BPZ Energy (Amex: BZP) is up more than 50% in the past two months. The reasons are not hard to find. Consider the following very recent developments:
- The CX11-14D well in the Corvina field, announced preliminarily in September at 25 million cubic feet per day, tested in October at 104 mmcf/d, i.e., equivalent to 17,300 barrels of oil per day.
- The first Corvina oil production for sales, previously planned for the end of December via an FPSO, began November 1st via leased tankers at 2,500 b/d. Full-scale FPSO loading and commercial sales starting at 4,000 b/d will begin around the end of the year.
- The first tranche of debt financing from the World Bank’s International Finance Corporation ($15.5M) to fund the gas-to-power project, previously expected to be signed by the end of the year, was signed in October and has been disbursed. BPZ is negotiating to increase the entire package from the previously announced $100.5M to $165M. The IFC is BPZ’s second largest shareholder and a strong supporter of its energy and local development projects.
- The final contracts with the Peruvian government for rights to two large exploration blocks (bringing BPZ’s total to four), previously expected to be signed by the end of the year, will be signed any day now. One of these blocks has internally estimated reserve potential of 170M bbl and 1.7 Tcf. The other block is on trend with several nearby producers. Adding these blocks to the existing blocks will permit development of the very large Mancora gas play.
BPZ has begun to generate cash flow from oil sales, with a very sharp projected ramp-up rate. Production from the Corvina field in the Z-1 block is 2,500 b/d, limited only by the capacity of the tankers to offload the oil. Current plans are to produce 4,000 b/d when the FPSO becomes available around the end of 2007, 6,000 b/d in the spring, and 8,000 b/d in the summer. And this is only from the first four oil wells in a small part of the Corvina field.
Also in the summer of 2008, drilling results will be available from the first oil wells at the highly prospective Albacora field in the same Z-1 block – a field where eight wells were drilled by others in the 1970s and all either produced oil or had pay. New drilling and completion techniques, an existing platform, and much higher oil prices make this a very low-risk, high-return prospect, indeed almost literally a recompletion project with execution risk but almost no exploration risk. Production at the Albacora field is expected to approach 10,000 b/d by late 2008.
To put these production rates in a valuation context, BPZ’s enterprise value on a fully diluted basis is about $800M. At $70 WTI, the 8,000 b/d of Corvina production by the summer of 2008 implies annualized EBITDA of about $150M, for an EV/EBITDA ratio of 5.3x. If the Albacora prospects come in as expected, the combined 8,000 b/d from Corvina and 10,000 b/d from Albacora implies annualized EBITDA of about $330M, for an EV/EBITDA ratio of 2.4x. Low finding costs, low operating costs, low royalty rates, low tax rates, massive onshore and offshore exploration potential, and commercial gas sales starting in 2009 round out the big picture.
Ironically, one of the reasons commercial gas production and gas-to-power development has been delayed is that the Corvina oil production and the increasingly probable Albacora oil production have created an immediate opportunity for oil-based cash flows far in advance of the originally expected gas-based cash flows. In this context, BPZ’s recently announced shelf registration for 25M shares is an indicator of strength and success, not dilution. BPZ wants the flexibility to accelerate some very big oil-related projects on the Z-1 block (including 3D seismic at Corvina and Albacora, a second drilling rig, and a larger FPSO) and initiate activities on the other three blocks. All in all, it’s a very attractive short-term and long-term opportunity for BPZ in Peru.