(MENAFN- ProactiveInvestors) Investing in oil companies in the current depressed market is the epitome of swimming against the tide.
However there is something to be said for the strategy if one looks at the long-term fundamentals of the industry.
The Saudis will at some point turn down the taps leading to a rise in prices while the commodity isn’t getting any easier to find.
So given the sector-wide sell-off it follows there must be some bargains out there.
() probably fits into that category.
It listed on the junior market last August raising US$50mln to de-risk and develop the R1 and R2 areas in the Agadem Rift Basin of south-east Niger.
It shelled out a fairly significant signing bonus of US$34mln to secure the acreage.
This if anything reflects the confidence management led by chief executive Andrew Knott has in the potential of the licences.
Why are they so excited Well the R1/R2 production sharing contract covering an area approximately the size of North Yorkshire was among those the China National Petroleum Corporation (CNPC) was mandatorily required to surrender under the terms of its contract with the government.
These aren’t worthless leftovers. Rumour has it CNPC was keen to reclaim them in the last licensing round.
And it is easy to see why the Chinese might be keen to hold onto as much of its original acreage for as long as possible for they’ve had tremendous success in Niger. They’ve drilled 93 discoveries from 124 exploration wells.
Savannah’s competent person the global firm CGG Robertson expects the company to be able to replicate this near 80% hit rate when drilling begins on parts of its acreage in the second half of the year.
It’s likely the company will partner up before embarking on its first well.
Knott says there has been “significant interest” in R1/R2 and he told Proactive Investors: “I’m very confident that any partner introduction will be done at a very material premium to that implied by our current share price.”
Savannah’s six-strong team of geologists and geophysicists has spent the period since listing working over historic data which includes some old 2D seismic surveys as well as state-of-the-art modern 3D.
The latter has been key to identifying Savannah’s 14 drill-ready exploration prospects with a mean prospective resource of 215mln barrels.
The Chinese success has been down to its use of 3D seismic data which allowed it to identify the trap structures that are a pre-requisite to discovering commercial oil.
Early interest in the Agadem Rift Basin by the majors which pre-dated CNPC’s arrival in 2008 was dimmed when they struck out more often than they hit commercial oil.
“CNPC used 3D seismic and it transformed how exploration was done. You need the 3D seismic to properly image the traps” says Knott.
“That is why four out of five wells are working; the trap risk is somewhat mitigated by 3D.
“We are very comfortable with what we are seeing. We have now completed the work [of interpreting data] from first principles with geologists and geophysicists working full time over course of the last nine months.”
Accumulations of this slightly waxy 31-degree API crude tends to be on the modest size internationally – the average find is around 11mln barrels while the largest is 60mln.
But as they are numerous reasonably easy to find shallow and therefore cheap to drill the Chinese have been happy to make inroads.
They have developed a 20000-barrel-a-day refinery and should complete Niger’s first export pipeline (which will hook into the Chad-Cameroon pipe) by 2017.
As mentioned earlier Savannah is keen to drill its first exploration well in the second half of 2015. Conservatively the costs are likely to be US$5mln.
However CNPC’s costs are coming in at US$4.25mln and the slowdown of the industry will undoubtedly give Knott and his team some power to hammer down costs.
As well as the shallow lying play that CNPC will target initially the Savannah boss reckons there may be several other larger deeper lying prospects.
A seismic programme will be used to work up potential targets as well as confirming some of the leads generated by going through the historic data.
While Savannah has had a relatively quiet start to life things are set to hot up as 2015 progresses.
Investors should look out for news on a new partner which should pave the way to drilling and the shooting of new seismic data.
Savannah also plans to use a process called a full tensor gravity gradiometry (“FTG”) survey to help it identify and confirm some of its hottest prospects.
It is a process that Tullow used to great effect proving up discoveries in the East African Rift System..
Knott is clear that Savannah is sitting on something special – an asset that belies the company’s current bargain-basement market capitalisation.
“In terms of the oil price being down you have to be very clear where you sit on the global cost curve” says the Savannah chief.
“I am very comfortable where we sit. What we have is large and relatively low risk. I am confident our asset is one that works throughout the cycle.”
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