RE: WZR equity research
WesternZagros Resources (TSXV: WZR)
Finger On The Trigger
Sector Perform
Speculative Risk
Price: 0.70
Shares O/S (MM): 371.2
Dividend: 0.00
NAVPS: 1.46
Float (MM): 284.3
Price Target: 0.90
Implied All-In Return: 29%
Market Cap (MM): 260
Yield: 0.0%
P/NAVPS: 0.5x
Major shareholders: Institution #1 - 19.9%; Institution #2 - 15.6%, Management - 3.5%
We see the potential for a turn-out that could commence
with a successful well test in December
Potential Catalyst: A positive well test on the Mil Qasim-1 exploration well on
the Garmian Block (WZR 40%), could be a catalyst for a share price re-rating, in
our view. In addition to the direct benefit – unrisked a successful well could add
C
.24/share to our NAV - a positive result would open up a new (Upper Fars)
play and could accelerate the arrival of a new partner. In our view, the allocation
of the Garmian Block’s, 40%, Third-Party Participating Interest (PTTI) would
result in a cash injection and a reduction in WesternZagros' commitments on a
go-forward basis; the company currently shoulders all the costs. The arrival of a
credible partner should also be seen as an endorsement.
Well test: Mil Qasim-1, is targeting a 63mmbbl (P50) structure within the
shallow, Upper Fars sandstone formation. To date management has said the well
encountered oil and gas shows while drilling; having reached TD last week the
well has been logged and we expect production tests to commence in early
December. We have calculated a risk reward ratio of C
.24/C
.08 per share for
the P50 case, and note the Pmean and P10 upside cases are 106mmbbl and
265mmbbl, respectively.
TPPI: By our calculations, the allocation of the third-party interest would result
in an estimated ~$70m cash injection, to cover 50% of past costs, and reduce
WesternZagros’ commitment to 50%. The new entrant would pay its 40% share
and half of the KRG’s (20% carried) costs. Combined with cash flow from the
ongoing Sarqala-1 extended well test and Taqa’s October $46m cash injection,
we expect the allocation of the TPPI would re-write WesternZagros’ balance
sheet and 2012 capex budget. And, as a result, we believe investor interest would
refocus on the company’s three-well, 2012, drilling schedule, rather than its
finances.
Valuation: On a sum of the parts basis we value WesternZagros at C$1.46/share,
up from C$1.28/share. The increase reflects the net impact of the inclusion of
Hasira-1 (C
.22/share), a revised view of exploration risks and a TPPI-linked
$70m (C
.18/share) cost recovery payment in H1/12.