Zeus Capital note -
CN-1 initial well result
⬠Successful initial result of CN-1 well. Arrow has announced a discovery in its CN-1
exploration well on the Carrizales Norte prospect onshore Colombia (Arrow 50%). The well
has intersected a total of 148ft of net pay across the Carbonera C7 (26ft), Gacheta (64ft) and
Ubaque (58ft) reservoirs. Arrow will now go about designing a flow testing programme for
the well, with each of the three reservoirs likely to be individually tested, before the well is
likely brought on stream from one of these. We would expect the flow testing to be carried
out over the coming weeks, after which Arrow will move to drill the second of its up to three
2023 Carrizales Norte wells.
⬠This looks like an excellent initial result from CN-1 for Arrow, in our view. The well has
encountered net pay zones on Carrizales Norte in the same formations as, and of similar
thickness to, those on the producing Rio Cravo Este field, which should bode well for the
successful producibility of Carrizales Norte. This is hopefully a positive early indicator that
both CN-1 will be productive, but also that further planned wells on Carrizales Norte will also
be successful, helping Arrow add new, oil-focused volumes to its production portfolio. We
await further news with keen interest.
⬠We carry a resource number of 3.6mmbbl gross (1.8mmbbl net) for Carrizales Norte in our
model. This is material in the context of Arrow's end 2022 7.7mmboe net 2P reserves
number, but given that this is exploration, there is likely to be less in the current share price
for this asset, implying greater upside potential from current levels as flow testing and further
drilling is progressed. The extension of Carrizales Norte in the neighbouring block has
historically produced over 8mmbbl, helping underpin the veracity of the resource number we
have used.
⬠Forecasts and valuation. We have taken this opportunity to update our forecasts for the
recent 2022 results, and for a downward adjustment to our 2023 and 2024 oil price (in-line
with other companies in our coverage). The oil price change, alongside allowance for higher
G&A based on 2022, drives the changes to our forecasts shown below. We also publish
numbers for 2024. Our forecasts do not yet include any production from Carrizales Norte.
⬠On valuation, de-risking our Carrizales Norte value (alongside our rolling over our valuation
date) moves this from 3.4p to 4.2p risked (7.0p unrisked). Overall, for the change to
Carrizales Norte, alongside our forecast changes, updating our net debt and rolling over our
valuation date, our main total risked NAV metric moves from 31.5p to 30.9p.
⬠Conclusion: Arrow is a producing E&P company with assets in Colombia and Canada. The
company had net production of 1.8mboe/d in January 2023, and has a significant ongoing
drilling programme aimed at growing this going forward. On Tapir in Colombia Arrow has an
ongoing programme of new wells on the existing Rio Cravo Este field and the recent
Carrizales Norte discovery, all of which can be quickly brought onstream on success.
Beyond this, there are several further prospects on Tapir (with a recent 3D seismic programme to
support these), and a significant potential new project based on a targeted extension of the
Oso Pardo licence. In Canada, tie-in of the West Pepper and East Pepper wells has provided
an important contribution to existing production. The company also has a history of adding
new assets via acquisition. All of this should provide regular drilling news flow for the stock
and continuous production gains. Gross cash was US$13.1m at the end of 2022, providing
important funding to augment production cash flows. Going forward we expect ongoing
drilling activity and production increases on the back of this, and value the stock in-line with
our 30.9p total risked NAV.