TO --questionSorry in advance, but my answer is a bit long.
You are correct about the flow rates between AEN’s Causeway and IAE’s Athena field. The lower flow rates are a function of lower reservoir porosity, internal reservoir pressures, a slightly lower API crude (28 API) in Athena versus Causeway (31 API), ect… But the 2P reserve estimates on both fields already incorporated these variables when determining the recoverable reserves so flow rates do not determine the ultimate recoveries. Flow rates themselves are a function of those same variables. So what is posted in their reserve reports are a best probability estimate of what both companies can extract from thier oil deposits.
One thing that a lot of people are not looking at is that AEN’s Causeway and Fyne & Dandy are completely delineated. This is not the case with Athena and Athena East. IAE estimates that if the next appraisal well in Athena (to the NE of the current field) is a success it could increase the Athena’s reserves by up to another 27 mmbo, doubling the overall size of current Athena reserves. The northern extension could have another 30 mmbo on top of that as well. So if this were to play out Athena could contain recoverable 2P reserves in the 85 mmbo range, even with the 17 well not being successful in the south of the field.
Now will this happen? Probably not as there could be some dusters along the way. But an increase in reserves to a number between the current 28 to 85 mmbo gross reserves, say 50 mmbo still has a good probability.
Athena’s wells are expected to come in at 5,000 bod/well on pump. But every new appraisal well that works out going forward will increase the production that Athena will produce by about 5,000 bod, if these wells have similar flow and reservoir characteristics to the previous successful wells at Athena. So now IAE expects 15k/d gross from Athena. But if the next appraisal well is a success, then the production profile increases to 20k/d gross and so on. AEN’s Causeway production profile is was it is b/c it can’t be delineated further. There is no upside on the production profile at that field from AEN’s current estimates from here on out. Same goes for Fyne and Dandy.
As for your second point, if IAE wanted to they could solely focus on Athena and Athena East delineation drilling if they wanted to and decrease the odds of hitting dusters going forward while increasing the reserves of both fields. But the long term upside in IAE is clear if they have more than one field to bring online after they begin production of Athena. N. Sea fields tend to decline at a 25-40% rate after 1 year of production, so if you don’t bring on any more production after 1 year your CF will fall off the cliff.
In AEN’s case they will bring in Causeway and Fyne and Dandy at pretty much the same time. So once they start to decline AEN currently has nothing in their UK inventory to offset that decline. Exploration success or an expensive takeover (dilution or debt funded) of assets will be needed to fill in the gap and at this time AEN doesn’t really have any other UK blocks to explore on.
IAE does have multiple blocks to explore on and the truth is with a 10-25% probability of successes on wildcat exploration wells there will be many more dusters than successes. Since there is a time restraint on when they got these blocks they have to drill in that timeline or give those blocks back to the UK government. So they have to drill some high-risk exploration plays or they’ll run out of blocks to drill.
More fields need to be found or there is no point to hold a stock after they begin production b/c they will only be able to sustain production for about a year before the party is over.
New fields are needed and dusters will occur to find those new fields. You can’t just stop drilling b/c you might miss. If you do your producing assets will eventually run dry and then your done as a business. There needs to be a pipeline of new developments in order to continue to grow. If you miss on 9 wells and then find another field on the 10th well the NAV will still increase overall. You have spent US$100 mm gross to drill 10 wells, but for every 10 mmbo that the new field contains it’s worth another US$200 million gross in NAV at US$20/bo in the ground. A modest 20 mmbo field would generate a NAV of $400 million and so forth. So a find more than makes up for past drilling expenses. They just have to find one first, but this can’t happen if you don’t look out of fear of dusters.
In the end the market will only fully value any energy company when they begin to produce and the CF from that production is evident in their earnings. So whether there are dusters or successes on individual wells from here on out for both companies it is irrelevant. After the Athena-17 well did not work out Fred Kozak (Canaccord) reiterated his $4.50 target. Why? B/c this is a US $10mm well that they pay 70% of. So all this cost the company was US$7 million and time. But the market wiped out (116.5 mm x CAD$0.80/share x $0.98 US/CAD exchange rate) = CAD $91.3 mm in market value (diluted) on the results. That is 13.3 times the value of what IAE actually lost in true cash value. All this when the Beatrice’s 1,800 bod of production almost covered that US$7 mm of lost cash with its own CF during that drilling time. This is why I said before that investing with emotions is a dumb way of trying to make money.
After Oilexco announced their Huntington discovery (estimated to be 250 mmboe at the time, now it’s estimated to be 350-400 mmboe) about 9 months ago the market pushed up the shares for about 3 weeks and then took it all back over the next 2 months even as oil prices were rising at the time. The same thing happened after the announced large discovery/appraisal successes at their Kildare, Shelley and Bugle fields. The market pays up for it initially, but quickly takes most of it away as they are not producing assets and will require funding and time to come online. The initial pop is just an emotional response to the success. The move is only good if you are a trader. If you are an investor it’s a short-lived gain, but it sets up for a much larger payday down the road when those new fields come online.
Even reserve reports discount the NAV of reserves @ 8-10% over the expected life of production b/c of the risks with what the actual oil price will be when the assets do produce versus their assumptions on the estimated price at the time of writing the report. At a zero discount rate the NAV values are closer to double what they are at a 10% discount rate. The market removes that discount at the time of production, as the actual oil/gas price is evident at that time and not based on speculated estimates that could have been way off on the actual oil price that company is generating at that time.
The market will only pay for those reserves when they actually flow. That’s why AEN is a 2010 story. IAE is a 2009 – 2010 story.