Sud Remada is a company maker
Hi,
I'm new on this board, but I've been writing quite actively on the TPL board for a while, please have a look at my postings there for reference. I'm a petroleum engineer by training.
I've been holding shares in CKE for around 6 months, and it was the potential of Sud Remada which attracted me to invest in CKE, coupled with a strong production base in Canada with apperant potential for moving towards a more oil-weighted production.
Jumping straight into it, I see Sud Remada (SR) as a company maker for CKE, especially in the light of the recent excellent NR which exceeded both the company's and my expectation. Forgive me if I'm pointing out or explaining the obvious, I'm not sure how familiar this board is with the terms and methodolgies being used in the industry.
What makes the SR license so attractive in my eyes are four factors:
1. The in-place size of the TT discovery and potential for applying "new" drilling and completion technologies
2. The excellent fiscal terms. Over the life time of the TT discovery, CKE gets to keep around 40% of gross production, there are no royalites and taxes are paid from the ETAP share. What this means is that we will see net backs close to 100 USD (on CKE's 40%) with the current Brent price which makes this hugely profitable.
3. The potential from the Shale oil (Tannezuft) formation.
4. The exploration potential in the rest of the block building on experiences from TT. CKE has stated that they have 8 additional prospects defined on sparse 2D.
Moving on the valuation, there are a few dfferent ways of valuing the TT discovery and I'll go through them briefly.
NPV per well approach (bottoms-up)
This is an established methodology that you see all the time in the shale plays in NA, it assumes a certain Initial Production (IP), a certain decline rate and an Estimated Ultimate Recovery (EUR) per well. Combining that with the well cost and operating costs, you can calculate the NPV per well. I've attempted to do this based on info released from CKE on well cost and the terms of the Production Sharing Contract (PSC). Using an IP of 500 bbl, an EUR of 500k bbl (remember, this is not a shale formation, this is a tight sand stone), a well cost of 5 MUSD and 10% OPEX, I've gotten to a PV10 per well of around 20 MUSD, net to CKE. With an assumed 10% rec rate, and 300 MMbbl in place, we're looking at around 60 wells to develop this field which corresponds to 250 ac spacing if I've done the conversions correctly. In summary, this field should be worth around 1 BUSD (accounting for phasing of wells) to CKE, close to 2X the current Enterprice Value (EV).
Metrics approach (top-down)
Based on a STOIIP of around 300 MMbbl, applying a 10% discovery factor we're looking at 30 MMbbl, of which 86% belongs to CKE, before state take. If we apply the metrics from the recent OMV transaction (22 USD/2P or 150,000 bbl/d), we could put a price tag on just the TT discovery of around 550 MUSD. This is in my mind a conservative valuation, which doesn't take into account the excellent fiscal terms nor the upside potential in the existing discovery (infill drilling, water injection, Tannezuft shale) or the exploraton potential that exists on the 900,000 Ac. Alternatively, if we look at the flowing barrel metric and assume that CKE will be able to ramp this up to around 10,000 bbl/d in a few years time, we could be looking at close to 1.5 BUSD, or almost 3X current EV.
To me, it looks like the market is putting next to no value on CKE's Tunisian assets, which in my mind is something which will change in the coming months when CKE starts ramping up production and releases more detailed information on the plans going forward.
I see clear similarities to Trans-Globe and how their share price went from 4 to 15 USD once the market realised the potential of the Nukhul formation. I have a target price of 4 CAD in 12 months time, just based on the current asset base.
All the best,
Darcy