OTCPK:WSRLF - Post by User
Post by
begullon Nov 15, 2013 10:13am
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Post# 21909356
TD Analysts
TD Analysts
Impact: SLIGHTLY POSITIVE
In our view, the impact of financial results is neutral although we believe there are some slightly positive operational updates. We find three items in the announcement as slightly positive. These are:
1. Interpretation of recently acquired 3D seismic appears to indicate that the Baram structure is separated from Kurdamir by a fault.
2. WesternZagros is working with its partners towards declaring commerciality for Sarqala and Kurdamir discoveries. These are expected by the end of 2013 and end of Q2/14 respectively.
3. The Company retains its optionality, as per its agreement with Gazprom Neft, in committing to and allocating financial resources to the Garmian exploration wells.
This in our view indicates that the Company is less likely to undertake a heavily dilutive equity issue to fund its 2014 work program.
We maintain our SPEC. BUY rating with a target price of C$1.80.
Outlook
In our view, Kurdamir-3 well was a disappointment for the Company and the results have weighed on the share price. However, the Company continues with its busy and potentially high impact work program for 2013/2014 with two near-term catalysts (Baram-1 and Hasira-1). Although geological risks are high, in our opinion WesternZagros benefits from diversification across a number of geological structures and across a portfolio that includes two material discoveries (Sarqala and Kurdamir) whilst retaining optionality in relation to its work commitments and financial resources. We consider Baram as potentially the biggest impact catalyst for the Company over the next few months. According to our estimates a discovery could be worth about C$0.50 per share. Our estimate of downside impact for Baram is C$0.20 per share.
Valuation
Exhibit 2 shows our asset valuation breakdown for the Company. In our opinion, the Company is trading at a significant discount to our risked estimates. Even accounting for a failure at Baram, we would expect the shares to trade at a higher level supported by the two discoveries at Garmian and Kurdamir.
Investment Conclusion
We are encouraged that WesternZagros and its partners are working towards the declaration of commerciality for the Sarqala and Kurdamir discoveries. These are, in our view, significant oil and gas fields that retain significant appraisal potential. However, in our opinion technical (reservoir) risks are relatively high particularly for Kurdamir. We note that the Company’s management have identified a number of issues that can be improved on the next Kurdamir well, including better cementing and acid treatment and the potential application of open hole testing. They have also re-iterated the application of horizontal drilling to maximize well deliverability.
Despite the recent set-back on Kurdamir-3, we believe there is sufficient risked upside to our 12-month target price to justify maintaining our SPECULATIVE BUY recommendation. We also keep our target price unchanged at C$1.80.