Success ratesVast states in its 2008 presentation on page 7 that Iraq has a success rate of 73% between 1970 and 1989.
WZRs block is classed as P90 (see below)
Vast should be rated similar to WZR
This is Iraq / middle east / Zagros mountains. The 10% factor does not apply here.
Investment Theme II: Kurdistan Pure Plays
There are only two Kurdistan pure plays in the Kurdistan universe: WesternZagros and its “mini” neighbor Vast Exploration. They share many of the same attractive investment characteristics.
Highly attractive risk/reward profile. We believe that the fair value of WZR (click here for valuation details) is conservatively about C$3.60, or roughly 2.5X its current price. There are many cheap lottery tickets in the E&P universe, but what makes this one unique is its high likelihood of success. It is hard to make a forecast of VST’s NAV due to the earlier stage in its exploration efforts. However, NKO, one of the larger E&P companies in Canada with a market cap of CAD 3.6 billion, is not only VST’s business partner (36% working interest) in the PSC block, but also VST’s largest shareholder (17% ownership). Combining both, NKO’s actual working interest in the block is over 42% (36%+36%*17%). Therefore, buying VST stock is essentially buying a call option on NKO’s Kurdistan business or the eventual consolidation into NKO.
High scarcity value. Kurdistan holds one of the world’s most coveted oil fields, which up until recently was off limits, protected from foreign ownership. WZR and VST were among the first movers, and because they took large risks as foreign investors at such an early stage, their potential reward is sky high.
Kurdistan is actually safe. Kurdistan is no tropical island for the long distance traveler, but it is arguably a true “security oasis” within the war-battered Iraq, and it is ranked “secure” by the US military. Over 20 E&P companies have been operating in the region over the past several years with no major interruptions, which makes this a safe haven among prospective untapped oil reservoirs. Click here for detailed blog on geo-political issues in Kurdistan region.
“Elephant” potential. An “elephant” oil field is one whose recoverable reserves are at least 100 million barrels. According to the well respected oil and gas consultancy Sproule and Associates, as of March 31, 2009, WZR’s exploration block has P90 prospective resources of 1.6 billion barrels. P90, for those unfamiliar with the industry jargon, refers to reserves that have a 90% certainty of actually being produced. WZR’s find, if “proved” would count among the 100 largest producing oil fields in the world. VST’s block is bordering both the WesternZagros block and the Heritage Oil block, which are considered among the 2 most promising blocks in Kurdistan (and in the world for that matter). Heritage Oil announced a major oil discovery in its Miran West-1 well early May with estimated oil-in-place of between 2.3 to 4.2 billion barrels. In early February 2009, VST started a seismic acquisition program for a minimum of 350 km of 2D seismic data. The process will take 4-5 months, and at its conclusion, VST will be able to generate an initial reserve estimate for its block – this creates potentially very market moving news flow this summer.
Terrific takeout potential. WZR, although well capitalized for a “junior” oil exploration company, with $130 million in cash and no debt, is extremely unlikely to remain independent long term. Its exploration partner, Talisman Energy, with $8 billion of revenue and a $16 billion market cap, is better suited to take on this elephant, and may wish to increase its stake by acquiring WZR itself. Other large oil companies who either have been waiting on the sidelines due to lack of a clear regulatory framework or who already have small stakes, are undoubtedly eying WZR’s prized oil fields hungrily. NKO is VST’s exploration partner and its largest shareholder. The likelihood that NKO eventually acquires VST in whole is arguably quite high, which provides another very direct catalyst.
Disclaimer: The author is long WesternZagros and Vast Exploration.