Enercast report
South American Oil Find Makes Small Canada Firm Popular
Published: Sep 21, 2011
By Isabel Ordonez
Of DOW JONES NEWSWIRES
A recent oil find off South America's northern coast has investors focused on little-known Canadian oil and gas company CGX Energy Inc. (CGXEF, OLY.V).
CGX doesn't have a stake in the block where Britain's Tullow Oil PLC (TUWOY, TLW.LN) found oil at its Zaedyus prospect offshore French Guiana, but the Toronto company has one of the largest acreage positions in what is known as the Guyana-Suriname basin, off South America's Atlantic coast. The region has long been thought to contain billions of barrels of crude oil, but only now--thanks to Tullow's discovery--investors believe its potentially vast reserves could be close to being exploited.
CGX President and Chief Executive Stephen Hermeston said his phone and email have been bombarded by people interested in investing in the company since the Zaedyus discovery was announced. "We have a lot of new friends," Hermeston said in an interview.
On Sept. 9, the day after Tullow Oil announced its discovery, CGX shares skyrocketed 63% from the previous close of 49 cents. The stock were halted until the company issued a press released explaining what happened.
A handful of large international oil companies, including Exxon Mobil Corp. (XOM), Royal Dutch Shell (RDSA, RDSB, RDSA.LN, RDSB.LN), Total SA (TOT, FP.FR) and Repsol YPF SA (REPPY, REP.MC), also have grabbed large swaths of land in the basin in recent years, betting on the area's high potential. But because their Guyana-Suriname basin positions represent only a tiny portion of their worldwide portfolios, their stocks are less likely to move on news of a large discovery on the region.
The Zaedyus find had a significant impact on the shares of Tullow, the operator of the block and owner of stakes in various licences in the basin: Shares rose 15% the day the discovery was announced. Since then, Tullow, one of the largest independent oil and gas producers in Europe, has been able to sustain a large portion of the gains.
CGX's stock more than doubled on the same news, reflecting the fact that it has the largest exposure to the area, said Frederick Kozak, an analyst with Canaccord Genuity.
CGX holds three licenses offshore Guyana, stretching about 248 miles from the Venezuelan border in the north to the Suriname border in the south. The assets in Guyana are the company's only assets. "The company has the most to gain, or lose, from developments there," Kozak said. "It's a high risk, high reward investment."
Before Tullow's discovery, the company was having difficulty finding partners for its 100%-owned Corentyne license in offshore Guyana, something analysts say will help CGX to spread the risk and high costs of exploring for oil in the region.
Drilling an offshore well in the basin would cost dozen of millions of dollars, a significant commitment for CGX, which has a market capitalization of $158 million. This is one of the reasons why CGX said Monday it's planning to fund its capital program with proceeds from a bought-deal financing agreement with a syndicate of underwriters, led by Cormark Securities.
The underwriters agreed to buy about 114.3 million shares at 70 cents for gross proceed of $80 million with the option for an additional $12 million. The price per share on the deal is a 19.5% discount to the stock closing price Friday. CGX shares, which already were trading lower Monday, took a greater hit on the news, and the stock closed down 11% on Tuesday.
The next trigger for CGX's shares could come in the next few days when a subsidiary of Japan's Inpex Corp. (IPXHY, 1605.TO) is expected to release the results for a well it's drilling offshore Suriname.
If Inpex finds oil, it will further support the theory that the entire basin contains many billions of barrels of oil and that they can be produced in a few years, said John Malone, an analyst with Ticonderoga Securities. An oil find also would increase the chances that CGX and its partners could be successful in its future exploratory efforts at the Jaguar prospect in the Georgetown license offshore Guyana.
Repsol is the operator of the block with a 15% ownership, while CGX has a 25% interest. YPF SA (YPF, YPFD.BA) and Tullow each have a 30% interest. Repsol expects to drill a well in October and hopes to duplicate the success Tullow had at Zaedyus.
Hermeston is more confident than ever about the future of CGX, but he acknowledged the risks. "We are very confident of our analysis," he said. "However, there are no sure things in the oil business."
(Isabel Ordonez covers U.S. integrated oil companies for Dow Jones Newswires. She can be reached at 713-547-9207 or by email at isabel.ordonez@dowjones.com.)
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