Pancontinental Is Drilling With Apache And Tullow For Oil In Offshore Kenya

Jun.21.12 | About: Pancontinental Oil (PCOGF)

Pancontinental (OTC:PCOGF) is an Australian company exploring for oil in various countries in Africa. They also have some Australian acreage. Pancontinental trades on the Australian exchange under the symbol PCL and on the pink sheets as PCOGF.PK. At time of writing, the current price on the ASX is 0.185.

Right now, the main and most important play Pancontinental has is the Mbawa Prospect in Block L8 in offshore Kenya. Mbawa has been advertised to have a P10 OOIP (Original Oil In Place) of 4.9 billion barrels and a P50 OOIP of 2 billion barrels. A typical recovery factor in these offshore wells would be 20-25% which would put mean prospective resources at around 500 million barrels.

One of the most important things to note about Mbawa is that both Apache and Tullow have farmed in to the block. Current interests in the block are as follows:

  • Apache (NYSE:APA) - 50% (Operator)
  • Origin Energy - 20%
  • Tullow - 15%
  • Pancontinental - 15%

Apache and Tullow have excellent track records in offshore African exploration. In the past 10 years, Tullow's stock has risen 1300% driven by their exploration success. Tullow has a 75% success rate on their worldwide exploration and appraisal program. One point to note is that even with everything Tullow has going on, in their latest presentation, they note the Mbawa 1 well will be high impact. Apache is no slouch with regards to offshore exploration either and they have made a big statement here by taking a 50% working interest.

Other items that increase confidence in the Mbawa well:

  • Typical anticline structure very easily seen on seismic
  • Lots of Oil Slicks above the prospect with corresponding expulsion craters on the sea floor
  • Possible flat spots on the seismic which are a typical indication of fluid contacts
  • One well is going to be able to test all of the different aged formations in the prospect
  • Pancontinental is carried on the well for up to $9 million
  • Water depth is only 860m which should speed development of any find

Apache has secured a rig to drill the well in Q3. The actual date is dependent on when the rig finishes current commitments. The well should take approximately 45-60 days to drill.

Tullow has an option to take another 5% of WI from Pancontinental if Tullow agrees to carry Pancontinental on the second well. They will most certainly exercise this option if the drill bit strikes oil. Using a P50 mean resources of 500 million barrels would give PCL 50 million barrels of reserves from this field alone. It varies on a lot of things, but a typical NPV10 figure for offshore oil reserves is ~$10/bbl which would make PCL's stake worth $500 million vs a current market cap of ~$150 million. Given their small interest in this block and positions in other blocks around Keyna, look for PCL to be a takeover/buyout candidate if oil is found on Mbawa.

As far as trading this stock goes, PCL trades around 12 million shares per day in Australia and around 45,000 on the pink sheets. Obviously, the pinks are going to be less liquid than the home market; however, there should be enough liquidity to move in and out of modest positions without moving the market.

All oil drilling is inherently risky and ultimately depends on mother nature, regardless of any seismic or engineering data. PCL seems like one of the more conservative plays if you are looking to get into junior oil explorers. They have a small interest, are partners with two of the top independent oil companies in the world, and are carried on the exploration well.

If you are looking for more risk and more potential reward, check out Falklands O&G (OTCPK:FLKOF), Borders & Southern (OTC:BDRSF), or Chariot O&G (OTCPK:OIGLF). Due to the very real risk of losing all of your investment in these companies, my philosophy is to diversify over a handful of these junior oil companies to try and spread the uncontrollable mother nature risk. I weight my positions stronger towards the higher risk, higher reward companies. If any of these juniors hit oil, you will have probably received all of your original capital back that you have invested in all of the companies. After that, you can play the remainder of the companies on house money. If another hits, you are golden.

Disclosure: I am long PCL on the Australian exchange.