Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Developments at Gulfsands Petroleum heat up

When Chinese oil and gas giant Sinochem (SHA:600500) acquired Emerald Energy in August 2009 for £532 million in cash, speculation immediately turned to the future of  Gulfsands Petroleum (AIM: GPX). 

Gulfsands and Emerald Energy each held a 50% interest in the Khurbet East Field in Syria which had delivered better than expected results and was fast becoming a serious asset with good flow rates and potential to develop more additional reserves through drilling.  It was rumoured at the time of the acquisition of Emerald that Sinochem had already approached Gulfsands too, but was rebuffed. Ever since rumours have circulated that Gulfsands Petroleum would be next on Sinochem’s shopping list.

This appeared to all be confirmed late last week when Gulfsands Petroleum confirmed and then rebuffed an approach by an unnamed suitor.   Not surprisingly, everyone and their dog thought it must be Sinochem coming back to the table.   It appears however that the would-be acquirer was in fact Bombay Stock Exchange listed Indian Oil Corporation (BOM:530965), India’s largest company by sales and the 18th largest petroleum company in the world.

Regardless of who made the bid, press coverage on the weekend has pointed to a take-out price of 400 pence to attain the blessing of Gulfsands board.  For investors, happy days are already here, with the Gulf of Mexico and Middle East focused oil and gas player trading at an all time high this morning of 330 pence – valuing the company at £400 million - up nearly 4% from Friday’s close, suggesting the market is expecting more to happen.

While bid speculation is undoubtedly going to be the key point of discussion for Gulfsand shareholders in the coming days, for the company, it is business as usual, to a degree.

Gulfsands Petroleum announced this morning that it had reached an agreement with AuDAX Resources  (ASX: ADX), to acquire working interest positions in two exploration permits in Tunisia, Chorbane and Kerkouane,  and one  exploration permit in Southern Italy, GR15 PU. Gulfsands will earn-in to the projects through the partial funding of upcoming exploration work.

Under the terms of the deal, the company can earn up to 40% of the onshore Chorbane permit and up to 30% of the contiguous Kerkouane and GR15 PU offshore permits.

"These onshore and offshore Tunisia blocks are within the area of focus of our Middle East and North Africa business strategy and offer a compelling opportunity that fits well with our growth strategy of gaining cost-effective high impact projects and operated production”, Gulfsands CEO Ric Malcolm commented. “We look forward to drilling these two exploration wells this year in what is an exciting development for Gulfsands".

The Chorbane permit spans 2,428km₂ near the port city of Sfax and the well will target the permit’s most prospective area, Sidi Daher. Gulfsands said the large-tilted horst block contains multiple potential targets, noting AuDAX’s estimate for recoverable un-risked prospective resources of 80mmboe. The Sidi Daher’s gross well cost is estimated to be approximately $5.0m, and Gulfsands expects to drill the well before to the end of 2010

If the exploration well is successful, appraisal and development activities will commence as quickly as practicable at Sidi Daher, with first production expected within 18-24 months of discovery, Gulfsands stated.

The company will earn up to earn a 40% interest in the Chorbane permit, onshore Tunisia. To earn-into the project Gulfsands will fund help fund the drilling of the first exploration well, providing 80% of the costs.

The contiguous offshore Kerkouane and GR15 PU Permits, have a combined area of approximately 4500km₂ off the southwest coast of the Sicilian Island of Pantelleria and the northeast coast of Tunisia. The permits contain multiple prospects and leads, with the most significant being the Lambouka Prospect, a large horst block containing multiple reservoir targets.  The Lambouka Prospect lies in approximately 400m of water. AuDAX has mean reserve estimate of 270mmboe for the Lambouka Prospect.

AuDAX plans to drill an exploration well on the Kerkouane Permit, Atwood Oceanics has been contracted to provide a semi-submersible offshore drilling unit to conduct drilling on the Lambouka prospect, with an expected spud date of 15th June 2010. 

Gulfsands will earn a 20% working interest in the contiguous Kerkouane and GR15 PU permits by paying 30% of the cost of an upcoming 3D seismic programme, which will be used to define the first drilling location. The company also has the option to earn an additional 10%, by funding 15% of the initial well cost.

The gross cost of the seismic programme is approximately $5.2m and the gross cost of the first exploration well is approximately $20m.

Bid speculation apart, this is a positive development for the company from the perspective that it diversifies its exposure into Europe and the Mediterranean.   Gulfsands has made excellent progress in Syria, and its mature assets in the Gulf of Mexico still generate cash flow, but to become a truly diversified mid-tier oil and gas player, it requires more projects in more territories. This morning’s announcement goes some way to addressing this, the question now is will the company remain independent long enough to execute on its strategy…

Disclosure: The author holds no positions in the company