Wild cards in the deck
Based on my assessment there are at least four wildcards (risks) at play in the Pieridae game:
First is the regulatory problem with the transfer of Shell assets. Regardless of Pieridae's commitment to address orphan wells (it’s not like they have a choice) the 20+ intervenors are unlikely to go away and given the heighted public (taxpayer) concern about abandoned well liabilities, the AER is presented with a very difficult decision to make. And if they approve the transfer they will likely see litigation as a result. And they know it. No, there is no certainty about how the AER, Shell and Pieridae asset transfer/acquisition story will end. This is a major risk factor.
Second, there is currently no loan guarantee from the German Government, only a promise to consider a loan guarantee. But there are two conditions precedent that the German Government has stated; one being that the German people would not be at risk of losing their investment and second that the gas supply for LNG imported into Germany must not include fracked gas (see below). I’ll let you draw your own conclusions with respect to condition one and as for condition two, I submit that it is impossible for Pieridae to achieve. The assumption that Pieridae will get the $10.5 Billion USD loan guarantee from the German government is, at best, very risky. And without the German loan guarantee, the project is dead in the water (assuming Kenny doesn’t use pension funds to finance the project).
Third, Pieridae’s attempted acquisition of the Shell assets was so they could fulfill the NEB (now CER) requirement for a gas supply and to satisfy the German Government requirement for non-fracked gas supply. If we put aside for a moment that all the post-1970 wells in the Shell assets were actually fracked, the fact is Pieridae, in the absence of successfully drilling hundreds of successful, very expensive (> $1 million per well) deep foothills wells in incredibly complex geology, does not and will not have adequate production of non-fracked natural gas to meet its train one requirements and its obligations to the German Government.
Fourth, Shell successfully operated these fields for over 5 decades. They understand the complex geology, technical and public safety aspects of operating in an extremely high H2S environment and importantly, the economics of what has been a very profitable operation. Even they have had more than their share of problems and disappointments in proving up new resources. So I submit that if there are hundreds of new target, as Pieridae has suggested, and assuming these targets make geological, technical and economic sense, why would an experience well capitalized company like Shell not have exploited the resource further. Instead they’ve decides to bail and move their capital to greener pastures. Is there any reason we should expect Pieridae to achieve what Shell believes they can’t in an area of deep complex geology, very high H2S levels and extremely high drilling costs. Any reasonable person must conclude that there is signicant risk that Pieridae will not make up their shortfall in supply from incremental upstream developments. If that true, and given Point 2 above, ask yourselves where that gas could come from?
I know this sounds grim but I want to understand the opportunity and risks of this stock. I would be interested in hearing feedback, pro or con.