WISR Ord Shs V.WZR

Scotia's take on these events

[Storck]

The market reaction certainly seems rather drastic. Here's what Scotia had to say:

• WesternZagros (WZR, SO, $3 TP) Aggressive Selling on Risk that Kurdamir May be Smaller than Previously Assumed; Results From DSTs 3 / 4 (late Sept/Oct) Increase Importance 
  The stock traded down yesterday more than our Sales Desk had predicted to ~$1.10/sh (-27%)...we had thought a 17% price reaction would have been full.  Admittedly, WZR was (and is) a high risk, high reward opportunity...but investors should keep in mind that the share price wasn't reflecting a giant size oilfield discovery at Kurdamir.  Using gross 1C of 240 MMbbl + P90 resources of 309 MMbbl or a net aggregate of 549 MMbbl gross (220 MMbbl net to WZR), which would still imply significant upside of $2.58/sh.  Clearly, investors are not going to give credit for risked resource value...but the current price either excludes any value for Sarqala, or risks Kurdamir down to <10% of its unrisked value.  This really means that DSTs #3, 4 in late-Sep/Oct will be extremely important for WZR insofar as proving the extent of resources at Kurdamir.  From the Q&A on the call yesterday, a key point investors were focused on was the size / extent of the pool and what these DSTs / potential OW-contact meant for total field size.
  Key points from yesterday's conference call: 
  1. Should DST 3 and 4 produce formation water, it places a MUCH higher risk around the current prospective resource estimates of 1.3 Bbbl (gross unrisked Pmean). However, given the well is testing the flanks of the structure a few km's away from K-1, Gavin views much less risk around the current contingent (2C) resources of ~545 MMbbl (oil only / 943 MMboe incl gas).  In our view, the DST 1, 2 results don't impact the case for a sizeable commercial development...but DST 3,4 will be important in narrowing the size range (commerciality obviously requires a gas monetization agreement / strategy).
  2. DST#1 should not be seen as overly negative given it was testing well below the previously lowest known oil depth (ie. more of a test toward understanding the fracture extent and not looking at material oil recovery).
  3. DST#2 was very near the depth of the prior deepest oil flow test in K-2; recovering formation water is a clear concern.  However, the low GOR (gas to oil ratio) recovered is an anomaly that could indicate the water is part of a transition zone or compartmentalized (meaning this is not the oil-water-contact and less risk associate with current prospective resource estimate).  Until proven otherwise, most investors will assume DST#2 is an oil water contact (e.g. smaller size reservoir).  DST #3 & #4 will be very important to test this theory---both tests will need to recover / flow primarily oil with limited to no water / gas to surface. Aggregate flow could now be on the low-end or below pre-drill estimate of 4,000-7,000 bbl/d.
  4. Implications for Baram. The Baram well on the Garmian Block has now spud and expected to TD at 3,800 m prior to year-end. Should DSTs 3/4 fail to recover oil, Gavin would consider the chance of success on Baram to be lower (likelihood of Baram-Kurdamir being connected becomes very small; may be stand-alone structure). However, if DSTs 3/4 are successful, and the water recovered in DST#2 is part of a transition zone, there is clear hope for Baram. At this point, the market is placing zero value on Baram.  The Pmean gross unrisked prospective resources of 434 MMbbl (oil only) assuming Baram as an independent closure. There is a large potential fault that separates the two structures (if this is the case, K-3 would have little bearing on Baram).
  5. Still commercial. When looking at Sarqala (2C = 24 MMbbl + Pmean = 296 MMbbl) and Kurdamir (2C = 545 MMbbl) it still would appear that commercial thresholds have been met. WZR reaffirmed its views that Garmian South development (Sarqala) could yield gross peak production of ~120,000 bbl/d, while Kurdamir could be in the 300,000 bbl/d range (perhaps high if Pmean is reduced).  The point is that while DST#1,2 are not the "dream case" confirming a >1 Bbbl oilfield, this doesn't mean that WZR near $1/sh reflects anywhere close to commercial success at either Sarqala or Kurdamir.   We have recommended a small 1% position in WZR since the start of the year, and we were up almost 50% and are now flat on the year.  We still think the Kurdistan region remains one of the most impactful globally for incremental oil supply, and despite DST#1,2 results, we still see WZR as one of the best ways to play this trend (as exports to Turkey will allow many companies to be paid for their oil production, therefore increasing the attractiveness of producing assets in the region...and setting WZR up for a longer term takeout upon commercialization).