Small-cap oil investors should look at Houston-based BPZ Energy (AMEX: BZP). BPZ has recently had three major drilling successes at its very large oil and gas prospects in Peru. Exploration work in the 1970s by other companies confirmed the presence of hydrocarbons but low oil and gas prices and challenging production requirements made the wells non-commercial. Today commodity prices are much higher, production is much more straightforward, and BPZ has just started to capitalize on this potential. Of its first three wells, completed over the past six months in the offshore Corvina field, two tested oil at a combined 8,300 barrels per day (b/d) and no water; and the three tested natural gas at a combined 105 million cubic feet per day. The company expects the two oil wells to be tied in for commercial sales at 4,000 b/d in December 2007, with additional oil wells in the field taking production to 6,000 b/d in April 2008 and 8,000 b/d in July.
Natural gas from Corvina will be transported via a to-be-constructed pipeline to a dedicated electric generation facility onshore. Debt funding for the pipeline and powerplant is scheduled to be provided by the World Bank's International Finance Corporation [IFC], a major holder of BPZ stock. With its drilling success, BPZ has met the IFC's key supply requirement for the project (three gas wells, each capable of delivering more than 20 million per day to a 40 million per day power plant). Extra gas could be used to expand the power plant, used elsewhere in Peru, or shipped overland to Ecuador. Demand for gas is strong locally.
PZ plans an initial campaign of six total wells at Corvina by mid 2008, of which four will be both oil and gas and two will be only gas, before moving on to the Albacora field, in the same block as Corvina (Block Z-1).
On a flowing barrel basis, BPZ's enterprise value gives minimal credit for any Corvina oil production beyond the levels of early next year and virtually no credit for future natural gas revenues. On an OGIP/OOIP or 2P/3P reserve basis, BPZ's valuation gives minimal credit for anything beyond Corvina. It excludes Albacora potential, BPZ's other major block under contract in Peru (Block XIX), or two additional blocks about to be under contract. These three other blocks, all of which are onshore, are either on trend with producing fields controlled by other companies or come with 1970s drilling results similar to those at Corvina. BPZ plans to drill those blocks after initiating drilling at Albacora.
The potential in these additional fields and blocks is very large. BPZ estimates Corvina's proved and probable original oil in place at 69 million barrels and its original gas in place at 350 Bcf. 2P and 3P gas reserves for the total Z-1 block are estimated at more than 900 Bcf and 4Tcf, respectively, with Albacora's 3P oil reserves estimated at more than 150 million barrels. Block XIX has 3P reserves estimated at 170 million barrels and 1.7 Tcf. For long-term investors, BPZ offers significant potential at a very attractive valuation in a now stable country with favorable tax and royalty policies. As always, the usual risks apply based on commodity price risk, country risk, etc.
Disclosure: Author has a long position in BZP