BPZ Resources Takes a Giant Step into the Big Leagues

Includes: BZP, RDS.A
by: Harry Chernoff

Anyone who closely analyzed BPZ’s (AMEX: BZP) rise from obscurity to a $2 billion market cap over the past year saw the same two things: 1) world-class oil and gas resource potential, and 2) insufficient technical and financial capabilities to develop that potential.

While BPZ’s drilling results over this period confirmed the oil and gas reserves and production levels in one small part of its vast resource base (Corvina field, one mapped structure on one block) and helped validate the company’s aggressive estimates of future results on a larger part of the resource base (Corvina complex and Albacora field, four mapped structures on one block), it was obvious that BPZ in its current configuration could not carry out the required development work across the total resource base (50 mapped structures and counting on four blocks) in any realistic time-frame.

BPZ’s management was repeatedly asked how they planned to get the technical and financial capabilities to develop resources at this scale on any realistic time-frame and what it would take to bring in a partner, i.e., a major international oil company, with the necessary capabilities.

The answer to these questions had always been that a partner would be brought in when a suitable agreement and a suitable valuation could be reached. Yesterday, BPZ announced a memorandum of understanding (NASDAQ:MOU) paving the way for that agreement. The partner is Shell Exploration, a subsidiary of Royal Dutch Shell (NYSE:RDS.A) ( or NYSE ADR: RDS-A, RDS/A, RDS-B, RDS.B, or RDS/B, depending on the equity class and website), and the MOU is for what could ultimately become a 50/50 development project across three of BPZ’s four blocks, with a special carve-out for the Corvina complex and Albacora field (combined 1 billion barrels original oil in place) and some other projects (see here and here).

For a company whose corporate motto is “step by step,” the magnitude of this step cannot be overstated. The MOU with Shell validates BPZ’s entire business model. It brings in an international major with exactly the right complementary characteristics (i.e., short on reserve potential and reserve growth, long on technical and financial capabilities) to accelerate the resource development. BPZ will maintain operational control on all the blocks and will continue to operate with a total commitment to local development and environmental excellence.

Although details have yet to be announced, it is likely that BPZ’s Mancora gas play will be high on Shell’s development agenda. Long before BPZ existed, Shell discovered the giant Camisea gas field in Peru but withdrew from the project when it could not reach an agreement with the government on key technical and pricing issues in what is now the operating Camisea LNG project. With a new, more pro-business and pro-development government in place, Shell may want a second try at what has the potential to be another giant gas field. Right now, BPZ’s market cap incorporates zero value for Mancora. If it turns out that Mancora is equivalent to Camisea (which will not be known for some time) and BPZ shares 50% of the project, this development alone would far exceed BPZ’s current market capitalization. Shell is also likely to be looking closely at testing BPZ’s deepwater assets in Block Z-1.

Prior to yesterday’s announcement, BPZ was valued almost entirely on the oil resources at the Corvina field (in production now) plus a little extra for oil at the Albacora field (expected to be in production in 2009). The market was giving BPZ zero credit for resource potential. BPZ and Shell, however, saw what a number of independent analysts saw – accelerating development of the resources would generate substantial reserve and production potential, even for an international major, and enormous market value for BPZ. Now it’s a matter of completing the agreement and executing on the joint plan. The potential market value that can now be unlocked by the BPZ/Shell team is unknown but the magnitude dwarfs anything that could have been established by BPZ alone over any reasonable time period. Long-term investors should be extremely pleased with this announcement and extremely well-rewarded for their continuing commitment to BPZ.

Disclosure: Author holds a long position in BZP