RE: Blackmont ReportHere are some more portions of the report.
The Durango well took longer to drill than was originally planned due to a number of operational and weather
related issues. Capital costs for the well, originally estimated at approximately $90 million, are now expected to
total approximately $115 million, a 28% overrun. We have factored these additional costs into our NPV estimate and
financial forecasts.
With updates to our NPV model including the timing of produciton, capital cost increases, and a commodity price
update, we are now estimating Durango's NPV10% at $1.00/share (diluted) which provides substantial support to the
current stock price of $1.45. Further upside to our valuation could occur if the P10 reserve estimates are achieved. In
this scenario our NPV10% estimate for Durango would increase to $1.40/share (diluted).
The Next Catalyst: North Piper
With Durango essentially completed, Bridge's next target is the potentially very large North Piper exploration
prospect located in the UK Central North Sea. The company has identified an additional potential heavy oil-bearing
reservoir on its prospect in the shallow Lower Eocene and Upper Paleocene sands.
The primary target is the potentially light-oil bearing Piper sand at approximately 7,700 ft. in depth. The Piper sand
is estimated to contain approximately 442 mmbbls of recoverable oil assuming a 60% recovery factor (Figure 2).
Additionally the Lower Paleocene sand is estimated to contain approximately 65 mmbbls of recoverable heavy oil
assuming a 25% recovery factor and the newly identified Lower Eocene and Upper Paleocene sands are estimated
to contain approximately 82 mmbbls of recoverable oil assuming a 25% recovery factor.
The total gross recoverable reserves are estimated at 589 mmbbls. We are assuming that Bridge farms out 50% of
its interest and we are assigning a 10% risk factor to the prospect; thus our valuation contains 29.5 mmbbls net to
the company.
Bridge had originially farmed out a portion of its interest to another company but this firm was not able to honour
its commitments and is now out of the project. Bridge is currently negotiating with two parties, one of which is
backed by individuals with knowledge of the Piper Field to the southeast (1,108 mmbbls recovered to date). We
believe participation by this group will lend credibility to the prospect. We believe that farm out terms being
negotiated include each party paying 37.5% for a 25% interest thus leaving Bridge with a 25% cost interest and a
50% working interest.
Time is of the essence because Bridge has a window of opportunity to secure a semi-submersible rig from Chevron
assuming the company can commit to the rig by June 15, 2008. A payment of approximately $7.2 million is required
by the end of the month to honour the commitment. The parties committing to farm in on the prospect would be
responsible for their share of this rig commitment amount. Should the commitment be made, the North Piper
prospect could spud as early as July 24, 2008. However, if not secured, the rig would not be available again until
the winter months; but, this would be problematic because the rig is not capable of drilling in the North Sea during
the rough and tumble winter period.
Rig utilization in the North Sea is now near 100% with approximately 70 rigs operating. Demand is outstripping
supply leading to skyrocketing prices with jackup rigs averaging $250k/day and semi-submersible rigs starting at
$375k/day. Thus, Bridge securing a rig early from Chevron would be a positive development.
The estimated cost of the North Piper well is approximately $25 million with an additional $6 million required should
testing occur down to the Jurassic aged Piper sand. The well is estimated to take 20 days to drill with an additional
7 days to test if successful. Our net risked asset valuation for the prospect of $1.29/share (diluted) is based on a
NPV/bbl assumption of $15.00 for light oil and $10.00/bbl for heavy oil.
Other Assumptions
In addition to commodity prices we have made several other changes to our valuation assumptions including:
?? Durango - Production is now assumed to occur beginning in November 2008. We have also increased capital
expenditures to reflect the higher costs of the well and made some changes to operating and tariff costs.
Additionally, we have increased the risk factor on the prospect from 90% to 95% to reflect our increased
confidence in the well given the successful test.
?? North Piper - We have added an additional 82 mmbbls of gross recoverable resource potential to reflect the
Lower Eocene and Upper Paleocene targets. The net risked recoverable estimate increases by an incremental 4.1
mmbbls.
Overall Valuation
The results of the above noted changes are reflected in Figure 5 which summarizes our estimated asset valuation by
the timing of future drilling. Our target price of $3.00/share (diluted) is based on the combined net risked value (i.e.
$2.99) of Durango, North Piper, and Aspen all of which should be drilled within the next 12 months. We consider the
other prospects to be "Blue-Sky" potential at this time given that drilling won't take place for some time. That said
the potential risked value to Bridge is an additional upside of $2.06/share (for a total of $5.05).
The un-risked value of Durango, North Piper, and Aspen is estimated at $16.83/share which provides significant
upside potential to the current stock price if drilling success should occur. We believe the current stock price
reflects the risked value for Durango and some exploration upside for either Aspen or North Piper. If Durango P10
reserve estimates are achieved then we estimate the NPV10% of Durango alone could be $1.40/share implying that the current stock price reflects no exploration upside whatsoever
At the end of December 2007, Bridge's last reported financial period, positive working capital was $31.6 million.
Based on our estimates of capital spending and cash flow in calendar 2008 we believe the company will have a
working capital deficiency of close to $60 million by the end of the year (Figure 8). This situation will be quickly
rectified in 2009 as cash flow from Durango ramps up. In the meantime, however, Bridge will require Interim
financing and we believe the company is currently exploring debt financing options but the timing and amount have yet to be disclosed.
The company does have 52.1 million warrants outstanding which would result in proceeds of approximately $49
million if exercised; however, we are assuming that conversion of the warrants does not take place until the end of
2009 just prior to their expiry. The possibility also exists of an equity financing but we have not factored this into
our models at the current time.