mentioned during the 1Q13 press releases that about this time, investors should see some value creation, meaning the market will take notice of the company and its ability to bring oil to market:

The other good news is that our investors won't have to wait on the completion and hook-up of well #7 and #8 to see value creation. After the initial 60-day drilling of Oyo well #7, we should be in a position to announce the Miocene exploration results from the well. As I mentioned on the last call, Miocene is the switchboard for all production in the Gulf of Guinea, with fields like Bosi, Ereng and Bonga, all producing over 100,000 barrels of oil per day from that structure.

A Miocene discovery in Oyo well #7 will significantly de-risk the Miocene potential in the rest of the OMLs, and it has the ability to attract a partner and accelerate explosion drilling. We are very excited about these results as we think it will be the key to unlocking immense value for our shareholders in coming years through relatively low-risk, high-impact exploration in a proven hydrocarbon province.

Medium term (12 months): By this time next year (summer 2014), assuming no major road block, the #7 and #8 wells should be in full production and the #9 well will be in the spudding/drilling phase. The company has not made any additional announcements for other wells in the area, but would expect there to be a plan outlined. The Oyo field is the one it is concentrating on right now, based on its proven resources, however, there are several other areas within OML 120 and 121 that could be lucrative. During the 1st Quarter conference call, Earl McNiel, the CFO and Sr VP stated the following:

Now we anticipate that these are not the last 2 wells to be drilled in the field. Our technical staff is currently making plans to drill additional development wells, which would bring -- continue to increase production into 2014. But we haven't put out any expectations of what that would be.

Long term (24 months +): Dr. Lawal has stated that he intends to develop these areas to the point of bringing in additional partners to assist in the development of the two blocks. Within the Nigerian Oil Fields, OML 120 and 121 are surrounded by blocks owned by Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), and Shell (NYSE:RDS.A). If CAK can demonstrate the potential in the oil and gas reserves to these companies, it may make an offer for additional participation or to buy the company out completely. Again, from Mr. McNiel:

Yes, just to be clear … we don't anticipate producing from this Miocene target. What we're attempting to do is leverage off the fact that we're drilling an Oyo development well in this location, take advantage of that well, test the Miocene. If we prove that there's oil in the Miocene, then that significantly de-risks some rather large -- some very large Miocene prospects that we have elsewhere on the block. And we would then look to bring in a partner to help defray the cost and the risk of drilling one of those large Miocene prospects. And we don't have any firm plans yet, but that could -- that is, we're thinking we'd like to drill one of those exploration prospects in the Miocene in 2014.

Right now, CAK is only lifting from wells #5 and #6 in the Oyo field totaling on average 2,350 barrels per day. Of that, the company's share is 230 barrels per day. Based on an average oil price of $100 per barrel, this comes to $23,000 per day. The success and production of #7, #8, and #9 right now is unknown, but I have tried to extrapolate a few hypothetical scenarios where the company produces an extra 1000, 2000, 5000, and 10000 barrels per day.

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During the recent 2nd Quarter conference call, Mr. McNiel estimated the production of the #7 well to be in the 6,000-7,000 barrels per day, tripling the current production. Exxon Mobil currently has 90 offshore platforms off Nigeria comprising of about 300 producing wells at a capacity of over 550,000 barrels a day of crude, condensate, and natural gas liquids, or an average of 1,800 barrels/well/day. Shell currently has 16 wells in the Bonga field, located to the South, and is producing at a rate of 202,000 barrels per day, or 12,600 barrels/well/day. The actual production capacity will probably lie somewhere in the middle, near the estimated 6,000-7,000 barrels per day.

I don't believe that right now the market values CAK for the oil it is producing, so it is difficult to speculate on what an increase in production will mean for the company. It is the speculation of what lies below the water where the market puts the price. I believe once it can demonstrate the fields hold significant reservoirs that can be successfully lifted at a sustained rate, the price will shoot up.

As far as the blocks in Gambia and Kenya, the market has yet to put a value on these. When the blocks were first announced, there was little to no price movement. Once the company has demonstrated proven reserves there, it will unlock additional value to the shareholders.

Landmines

So the big question then becomes, what are the potential landmines for this company?

  1. Inability to lift oil from the #7 and #8 wells. The company has already done its research into the area and is confident the oil is there, so it's just a matter of getting everything hooked up without any major accidents.
  2. Nigerian instability. The country as a whole isn't exactly the most stable democracy in the world, and crime is rampant in areas. The major oil countries have had substantial projects on shore, but due to oil theft and violence, many have opted to move offshore in order to avoid the difficulties associated with Nigeria. There are still pirate attacks that occur in the Nigerian Delta, but most of the platforms are far enough off shore to avoid any serious threat.
  3. Dilution. CAK has access to numerous potentially prosperous oil fields, but it lacks the cash to truly develop them and unlock their current value. Its strategy has been to seek partnerships to develop them, however, in the recent conference call management didn't exactly rule out dilution if needed. The stock has been seeing a bump in price, and could be a source of funding for the company in a bind.
  4. Oil prices. Right now oil is sitting at just over $100. At that price, the company can continue to pull in a healthy profit. However, I still believe the value of CAK lies in its ability to pull oil out of the OML 120 and 121, and not necessarily on how the price of oil affects the bottom line.
  5. News on Gambia and Kenya. Right now the market has not put a value on the blocks owned by CAK in Gambia or Kenya. The company currently is conducting studies of the onshore and offshore blocks. In these blocks, the company owns 100% interest, and any positive developments on the studies afford the company the opportunity to bring in a partner to finance the exploration.

Conclusion

Camac Energy is a pure speculative play in the off shore oil exploration business. The company currently has a road map for how it is going to develop assets in Nigeria that are in the final stages, and has begun to look to the future and expanding in other areas. If it is able to lift oil from the OYO #7 well, it will signal success for the #8 and #9, and potentially bring in another large company (Exxon Mobil, Shell, or Chevron) to help build out the rest of the oil field and increase profits. The signing with a partner will send this through the roof. In addition the company has developed several long term projects that could unlock future shareholder value when Gambia and Kenya get off the ground. Expect further details to these plans in the coming months.

Source: Camac Energy Has A Road Map To Unlock Shareholder Value