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Update on One of My Top Picks for 2010

It had to happen sometime.

Nobody ever hits 100% of their wells forever.

Shareholders in Coastal Energy (CEN-TSXv) woke up this morning to see their stock drop over $1 per share, or 15%, down to $5.35 after the company reported they had stopped drilling on their first well in the new Songkhla B field in the Gulf of Thailand.

Coastal Energy grew from 2000 – 12000 barrels of oil per day in 2009 as they hit two big wells in the Gulf of Thailand, one of them within 2.5 miles of where they drilled this recent well.   I discovered the stock at $2.50 in August last year, and put it in the subscriber portfolio.  It was recently trading over $6 and I have been very public in saying that it’s one of my favourite stories for 2010.  You can read my 9 page report on the company for free by signing up to receive my free blog (just to the right here on my home page.)

In announcing it was abandoning the well, the company said it “encountered a breached trap”.  In English, this means there was a hole in the reservoir.  And, at some time in the last 100 million years most of the oil seeped out through it.

 

The well did hit 10 feet of pay and CFO Bill Phelps told me that if the second well at Songkhla B is successful – which spudded yesterday – they may tie-in the first well to get an estimated 200-300 bopd from it.  While this production rate would pay back the capital of the well, Phelps said it is not economic to be a stand alone well.

Phelps added that the second Songkhla B well is being drilled from the same location as the first, but will be drilled to the west side of the fault block.  This first one was on the east.  On this second well, Phelps says, from a technical perspective, it is more like Songkhla Main, where they hit two 4,000 bopd wells.

We’ll know if that means anything in less than two weeks.

If this second well hits on Songkhla B, Coastal will likely drill a third well there.  Right after that gets drilled, they have 3 potentially high impact exploration wells in another nearby field in the Gulf of Thailand – called Benjarong. One of these wells is relatively low risk because Premier Oil recovered oil from the Benjarong prospect in 1996 when they held the concession originally.

One reason I have Coastal as one of my top picks for 2010 is that they have three low risk wells to drill in March at the nearby Bua Ban field.

After Benjarong, Coastal will move the rig to the Bua Ban field (likely in March) which contains proven and probable reserves of 20 million barrels. Coastal drilled 3 successful wells on this field in 2006, one of which flow-tested at 750 bopd. Coastal will be drilling there again in late March with new 3D seismic and larger equipment (ESPs – Electric Submersible Pumps), Phelps hopes to hit and produce 1000 bopd in each well.   These are low risk wells, and that’s a great backup to all the other high impact, but riskier exploration the company is doing now.

Current production is 7,000 bopd offshore and 2,000 bopd onshore for total production of 9,000 bopd.  These rates are expected to increase by 3,000 bopd offshore as a result of bringing one of the more prolific producing wells (A-04) on Songkhla Main back onstream in the next couple of weeks. This well had been down due to mechanical issues with the pump.

There is no change to Coastal Energy in the subscriber portfolio.



Disclosure: I own 10,000 shares of Coastal Energ