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Over the last week, and in the aftermath of the negative Tronox ruling, Anadarko (NYSE:APC) - 55% WI, and her partners Tullow (TLW.L) - 30% WI) along with state owned Petroci (15% WI) have quietly advanced the commerciality of the Paon discovery offshore Cote d'Ivoire.

Paon 2A results

Tullow reported the following well results:

Tullow Oil plc (Tullow) announces that the Paon-2A appraisal well in the CI-103 licence offshore Cote d'Ivoire has determined the down-dip extent of the Paon oil accumulation. The well encountered the water below the oil accumulation discovered at the Paon-1X well and pressure logging has located the likely oil water contact.

To minimise the number of appraisal wells, Paon-2A was located 15km south west and approximately 370 metres down-dip of the Autruche light oil discovery made by the Paon-1X well in 2012. The well encountered Upper Cretaceous reservoir sandstones which were water bearing at this location. Pressure data from the Autruche age reservoirs intersected in Paon-2A indicate that the Autruche oil accumulation between this well and Paon-1X has a hydrocarbon column of at least 230 metres.

Determining fluid contacts using high precision wireline formation tester measurements has long been an accepted reservoir engineering procedure. These measurements have now defined the oil water contact and extended the Paon oil accumulation some 9.2 km south of the original Paon 1X discovery.

A cross sectional view (not to scale) of the Paon accumulation and incorporating data from the Tullow announcement is depicted below:

And the block map incorporating this new data (original from Anadarko site):

Reserves Calculation

Using the information supplied in Tullow's news release along with the assumption that the reservoir thickness of 74m and net to gross ratio of 42% apply throughout, allow an estimate of oil reserve volumes:

The reserve estimate range is 500 to 900 MMBBL recoverable, largely depending on confirmation of the area updip of the Paon 1X discovery. A 'commercial' discovery in a frontier West Africa setting would be 500MMBBL. Thus Paon appears to be a commercial discovery that will (eventually) proceed to development.

Impact and valuation

In 2012, Total sold Sinopec a 20% stake in block OML 168, deepwater Nigeria including the Usan Field, for $2.5BB. Estimated proved and probable reserves for Usan are 500MMBL. Consideration per equity barrel was considered 'on the high end of the range' at $22 per barrel.

In 2010, CNOOC offered Kosmos $5BB for their assets in Ghana, including a 24% share of the Jubilee field. Estimates vary, but the proved reserves of Jubilee are thought to be in the range of 1000MMBBL. Thus the offer (not accepted) was in the region of $21 per barrel.

Assuming the lower limit of Paon reserves (500MMBBL) and $20 per BBL for proved and probable reserves yields a valuation for Anadarko's 55% working interest in Paon of $5.5BB or $11 per share. None of this potential intrinsic value for Anadarko's Paon interests has yet to be embedded in the stock price.

Next Steps

To unlock the value of Paon, Anadarko should confirm reserve upside via a deliniation test updip of the 1X discovery, perform a drill stem test to demonstrate reservoir flow rates, drill one or two wells to test the flank of the oil leg including reserevoir quality and drill an exploration well into 'Pintade' fan just north of Paon.

Investment Thesis

$5.5BB is at the lower limit of the Tronox liability that has absolutely horrified the investment community. However, there was no upside reaction when the Paon 2A news was announced. I see Paon as just another reason to continue holding a contrarian investment in Anadarko.

Source: Anadarko Advances Commercial Discovery In Deepwater Cote D'Ivoire