J. Frederick Kozak, P.Eng.
1.403.508.3836
[email protected]
Timothy Clark
1.403.508.3824
[email protected]
Energy – Oil and Gas, Exploration and Production
South American Offshore –
The Caribbean Report
It’s not just on the beach – there’s oil there
INSIDE
Summary ..................................................... 2
The Caribbean – An Overview.................... 3
Caribbean Geology ..................................... 4
Trinidad and Tobago................................... 9
Guyana ......................................................21
Suriname ...................................................26
Company Feature Summaries .............. 30
Canadian Superior Energy Inc. ............31
CGX Energy Inc......................................45
Challenger Energy Corp........................61
Petro Andina Resources Inc.................73
Primera Energy Resources Ltd. ...........77
Voyager Energy Ltd. ..............................81
The Caribbean is probably best-known as a destination for golden sun and sand, but
looking around the Caribbean basin, especially off the northern coast of South America,
we find gold of a different colour: black gold, and with it trillions of cubic feet of natural
gas. Although this area may not be high on the explorers’ lists of prospect regions,
exploration is underway and it is generating results.
Mature and not-so-mature
Regions of the Caribbean basin, including Barbados and Trinidad and Tobago, are well
known for having crude oil – discoveries that were made more than 100 years ago
through surface oil seeps and later proven with exploration drilling. While these mature
areas are well know, opportunities remain for new and exciting discoveries in these
areas. Add to this list the less mature areas where there is exploration potential,
hydrocarbons to be produced and not surprisingly money to be made.
Focus on the companies
We focus on the up-and-coming regional players. In Trinidad and Tobago, the offshore has
garnered the most recent interest with continuing large discoveries of natural gas. However,
the onshore region is not finished and we look at companies operating in both areas.
Further away, with undiscovered resources and a small oil and gas sector, is the GuyanaSuriname Basin, where oil production exists but upcoming exploration activity from large
international and smaller, exploration- focused companies is underway.
New company initiation reports included
As part of our regional study, we are initiating coverage on two Trinidad and Tobago
offshore exploration companies and one early-stage exploration company in Guyana.
Company
Canadian Superior Energy Inc.
CGX Energy Inc.
Challenger Energy Corp.
Ticker
SNG : TSX
OYL : TSX-V
CHQ : TSX-V
Current Price
C$1.94
C$0.49
C$2.20
Rating
SPECULATIVE BUY
SPECULATIVE BUY
SPECULATIVE BUY
12-month target
C$4.50
C$1.80
C$5.25
Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM)
The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analyst’s personal,
independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important
information, please see the Important Disclosures section in the appendix of this document.
5 November 2008
2008-185
2
SUMMARY
In this report we focus on the offshore hydrocarbon potential of the Caribbean adjacent
to South America. There are several countries with known hydrocarbon potential and
production in the region and other countries that have limited hydrocarbon production
but tremendous potential. We have reviewed the region as a whole and, for the purposes
of this report, we look at Trinidad and Tobago, Guyana, and Suriname. As part of this
review we will also look at companies operating in these areas and highlight new
research coverage.
With the popularity of oil and gas in Colombia drawing attention to the South American
continent, investors and oil and gas companies alike are looking further afield for
investment opportunities. Colombia’s offshore potential is well known, as the country
currently produces a majority of its natural gas production from the offshore Caribbean
natural gas field at Guajira.
Wrapping around the northern edge of the continent and adjacent to Colombia is the
country of Venezuela. Onshore, this country has significant hydrocarbons which appear
to extend into tremendous offshore hydrocarbon resource potential. Unfortunately the
exploration of this potential is currently limited due to the country’s current political
landscape. But extending to just offshore Venezuela is the Caribbean nation of Trinidad
and Tobago. This country has long been an area of known oil potential, with surface oil
seeps having been used as caulking for ocean-going ships for centuries. There is a long
history of oil production from onshore Trinidad, but more recently natural gas
production, located offshore Trinidad and Tobago has become the dominant
hydrocarbon product of the country. Trinidad and Tobago has become a prime exporter
of Liquefied Natural Gas (LNG) to the US and the world through the installation of LNG
processing facilities and production. Just 10 years ago production of natural gas was
approximately 1.0 Bcf per day – this has now increased to more than 4.0 Bcf/d with the
potential to grow further.
As part of our report, we also reviewed companies operating in the Caribbean region.
Most notable is the exploration currently underway offshore Trinidad by Canadian
Superior and its joint venture group, where as much as 4 trillion cubic feet of natural gas
may have been discovered in 2008.
But the known hydrocarbon resources come at a price – the upcoming bidding round for
new offshore blocks in Trinidad is expected to be highly contested, given the proximity of
the acreage to the new offshore discoveries made by Canadian Superior, et al.
Wrapping further eastward around the northern coast of South America, oil and gas
potential still exists. Excluding Venezuela (for now), oil and gas companies are seeing
tremendous potential in Guyana and neighbouring Suriname. While no significant recent
discoveries have yet been made, the Guyana-Suriname Basin has been identified by the
US Geological Service as a very underexplored basin, with potential that could exceed 15
billion barrels of oil with natural gas potential of 42 trillion cubic feet. In this report, we
will also examine that area’s potential and operations that are currently underway.
South American Offshore
5 November 2008
3
THE CARIBBEAN – AN OVERVIEW
Long considered a hot spot for winter sun seekers from North America and Europe, as
well as vacationing sailors, the Caribbean has not been well thought of as a source of oil
and gas production. Most people think of Caribbean oil as what’s been spilled on the
beach from suntan lotion bottles!
Figure 1: Caribbean region oil production or shows
Source: Google Maps, Canaccord Adams
But think again.
Our specific area of interest is the Caribbean off the coast of South America as shown on
the map in Figure 1. The oil and gas potential of South America is well known, given the
history of production from Venezuela and Colombia, both located on the northern coast
of the continent. However, in addition to extensive oil and gas production (and offshore
potential) in these two countries, there has been a long history of oil production from the
island of Barbados and the island of Trinidad. (More recently, offshore gas production
from Trinidad has been a major new export for the country). In addition to hydrocarbons
from the islands, there has been production from onshore Suriname and exploration has
also yielded oil and gas shows offshore Suriname and Guyana. While not close to the
region in question, explorers have gone further afield and have also found indications of
oil and gas in Nicaragua in Central America. While many think of the Caribbean as a
holiday destination, it is clear that there is oil and gas potential in the region.
5 November 2008
The Caribbean Report
4
CARIBBEAN GEOLOGY
The structural geology of the Caribbean region is surprisingly complex. In the technical
readings done to prepare for this report, we noted that even the experts can not fully
agree on the full technical development of the region. However, there is enough “big
picture” information to explain how the region was formed. With this understanding, it is
easy to see how the prospectivity of the region developed and supports the currently
known oil and gas potential of the area.
Throughout the Earth’s history, the continents have moved and been joined to one
another in some form or fashion. Plate tectonic models have identified the supposed
orientation of the Earth’s crusts as far back as 750 million years ago1.
However, our interest in plate tectonics is only related to the past 250 million years. As
shown below, approximately 250 million years ago, the plates of the world were all
clustered together as shown below. Note in particular the orientation of North America,
South America and Africa.
Figure 2: Plate tectonics – 250 million years ago
North America
Caribbean
South America
Africa
Source: Lawver et al; Plates 2002
The significance of this map is not just to the subject of our report. Over time, as the
continents started to move apart, major oil and gas regions were formed due to
deposition of sediments and faulting. Outside of the Caribbean one most notable impact
is the discovery of very significant oil and gas deposits off the eastern coast of South
America (Brazil) and the western coast of Africa (Angola).
Starting approximately 170 million years ago (Middle Jurassic), the three continents
started moving. Most notable is the movement of North America away from the other
two continents. The significance of this event is that it correlated to the formation of the
1
South American Offshore
Atlas of Plate Reconstructions, Lawver, Dalziel, Gahagan, Martin and Campbell, 2002
5 November 2008
5
Atlantic Ocean between North America and Africa and also provided for the formation of
reefs and ultimately carbonate formations in the Caribbean area.
Figure 3: Plate tectonics – 170 million years ago
Source: Lawver et al; Plates 2002
Guyana/Suriname potential created by well-understood processes
As the Atlantic Ocean was forming, there were changes occurring on all three continents.
Specifically, with the movement of the continents away from each other, there occurred
uplift of the continents due to the release of geologic stresses and movements of the
tectonic plates.
This tectonic movement created the conditions that account for the hydrocarbon
potential today. Uplift of the continents (specifically South America) resulted in erosion
on the land mass over time. With the erosional process, there was a long period of
deposition at the continental margins of thick sedimentary sequences, rich in organic
material, well-sorted sandstones and mudstones/claystones and siltstones.
As South America and Africa separated from each other, thick sedimentary sequences
from the erosional processes were created in the Caribbean area. Notable was the
creation of large turbidite fan sequences off the coast of northeast South America2. These
are now primarily located off the coast of Guyana and Suriname and are identified as the
Guyana-Suriname Basin.
2
5 November 2008
US Geological Survey World Petroleum Assessment, 2000
The Caribbean Report
6
Figure 4: Plate tectonics – 90 million years ago
Source: Lawver et al; Plates 2002
Structural geology drives Trinidad and Tobago Oil and Gas
At the same time as the thick sedimentary deposits were being made off the northeast
coast of Guyana/Suriname, plate tectonics in the Caribbean were forming this region. In
the Late Cretaceous (80 million years ago), the movement of the Caribbean Plate between
North and South America commenced.
Figure 5: Movement of the Caribbean Plate (20 million years ago)
Source: Lawver et al; Plates 2002
Starting on the Pacific Ocean side of the continents, the Caribbean plate started moving from
west to east as highlighted above in Figure 5. From 80 million to 20 million years ago, the
Caribbean Plate continued to move across the top of South America as the continents drifted
apart. Further movement of the Caribbean Plate over the past 20 million years has resulted
in the structural geological elements of the Caribbean as it stands today.
South American Offshore
5 November 2008
7
Figure 6: Caribbean Plate representation
Caribbean Plate Margin
Trinidad
Source: Jackson School of Geosciences, University of Texas at Austin website; Canaccord Adams
This movement of the Caribbean Plate was resisted by both the South American Plate
and the North American Plate. As a result, at the margins of the plates, significant
faulting and deformation occurred. With the depositional environment providing organic
source rock and the geologic environment providing temperature and pressure creating
the geologic kitchen, a perfect environment for the formation of hydrocarbons occurred.
Figure 7: Structural areas offshore Trinidad
Large Natural Gas discoveries in this area
Source: Leslie J. Wood and Carolyn Roberts “Opportunity in a World-class Hydrocarbon Basin; Trinidad and
Tobago’s Eastern Offshore Marine Province” Houston Geological Society Bulletin, June 2001
5 November 2008
The Caribbean Report
8
As highlighted above, at the margin of the Caribbean Plate in Trinidad’s offshore waters,
large natural gas structures have been discovered in fractured and faulted zones. Most
notable are some of the fields highlighted below in Figure 8.
Figure 8: Offshore Trinidad natural gas discoveries
Field Name
East Manzanilla
Juniper
Mahogany
Manakin
Savonette
Dolphin
Dolphin Deep
Manatee
Starfish
Toucan
Discovery
Date
08 May 1972
11 Feb 1996
13 Sep 1973
10 May 2000
18 Dec 2004
21 Nov 1976
15 Aug 1998
03 Mar 2005
30 Nov 1998
30 Jan 2006
Total Recoverable
Reserves (Tcf)
0.32
1.91
2.38
1.07
2.11
4.26
0.50
1.67
0.43
0.70
Partners
BP* (70.00%), Repsol YPF (30.00%)
BP* (70.00%), Repsol YPF (30.00%)
BP* (70.00%), Repsol YPF (30.00%)
BP* (70.00%), Repsol YPF (30.00%)
BP* (70.00%), Repsol YPF (30.00%)
BG* (50.00%), Chevron (50.00%)
BG* (50.00%), Chevron (50.00%)
Chevron* (50.00%), BG (50.00%)
BG* (50.00%), Chevron (50.00%)
EOG Resources* (90.00%), CL Financial
(10.00%)
*Operator of the field.
Source: Wood Mackenzie
Figure 9 below shows a more detailed interpretation of the prospectivity of this offshore area.
At the margin of the Caribbean Plate and the South American Plate, significant anticlinal
features have been created. It is in this area that, with a combination of other structural
geological elements, the major natural gas fields of Trinidad have been discovered.
Figure 9: Offshore Trinidad structural geology showing anticline orientations
Block 5c
Source: Wood and Roberts
South American Offshore
5 November 2008
9
TRINIDAD AND TOBAGO
GOVERNMENT
The country of Trinidad and Tobago (more commonly referred to as “Trinidad”) became
a republic in 1976 after gaining its independence in 1962 from the UK. The government
system mimics the Westminster (British Parliamentary System) model of government,
which values parliamentary democracy. The Executive branch includes the President,
Prime Minister, and Cabinet. The Legislative branch includes the bicameral parliament,
which consists of 31-seat Senate whom are appointed by the President and a 36-seat
House of Representatives whom are elected by popular vote. The judicial branch includes
an independent court system and since the country remains a member of the British
Commonwealth, the highest court of appeal is London’s Privy Council.
Parliament members elect a President for a five-year term and are instrumental in
electing a Prime Minister. The Prime Minister, who is appointed by the President, is
generally the Member of Parliament who received the most parliament-member votes.
The current President is George Maxwell Richards, who was reelected to a second fiveyear term on February 11, 2008. Patrick Manning, who holds both the position of Prime
Minister and Minister of Finance, has held his positions since December 2001. Currently,
the People’s National Movement (PNM), United National Congress (UNC), and the
Congress of the People (COP) are the major political parties; these parties are interested
in increased foreign investment and pursuing free mark economic policies.
Since gaining its independence in 1962, Trinidad has developed and forged strong
relationships with the United States and Europe, both of which are two of the country’s
main trading partners. Trinidad has taken a lead role in the Caribbean Community and
Common Market (CARICOM), where it was both an advocate and instrumental in
strengthening economic conditions and securing political security and integration.
Trinidad has many planned, executed, and proposed foreign investment projects. The
government wants to increase and expand foreign investment within the country. The
history of successful foreign business can be attributed to several factors, including but
not limited to: a history of prosperous oil and gas industry, consistent democratic
legislation and government, accessible raw materials, and a strong fiscal regime
promoting foreign investment. The following chart shows foreign direct investment in
Trinidad since 1998.
5 November 2008
The Caribbean Report
10
Figure 10: Trinidad and Tobago’s historical foreign direct investment
1,200
998
1,000
835
US$B
800
791
808
2000
2001
940
788
680
600
400
200
0
1998
1999
2002
2003
2004
Source: Nations Conference on Trade and Development (UNCTAD), World Investment Report 2007
ECONOMY
Trinidad has shifted from an oil-based economy to a gas-based economy. The oil and gas
industry in Trinidad began with oil exploration and production. During the 1950s,
significant gas production began to take place. From 1950 onwards, enormous volumes
of natural gas reserves were discovered while exploring for oil. Natural gas boomed in
the 1980s and became an integral part of Trinidad’s economy. Starting in the late 1970s
natural gas production started a steady growth curve. However, it was not until 2000
when significant Liquefied Natural Gas (LNG) projects commenced that gas production
grew significantly. Average natural gas production in Trinidad for 2007 was
approximately 3.9 bcf/d. The following graph displays Trinidad’s evolution from an oilbased country to a predominantly natural gas-based country.
South American Offshore
5 November 2008
11
Figure 11: Trinidad and Tobago’s crude oil and natural gas average production
4,500
300
Oil Production
Natural Gas Production
4,000
Oil Production (mbls/d)
3,500
3,000
200
2,500
150
2,000
1,500
100
1,000
Natural Gas Production (mmcf/d)
250
50
500
0
0
80
83
86
89
92
95
98
01
04
07
*Natural Gas Production for 2007 is based on the CIA Factbook Estimate
Source: Energy Information Agency, Canaccord Adams
Trinidad, which has one of the highest GDP growth rates in Latin America, has gained the
reputation of being an excellent investment area for international business. The country’s
growth can be attributed to oil and gas exploration, LNG, petrochemicals, and steel. GDP in
2007 was $23.8 billion, with oil and gas accounting for approximately 40% of the total. The
2007 GDP breakdown is approximately 0.6% agriculture, 61.9% industry, and 37.5%
services. The following graph displays Trinidad’s GDP growth since 2003.
Figure 12: Trinidad and Tobago’s historical GDP
16%
GDP (US$BN) (current prices)
25
20.7
10%
20
18.2
8%
15
15.1
GDP (US$BN)
12%
Real GDP Growth Y/Y (%)
25.0
Real GDP Growth (% change Y/Y)
14%
6%
12.7
4%
11.2
10
2%
5
0%
2003
2004
2005
2006
2007
2008*
Source: Australian Department of Foreign Affairs
*Estimate for 2008
5 November 2008
The Caribbean Report
12
The oil and gas industry accounts for approximately 80% of exports and 5% of total
employment. Economic growth in 2006 was approximately 12.2% and 5.5% in 2007,
fuelled by a growing trade surplus and increasing prices of oil, LNG and petrochemicals.
Additionally, during this period the energy sector increased its capacity as foreign
investment increased, with a particular focus on oil and gas. Oil and gas plays a vital role
in Trinidad’s economy as shown below.
Figure 13: Trinidad and Tobago’s GDP composition
Source: Minister Of Energy And Energy Industries (MEEI) Presentation, 2008
Trinidad exports petroleum and petroleum products, LNG, methanol, ammonia, urea,
steel products, beverages, cereal and cereal products, sugar, cocoa, coffee, citrus, fruit,
vegetables, and flowers. Additionally, Trinidad is the largest exporter of LNG to the US in
the world. Of the total LNG exports in Trinidad, 65% is shipped to the US. The following
graph displays Trinidad’s LNG export markets.
Figure 14: Trinidad and Tobago’s LNG exports destinations
Source: BP Statistical Review of World Energy, 2007
South American Offshore
5 November 2008
13
Figure 15: Trinidad and Tobago’s LNG exports by country
Source: BP Statistical Review of World Energy, 2007
Figure 16: LNG exporting countries
Source: BP Statistical Review of World Energy, 2007
5 November 2008
The Caribbean Report
14
OIL AND GAS INDUSTRY
In 2007, Trinidad and Tobago’s total crude oil production was 121.4 million barrels a day,
with exports of 99 million barrels a day to the US. According to the CIA World Factbook,
total crude oil proved reserves are approximately 605.8 million bbl as of January 2007. In
2007, estimated aggregate natural gas production was approximately 1.4 trillion cubic feet,
allowing for natural gas exports of 742.7 billion cubic feet.3 According to Ryder Scott, total
natural gas Proven reserves as of year-end 2007 totaled 17.0 trillion cubic feet and Proven
plus Probable (2P) reserves were 24.9 trillion cubic feet.
Figure 17: Trinidad and Tobago’s oil and natural gas production
Source: The Natural Gas Company of Trinidad and Tobago Ltd., 2007
Trinidad has a large and increasing domestic demand for gas. The country’s extensive
collection of petrochemical plants and infrastructure play a significant role in Trinidad’s
domestic demand of approximately 1.58bcfd. According to Wood Mackenzie’s estimates,
over the next 15 years (2008-2022) approximately 11.4 tcf of gas will be required to
supply existing projects, and over the next 20 years the supply requirement is expected
to soar to approximately 15.7 tcf. Trinidad’s domestic demand is expected to increase
29% from 1.58 bcf/d in 2007 to 2.04 bcf/d in 2011.4 The following graph represents
Trinidad’s historical natural gas production and consumption.
3
4
South American Offshore
CIA Factbook
Wood Mackenzie
5 November 2008
15
Figure 18: Trinidad and Tobago’s natural gas production vs. consumption
1600
Natural Gas Production (bcf)
Natural Gas Consumption (bcf)
1400
Billion Cubic Feet
1200
1000
800
600
400
200
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007*
Source: CIA World Fact Book - 2007 Estimate, Energy Information Agency (EIA)
Over the next several years, Trinidad needs to discover new natural gas reserves in order
to supply existing demand as well as future additional demand. Wood Mackenzie’s
demand base case forecast for Trinidad expects that 24.9 tcf of gas will be required over
the next 15 years and 33.7 tcf over the next 20 years. These figures are not including
proposed new project requirements, which could add an additional 1.7 tcf over 15 years.
As mentioned above, current Proven plus Probable reserves according to Ryder Scott are
approximately 24.9 tcf. As a result, Trinidad desperately needs to discover new reserves
as they fall short, potentially causing the country to be a net importer of natural gas.
The government is attempting to reduce its demand requirements and increase its
reserve supply through several means, including:
5 November 2008
•
Construction of “Train X” (a new LNG processing train) has been postponed until
new gas discoveries are made
•
The Eastern Caribbean Gas Pipeline, which was a proposed project to build a gas
pipeline from Trinidad north to nearby islands including Grenada, Saint Lucia and
Barbados.
•
Offer better incentives for new exploration. A full review of Trinidad’s upstream
fiscal regime is in order, beginning with a review of the PSC terms for new acreage.
Trinidad’s 2006 bidding round provoked little interest from businesses, after
Trinidad initiated the new “Taxable PSC” terms into the bid rounds.
•
The government plans on holding a bid round late in 2008/early 2009 to spur new
exploration in Trinidad. The structure of the existing bid round process can take
over a year before any contracts are finalized. Expediting this process will help fuel
further exploration. (We note that the recent discovery by Canadian Superior et al
has likely fueled interest in the upcoming bid round).
The Caribbean Report
16
•
Potential increase of domestic natural gas prices. The domestic market of Trinidad is
paying approximately US$2/mmbtu for gas, compared to LNG, which offers a
significantly higher netback in excess of US$5/mmbtu or more. Accounting for the
current economic outlook, including rising inflation and the fact that exploration in
Trinidad is becoming much more risky and costly, increased domestic gas prices to
account for the changing times would reduce domestic consumption and position
itself as an economically feasible option compared to LNG.
The following figure highlights Trinidad’s reserve estimates as evaluated by Ryder Scott.
Since 2001, the Trinidad government has had six reserve reports prepared. It is clear
that over the last three years the country’s overall Proven plus Probable plus Possible
(3P) reserves are decreasing.
Figure 19: Trinidad and Tobago’s reserves estimates
40
Proved
Probable
Possible
35
Trillion Cubic Feet
30
7.1
6.2
5.9
7.8
7.9
18.8
17.1
17.0
2004
2006
2007
25
9.0
20
15
10
5
0
Source: Ryder Scott Presentation, July 2008
Production Sharing Contracts (PSC)
International oil and gas companies hold a significant stake in the Trinidad and Tobago
energy industry. Some of the largest oil and gas companies in the world operate in
Trinidad and Tobago. Since 1995, 21 Production Sharing Contracts (PSC) have been
awarded to companies such as ConocoPhillips, British Gas, ExxonMobil, BHP Billiton,
PetroCanada, and even Enron. However, smaller companies are starting to enter the
area such as Canadian Superior Energy, Challenger Energy and EOG Resources. These
21 PSCs awarded since 1995 are reflected in the figure below.
South American Offshore
5 November 2008
17
Figure 20: Trinidad and Tobago’s production-sharing contracts history
1995-2002
Blocks
2(c.)
2(ab)
Modified U(a)
S11(b)
5(b)
NCMA1
4(a)
4(b)
5(a)
25(a)
25(b)
26
27
3(a)
Lower Reverse "L"
2005
Blocks
1(a)
1(b)
3(b)
4(a)
5(c.)
22
Acreage
51,772
133,504
38,881
39,260
73,691
93,949
45,743
75,333
40,761
138,811
139,076
119,520
117,880
614 sq. km.
364 sq. km
Acreage
62,011
58,591
64,476
45,727
32,392
296,805
Effective Date
April 1996
June 1996
July 1996
November 1996
January 1997
March 1997
June 1997
June 1997
December 1997
February 1998
February 1998
February 1998
February 1998
April 2002
April 2002
Company (main operator)
BHP
BHP
Enron
Elf
Amoco
British Gas
Conoco
Conoco
British Gas
Shell
Exxon
Exxon
Arco
BHP Billiton
EOG Resources
Effective Date
July 2005
July 2005
July 2005
July 2005
July 2005
July 2005
Company (main operator)
Petro-Canada/Petrotrin
Petro-Canada/Petrotrin
Kerr McGee/Primera
EOG Resources/Primera
Canadian Superior
Petro-Canada
Source: Trinidad and Tobago: Ministry of Energy and Energy Industries website
In January 2006, the Government of Trinidad opened a competitive bidding round for
the exploration and production of eleven blocks, including eight onshore/near shore, and
three shallow marine blocks. Later in June 2006, the Government furthered its offerings
through the tender of one Deep Atlantic Block. The bidding round ultimately attracted
eleven companies, resulting in 14 bid proposals for eight blocks and one proposal for the
Deep Atlantic block.
The Government of Trinidad plans on hosting an open bidding round late 2008/early
2009. On offer are blocks from the North Coast Marine Area (NCMA), and in the East
Coast Marine Area (ECMA). The following blocks are expected to be open for bidding.
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The Caribbean Report
18
Figure 21: Trinidad and Tobago’s available concessions
Source: Trinidad and Tobago: Ministry of Energy and Energy Industries website
Figure 22: Trinidad and Tobago’s bidding round 2008/2009
2008 Bidding Round – Q4 2008
North Coast Marine Area
Blocks
NCMA 3
NCMA 4
NCMA 5
Acreage
2100 km²
1800 km²
2300 km²
Water Depth (ft)
100-300
200-400
100-350
2009 Bidding Round - Deep Atlantic Area
East Coast Marine Area
Blocks
Block 4(b)
Block 5(d)
Acreage
750 km²
700 km²
Water Depth (ft)
1300-2700
1400-2700
Source: Trinidad and Tobago: Ministry of Energy and Energy Industries website
Fiscal regime
The Petroleum Act (1969), Petroleum Regulations (1970), and the Petroleum Taxes Act
(1974) govern the petroleum industry in Trinidad. The Petroleum Act created a structure
for the grant of licences and contracts for petroleum operations in the area, including
both onshore and offshore activities. The Act established the areas to be allowed for
petroleum operations. Additionally, a land right to explore and produce petroleum from
these given areas is decided through competitive bidding. Once bidding has taken place,
the following types of licences/contracts can be offered:
South American Offshore
•
Exploration Licence: allows the licensee(s) the right to conduct operations, with
terms according to the licence, in the given area.
•
Exploration and Production Licence: allows the licensee(s) the sole right, with rules
according to the licence, to explore and produce all petroleum opportunities within
the given area.
5 November 2008
19
•
Exploration and Production (Private Petroleum Rights) Licence.
•
Production Sharing Contract (PSC): an agreement where the licensee(s) have an
agreement with the host government. According to the agreement, which varies
between contracts, the contractors carry all exploration and development risks in
order to be granted a share of the potential production.
The current energy taxation/fiscal regime is a two-tier system including a production
based tax, which includes a Royalty, Production Levy, and a Supplemental Petroleum Tax
(S.P.T.). The second-tier is a profits based tax, which has a Petroleum Profits Tax and an
Unemployment Levy. The government has added incentives to attract business
investments. The following table outlines the fiscal regime.
Figure 23: Trinidad’s fiscal regime
Production-Based Tax
Royalty Tax
Production Tax
S.P.T.
S.P.T. Allowable Deductions
Profits-Based Tax
P.P.T.
Unemployment Levy
12.5% of all hydrocarbon production.
Value ranges.
Maximum of 3% of gross income earned from crude oil
production.
Rate is unique to each project.
Charged on production of crude oil.
Rate is defined by oil price sensitivities.
Ranges from 0% to 35% for crude in excess of
US$49.50/bbl.
50% of geological/geophysical costs.
100% of drilling exploration wells direct costs.
40% of direct intangible drilling costs.
40% of tangible development costs.
Royalty payments.
50% of gross revenue less deductible
expenses/allowances
5% with eligible deductions.
Including:
Operating/Administrative Expenses.
Royalty Tax.
Production Tax.
S.P.T. Payments.
Capital Allowances.
Heavy Oil Allowance.
Source: Trinidad and Tobago: Ministry of Energy and Energy Industries website
Infrastructure
Trinidad relies heavily on LNG plants to facilitate the transportation of natural gas
between their country and other countries. An LNG plant uses “trains” to properly
convert and process the LNG, where the gas passes through a compression area,
propane condenser area, and methane and ethane areas before being liquefied. The
process of bringing LNG to market takes several steps, including:
5 November 2008
•
Producing the natural gas (15% of cost);
•
Liquefying the natural gas through LNG plants (trains) (40% of cost);
•
Shipping the LNG (25% of cost);
•
Re-gasification—turning the LNG back into a gas (20% of cost);
•
Bring the natural gas to market.
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The Atlantic LNG Company of Trinidad, with operations in Point Fortin, Trinidad,
currently operates four LNG trains. The trains are owned by various companies,
including: BG, BP, Repsol YPF, NGC Trinidad LNG, and Suez. These are the only LNG
trains operated in Trinidad. The four trains have a combined production capacity of
approximately 15.3 million metric tones per annum. LNG trains account for a significant
portion of domestic demand for gas (approximately 59%). Currently, all four trains are at
full capacity and require approximately 2.5 billion cubic feet a day of natural gas to run
the trains. Wood Mackenzie believes that feedstock requirements will increase to 13.5 tcf
over the next 15 year period (2008 to 2022) and 18.0 tcf over the next 20-year period
(2008-2027).
A fifth train, or “Train X,” has been proposed; however, the project has been put on hold
until further discoveries or new production becomes available. The following figure
displays information regarding the four current trains in Trinidad.
Figure 24: Atlantic LNG liquefaction trains information
Source: BG Trinidad and Tobago Limited
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21
GUYANA
GOVERNMENT
The government of Guyana is run under a semi-presidential representative democratic
republic system, where the President of Guyana heads both the government and multiparty system. This system is basically a hybrid of the Westminster (British Parliamentary
System) style democracy and the Philadelphia (Presidential) system. Executive power is
exercised by the government, but legislative power is vested in both the government and
National Assembly of Guyana, which is the country’s parliament. The judicial system is
independent from executive and legislative powers.
Currently, there are two main political parties in Guyana: the Peoples’ Progressive Party
or PPP, and the Peoples National Congress or PNC. Parties are elected every five years;
the PPP currently forms the government. The government system considerably lowers
the risk to foreign investment compared to its neighbor Venezuela.
Guyana’s government is inclined to attracting more foreign investment. Both public and
private business leaders have declared their openness and willingness to foreign
investment. This approach is confirmed with Guyana’s conduct towards foreign
investors, who are treated the same as domestic investors. In addition, there are many
attractive incentives to doing business in Guyana. Incentives include a flat tax rate, tax
holidays, export tax allowances and waivers of custom duties. Specifically, custom duties
waivers cover plant, machinery and equipment imports (with the permission of the
Commissioner General). Due to the amicable relations between Guyana and the U.S.,
Guyana offers the same high quality and reliable low cost goods as the U.S. Additionally,
many Guyanese importers favor U.S. suppliers. The following chart shows foreign direct
investment in Guyana since 2003. Foreign Direct Investment from 2004 to 2006 has
increase significantly due to improved investment climate in the country. Specifically, the
increase is a result in the government’s aim to maintain infrastructure needed to
maintain growth and development, such as roads, bridges, sea defense, drainage and
irrigation, and schools. Moreover, the government is also allocating funds for
improvement in agriculture, housing and water, and national security.5
5
5 November 2008
US State Department
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22
Figure 25: Guyana’s historical foreign direct investment
110
102
DFI Flow (US$MM)
100
90
77
80
FDI (In US$MM)
70
67
56
60
50
44
40
26
30
30
20
10
0
2000
2001
2002
2003
2004
2005
2006
Source: Nations Conference on Trade and Development (UNCTAD), World Investment Report 2007
Natural resources in Guyana are vast and include mineral deposits of gold, bauxite,
diamonds and potentially large reservoirs of oil and gas in the minimally explored
Guyana-Suriname Basin and Takatu Basin. Although the country is known primarily for
its rice and sugar production capabilities, its agricultural industry includes fresh fruits
and processed vegetables. Another potentially lucrative resource is Guyana’s forestry,
which is only beginning to be exploited. The U.S. Commercial Service from the
Department of Commerce lists the sectors with the best prospects in Guyana as
Agricultural Machinery/Equipment, Telecommunications Equipment, Mining Industry
Equipment, Computers/Peripherals, Automotive Parts, Construction Equipment, and
Architectural/Construction/Engineering Services.
A major block of foreign investment into the country’s oil and gas industry resulted from an
offshore border dispute between Guyana and Suriname. The dispute had flared up in June
2000, when CGX Energy was drilling for oil under a Guyanese concession and was forced
to cease operations by Surinamese military gunboats. After several failed attempts at
negotiation, in 2004 Guyana took the dispute to the UN Law of the Sea tribunal, which
unanimously determined that the vast majority of the area in contention belonged to
Guyana. The resolution of the dispute is expected to very positive for Guyana's economy in
6
the long term, as the seabed is estimated to contain approximately 15 billion barrels of oil.
6
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US State Department
5 November 2008
23
Figure 26: Guyana’s export partners
20%
18%
Canada
U.S.
Percentage of Total Exports
16%
14%
12%
10%
8%
6%
U.K.
Portugal
Trinidad and Tobago
France
Netherlands
Jamaica
4%
2%
0%
Source: CIA World Factbook
Although the oil and gas industry has not historically been an important part of Guyana’s
economy, the potential is there. Depending on exploration results and Guyana’s ability to
attract more foreign exploration and production companies, oil and gas could be a
lucrative opportunity to boost Guyana’s economy. With the end of Guyana and
Suriname’s border dispute, the biggest block against foreign investment has been
resolved. The U.S. Geological Survey estimates there are potentially 15 billion barrels of
oil and 42 trillion cubic feet of gas lying off the shores of Guyana and Suriname. Until a
bidding process is created, Guyana will continue to award licences and concessions on a
first-come first-served basis. The Petroleum Division of the Guyana Geology and Mines
Commission is in charge of negotiating the exploration contracts. Guyana had no oil and
gas production in 2007.
Guyana has two basins of interest, the Guyana-Suriname Basin which is located both
onshore and offshore, and the onshore Takatu basin. The Guyana-Suriname Basin is a
classic passive margin basin associated with the opening of the Central Atlantic. Its
stratigraphic and sedimentation framework is comparable to the Espirito Santo and
Campos basins, especially in terms of the shelf and basin stratigraphy. The difficulty in
this basin for petroleum exploration is finding prospective traps of oil from the migration
path of the source rock. The Takatu basin origins from a failed rift associated with the
opening of the Central Atlantic. However, both basins have not been explored enough to
be completely understood.
5 November 2008
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Figure 27: Guyana-Suriname Basin
Source: www.economist.com
The fiscal regime in Guyana consists of two licences, one for exploration and the other
for production. The Petroleum Prospecting Licence includes a waiver of duty for imports
of petroleum equipment, reduction of duty to nominal levels on fuel for exploration
operations and exemption for the contractor from certain provisions of the Corporate
Tax Act. For both exploration and production, there are no tax obligations and a 10%
reduction on all fuel costs. The government has a minimum discretionary position to
profit from the split of oil production with the contractor; contractors can make a
maximum of 50%. The Petroleum Prospecting Licence is for an initial period of four
years with provision for two further renewal periods with each period lasting no more
than three years. The renewal period is at the option of the licensee. The Petroleum
Production Licence has an initial period of 20 years, potentially followed by one renewal
period up to 10 years, which is also at the option of the licensee. CGX Energy, a
Canadian exploration and production company with interests in Guyana, estimates that
using full-cycle economics, the licensee’s share of gross revenue is 63%.
Figure 28: Guyana’s exploration licences
Area/Block/Licence
Corentyne Licence
Georgetown Licence
Pomeroon Licence
Exxon Licence
Takatu Basin Area
Acreage (MM)
3.8
2.8
2.8
17.0
2.7
Company (main operator)
CGX Energy
CGX Energy and Repsol YPF
CGX Energy
ExxonMobil
Groundstar Resources
Source: CGX Energy Corporate Website, Groundstar Resources Corporate Website
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25
Figure 29: Guyana’s offshore exploration licences
Source: CGX Energy Corporate Website
Exploration and production companies operating in Guyana include Exxon-Mobil,
Century Oil, CGX Energy, Repsol YPF, Maersk Oil, and Groundstar Resources.
5 November 2008
The Caribbean Report
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SURINAME
GOVERNMENT
Suriname’s government is a constitutional democracy, consisting of a 51 member
National Assembly. The President must be chosen by a minimum of 2/3 of all votes of the
National Assembly or else a People’s Assembly will be formed. If a President is elected,
he or she appoints a 16 member cabinet. The President also selects 10 commissioners,
one for each administrative district of Suriname.
ECONOMY
Suriname’s economy is highly dependent on mining and petroleum exploration, with
85% of exports coming from aluminum, gold and oil. Although aluminum accounted for
46.2% of all exports in 2006, government revenue from oil is now higher than that of
both bauxite and aluminum. At present time, Suriname is doing relatively well when
compared with its history. In 2000, when the government of Ronald Venetiaan came into
power, inflation was over 100% and the fiscal deficit was growing. In 2006, inflation had
fallen to a more manageable 5.6%. Real GDP annual growth for 2006 was 5.8% and
2007 GDP was US$ 2.23 billion. Canada is an important part of Suriname’s trade,
purchasing approximately 24.5% of Suriname’s exports. The Venetiaan government has
also been successful at managing its fiscal debt; a ceiling of 60% debt to GDP was put in
place during 2002.
Figure 30: Suriname’s export partners
Percentage of Total Exports
25%
Canada
20%
Norway
15%
10%
5%
Belgium
U.S.
U.A.E.
France
Venezuela
0%
Source: CIA World Factbook
Each investment project is individually negotiated by Suriname’s government. Keeping
good business relations with the U.S. is crucial to Suriname due to various U.S. firms
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5 November 2008
27
operating in the country, including Suralco, Exxon-Mobil, Texaco, IBM and Alico.
Additionally, Suriname is highly dependent on its relations with the Dutch government.
OIL AND GAS INDUSTRY
The country has a state owned petroleum firm called Staatsolie. Many of the foreign
companies operating in Suriname are doing so through production sharing contracts
with Staatsolie, including Repsol YPF, Noble Energy, Maersk Oil, Teikoku, Murphy Oil
and Tullow Oil. In addition, Staatsolie also has a 100% subsidiary called Paradise Oil. In
2007, Staatsolie contributed US$150 million to the government’s budget. ROE was 54%
on a net profit of US$ 225 million. Total crude oil production for Suriname in 2007 was
13,500 bbl/d.
Figure 31: Suriname’s historical oil production
14
Thousands of barrels a day
13
12
11
10
9
8
2000
2001
2002
2003
2004
2005
2006
2007
Source: Energy Information Agency (EIA)
The table below summarizes oil and gas exploration areas in Suriname:
Figure 32: Suriname’s production-sharing contracts
Area/Block/Licence
Block 30
Block 31
Block 37
Acreage (MM)
3.4
3.4
2.1
Company (main operator)
Repsol YPF and Noble Energy
Maersk Oil and Inpex
Murphy Oil
Source: Repsol Corporate Website, Caribbean Net News, Maersk Corporate Website, Murphy Oil Corporate
Website
5 November 2008
The Caribbean Report
28
Figure 33: Suriname’s offshore exploration licences
Source: CGX Energy
In the past, Suriname had a poor record of attracting foreign investment. One example is
the 1997-2001 period, where there was net divestment every year except 1998.
However, in recent years foreign direct investment has been improving for the country,
as depicted in the chart below.
Figure 34: Suriname’s historical foreign direct investment
475
375
FDI (In US$MM)
275
175
75
-25
2000
2001
2002
2003
2004
2005
2006
-125
Source: Nations Conference on Trade and Development (UNCTAD), World Investment Report 2007
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29
Historically, oil and gas has not played an important role in Suriname’s economy. Going
forward, exploration and production activity could be a significant contributor to the
country’s prosperity. This would be dependent on exploration results as onshore and
offshore exploration has been limited. However, with the resolution of the border dispute
with Guyana, there is more certainty to the offshore land position which could generate
further offshore activity.
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30
COMPANY FEATURE SUMMARIES
In the following section, we highlight a number of oil and gas companies that have
operations in the Caribbean. We have included five public companies and one private
company which are all headquartered in Canada. Within our company features we have
three companies of particular interest that we have initiated research coverage on. These
companies are Canadian Superior Energy, Challenger Energy, and CGX Energy.
Canadian Superior Energy Inc.
(SNG : TSX : C$1.94 | SPECULATIVE BUY, C$4.50 12-month target).........................31
CGX Energy Inc. (OYL : TSX-V :
C$0.49 | SPECULATIVE BUY, C$1.80 12-month target) ............................................45
Challenger Energy Corp.
(CHQ : TSX-V : C$2.20 | SPECULATIVE BUY, C$5.25 12-month target).....................61
Petro Andina Resources Inc.
(PAR : TSX : C$4.16 | Not rated) .................................................................................73
Primera Energy Resources Ltd.
(PTT : TSX-V : C$0.22 | Not rated) .............................................................................77
Voyager Energy Ltd.
(Private Company | Not rated).....................................................................................81
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31
Canadian Superior Energy Inc.
SPECULATIVE BUY
SNG : TSX : C$1.94
Target: C$4.50
COMPANY STATISTICS:
Forecast Return %:
52-week Range:
Avg. Daily Vol. (000s):
Shares Out (M) basic:
Shares Out (M) fd:
Market Cap (M):
Net Debt (2008E) (M):
Enterprise Value (M):
132%
C$1.27–5.01
147.8
157.6
179.1
C$305.8
C$60.9
C$366.7
EARNINGS SUMMARY:
FYE
Oil & NGL (b/d):
Natural Gas (mmcf/d):
Total (boe/d):
EPS (fd)
CFPS (fd):
Commodity Prices
WTI (US$/b):
NYMEX Gas (US$/mmbtu):
2007A
594
13.5
2,843
$(0.07)
$0.09
2008E
750
18.0
3,750
2009E
750
20.0
4,083
$0.19
$0.25
$0.11
$0.29
2007A 2008E 2009E
$72.29 $104.97 $80.00
$6.97
$9.25 $8.75
SHARE PRICE PERFORMANCE:
COMPANY SUMMARY:
J. Frederick Kozak, P.Eng.
1.403.508.3836
[email protected]
Timothy Clark
[email protected]
1.403.508.3824
Energy – Oil and Gas, Exploration and Production
PUSHING BEYOND CANADIAN
BOUNDARIES
Initiating research coverage
We are initiating coverage on Canadian Superior Energy Inc. with a
SPECULATIVE BUY recommendation and a 12-month target price of
C$4.50. Our target price is based on a risked net asset valuation of the
company’s development projects in Canada and Trinidad and Tobago.
Overview
Canadian Superior Energy is a Calgary-based oil and gas exploration
and production company with operations in western Canada, offshore
Nova Scotia, offshore Trinidad and Tobago and a recently awarded
block in Libya in north Africa.
The company has a sizeable presence in Trinidad and Tobago with
interests in Block 5(c) and the Mayaro/Guayaguayare (M/G) project,
accounting for gross undeveloped holdings of 135,041 acres. The
company has a 45% working interest in Block 5(c), which has estimated
reserves of 4 tcf. Block 5(c) has three separate potential hydrocarbon
basins: Victory, Bounty and Endeavour. Exploration wells on the Victory
and Bounty discoveries have potential initial production rates of
approximately 100 and 200 mmcf/d respectfully. Additionally, the
company has a 100% working interest on the M/G Block, which has
estimated reserves of 10-30 million barrels of oil. Canadian Superior
expects to drill two exploration wells on the licence by the end of the
first quarter of 2009
Canadian Superior Energy is a Calgary-based oil and gas
exploration and production company with operations in
Western Canada, offshore Trinidad & Tobago, and
Offshore Nova Scotia.
All amounts in C$ unless otherwise noted.
5 November 2008
The Caribbean Report
32
RECOMMENDATION
We are initiating coverage on Canadian Superior Energy Inc. with a SPECULATIVE BUY
recommendation and a 12-month target price of C$4.50. Our target price is based on a
risked net asset valuation of the company’s development projects in Canada and
Trinidad and Tobago.
CORPORATE PROFILE
COMPANY HISTORY
Canadian Superior Energy was previously known as Kapalua Gold Mines Ltd. when it
was founded in 1983. During 1993, the company changed its name to Prize Energy Inc.
before finally changing its name to Canadian Superior Energy in 2000. The company has
offices in Calgary, Halifax, Jersey City (NY) and Port of Spain, Trinidad, with total staff
(including direct contract) of approximately 70.
The company was founded by Mr. Greg Noval, the current Chairman of Canadian
Superior Energy, who also founded 88 Energy Corp., a company that he grew to a
market cap worth over $500 million. Unfortunately, 88 Energy Corp. eventually ran into
trouble with an unsuccessful exploration program and oil price volatility. This resulted in
Mr. Noval coming to an agreement with the board of directors at 88 Energy Corp. to
form a new entity called Canadian Superior. The new company was formed with the
divestiture of certain assets and properties from 88 Energy Corp. to shareholders.
Canadian Superior made one of its first major acquisitions on January 13, 2003, by
purchasing the Drumheller, Alberta, area of the Canadian plains assets from El Paso, a
multi-billion-dollar company that had become overburdened with debt.
Canadian Superior’s major holdings now include offshore properties in Trinidad and
Tobago and 2.59 million gross acres located in offshore Nova Scotia. Other areas with
interests include Libya and Tunisia, and Windfall and Boundary Lake in western Canada.
The company also has a 50/50 LNG joint venture called Liberty Natural Gas with
Excalibur Energy USA. The project proposes to bring LNG to the Greater New York City
area in the United States.
BUSINESS STRATEGY
Canadian Superior’s business focus is on international high-impact growth paired with
production growth in western Canada, while also exploring in offshore in eastern
Canada. At the same time, the company will strive to maintain financial discipline; one of
Canadian Superior’s short-term goals is to be debt-free by the end of 2008. Additionally,
the firm will mitigate risk where it can but will still attempt to take bold new business
steps.
MANAGEMENT AND DIRECTORS
The management group and board of directors consist of professionals with considerable
international oil and gas industry experience.
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33
•
Greg Noval, Chairman. Mr. Noval was recently Chairman of Challenger Energy (CHQ
: TSX-V : C$2.20 | SPEC BUY, C$5.25 target) but recently resigned his position. Mr.
Noval is also an owner of many private firms involved in real estate development,
aviation and farming and ranching. He has over 20 years’ experience in the
Canadian energy industry. Mr. Noval founded Canadian 88 Energy Corp., which
converted into Esprit Energy Trust, before being acquired by Pengrowth
Corporation. He holds a BComm and BA in economics from the University of Alberta
and also a Bachelor of Law degree from the University of Saskatchewan.
•
Craig McKenzie, Chief Executive Officer and Director. Mr. McKenzie was previously
President of BG Trinidad & Tobago, one of BG’s largest and most profitable
divisions. He has 21 years of international exploration and production experience in
diverse segments including LNG, commercial and corporate operations and largescale business transformations. Mr. McKenzie has also worked with BP plc and
Amoco Corporation in various senior management positions. He holds an MBA from
Kellogg School of Management at Northwestern University and a BS, petroleum
engineering, from Louisiana State University.
•
Michael Coolen, President and Chief Operational Officer. Mr. Coolen has worked for
Canadian Superior since mid-2001. Prior to joining the company he was employed
for over 20 years at Mobil Oil Canada and ExxonMobil. His last assignment at
ExxonMobil was as senior manager for the Sable Offshore Energy project, which was
the first offshore natural gas production project in offshore Nova Scotia. Mr. Coolen
holds Bachelor of Science and Bachelor of Engineering degrees.
•
Robb Thompson, Chief Financial Officer. Mr. Thompson was formerly the CFO and
VP Finance at Berkana Energy Corp. He has over 25 years of experience, including
technical, financial and operational expertise. He is a Chartered Accountant who has
worked with KPMG LLP where he was an audit partner in the energy sector.
•
Leif Snethun, VP, Western Canada. Mr. Snethun was a founder and President and
CEO of Seeker Petroleum Ltd. He is a Professional Geologist and a member of the
Association of Professional Engineers, Geologists and Geophysicists of Alberta. He
holds a Bachelor of Science in geology from the University of Calgary and has 25
years of oil and gas experience within various senior geological, geotechnical and
managerial positions.
The board of directors consists of Greg Noval, Craig McKenzie, Michael Coolen, Alex
Squires (Managing Director of Brant Securities Ltd.), Charles Dallas, T.J. (Jake) Harp,
Kaare (Kory) Idland and Richard (Rick) Watkins.
CAPITALIZATION
Canadian Superior’s capital structure is designed to support a growth-oriented model.
The most recent equity issue closed on September 4, 2008, and raised total gross
proceeds of US$35 million at a price of $4.00 per share through the issue of
approximately 8.8 million shares. The firm also completed a financing on November 16,
2007, raising gross proceeds of $22.7 million at a price of $3.50 per share through the
issue of 6.5 million shares. The company currently has 157.7 million common shares
outstanding and approximately 21.4 million dilutive securities. The 21.4 million in
dilutive securities consist of 17.1 million options with an exercise price of $2.39 per
5 November 2008
Caribbean Report
34
share and 4.4 million warrants with an exercise price of $4.00 per share. Additionally,
the company has drawn $40.8 million against a revolving credit facility of $45 million.
Figure 35: Canadian Superior’s capital structure
Shares O/S - Basic
Options (average price $1.76)
Warrants (average price $3.68)
Shares O/S – Fully Diluted
Market capitalization
Net Debt
Enterprise Value
(M)
157.7
17.1
4.4
179.1
$305.8
$60.9
$366.7
Source: Company reports, Canaccord Adams research
Institutional investors own approximately 36% of the issued and outstanding shares of
Canadian Superior. According to Thomson Financial, the major institutional
shareholders of Canadian Superior include: Steelhead Partners, LLC (16.2 million
shares), Palo Alto Investors, LLC (16.1 million shares), Blackrock Financial Management
Inc. (9.4 million shares) and West Coast Asset Management Inc. (8.4 million shares).
Canadian Superior’s directors and management team own approximately 1.2% of the
issued and outstanding shares of the company.
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35
OPERATIONS
BLOCK 5(C) – OFFSHORE TRINIDAD
This block is located approximately 86 kilometres off the east coast of Trinidad, where
the water depths range from approximately 500 to 1,500 feet. All wells drilled on this
block to date have been drilled with a semi-submersible drilling rig. The company is
paying 26.3% of the block’s exploration costs as a result of farming out to other parties to
maintain a 45% working interest.
Figure 36: Joint venture partner working interest on Block 5(c)
Canadian Superior
British Gas
Challenger
Exploration Program
Capital Commitment
27%
40%
33%
100%
Production Sharing
Contract Interest
45%
30%
25%
100%
Source: Company reports
Over the last several years the company determined three large separate potential
hydrocarbon structures on the block: named the Victory, Bounty, and Endeavour
prospects. Canadian Superior drilled the Victory and Bounty prospects this year, and
both were very successful. The third prospect, Endeavour, is currently being drilled with
total depth expected to be reached in November 2008. The block is adjacent to several
large gas fields including British Gas’ Dolphin and Dolphin Deep natural gas fields (see
Figure 37).
Figure 37: Canadian Superior’s Block 5(c) operations
Source: Company reports
5 November 2008
Caribbean Report
36
In early 2008, the company drilled the first well on the block at the Victory prospect. The
well tested natural gas in two formations with the first zone being condensate rich. The
first zone tested natural gas at pressure rates averaging between 40 mmcf/d and
45 mmcf/d and the second tested at rates averaging 30 mmcf/d. The two zones
combined could produce gas at rates of approximately 100 mmcf/d. Reserves for the
prospect are estimated to be between 0.6 and 1 tcf. The company believes that the
Victory discovery well has an expected initial sales rate of 195 mmcf/d plus 6,000 bbl/d
of condensate.
In July 2008, the company completed drilling the Bounty prospect to a total depth of
17,360 feet, which is located 2.2 miles from the Victory well. The well encountered gasbearing zones with the main targeted zone encountering approximately 200 feet of pay.
The well’s flow test indicated productive capability in excess of 200 mmcf/d of natural
gas from this main targeted zone. Canadian Superior believes it has up to 2.6 Tcf of
natural gas from this tested structure.
The company is now in the process of drilling the third prospect on Block 5(c). The
Endeavour prospect is an independent prospect to the formerly drilled two prospects. It
is expected that drilling will be completed in November 2008, with testing results due in
the early first quarter of 2009. Despite the discoveries at Bounty and Victory, the chance
of success on Endeavour is rated to be only 30%.
Regardless of the current and future success of these three prospects, the company still
has the problem of bringing the Block 5(c) gas onstream. Canadian Superior and its
partners are considering two options. The first one is to build a pipeline from Block 5(c)
to the mainland. From there a fifth LNG train must be constructed to accommodate the
new gas as the other four existing trains are already at capacity. A fifth train in the area
has been proposed. However, the Trinidad government has yet to make a decision until a
“new substantial gas discovery” can be made to justify the construction. Canadian
Superior’s management believes a discovery over 4.5 tcf of natural gas should be sufficient
to justify the construction of a fifth train. The second option is to liquefy the gas offshore
and then transport the LNG to a sales point. Management has stated that both options have
roughly the same economics and the decision depends on agreement from other
stakeholders and joint venture partners, as well as the success of Endeavour well.
M/G BLOCK
The company is a joint venture partner (100% working interest) with the Petroleum
Company of Trinidad and Tobago (Petrotrin) in the near-shore Mayaro/Guayaguayare
(M/G) Block. The block is off the east coast of Trinidad and consists of 58,080 gross
acres. Reserves are estimated to be approximately 10-30 million barrels. Additionally,
the block is in close proximity to several large onshore and offshore oil and natural gas
discoveries. It is located 1.5 miles from the Navette field, which has produced over 60
million barrels of oil. Also nearby is its neighbour, the Angostura field, which has
estimated reserves of approximately 1.75 tcf of natural gas and 450 million barrels of oil.
The company is currently in the process of receiving permits for the drilling of two
locations on the block. Canadian Superior plans to drill both in the first quarter of 2009
pending approval from the government. The wells are expected to cost approximately
$12-14 million assuming a 100% interest to the company. If the exploration wells are
successful the company will follow up with additional 3D seismic in the area to
determine a full field development plan.
South American Offshore
5 November 2008
37
Figure 38: Canadian Superior’s M/G operations
Note: Corporate website
OTHER OPERATIONS
Libya and Tunisia
The company recently announced its entry into North Africa, which it calls its Oasis
project. On August 27, 2008, the company signed the formal Exploration and Production
Sharing Agreement for the offshore Libya/Tunisia block called the 7th of November
Block. The block comprises approximately 1,200 square miles (750,000 acres) of
exploration property located 75 miles offshore North Africa in the Mediterranean Gulf of
Gabes. Water depths in this area range from 250 to 375 feet. Nearly equal portions of the
block fall in Tunisian and Libyan waters.
In close proximity to the7th of November Block is the El Bouri (Libya) and Ashtart
(Tunisia) oil fields, which are estimated to have produced over 750 million barrels of oil
and 250 million barrels of oil, respectively. Canadian Superior’s management team
believes that its newly acquired block lies on productive trends established by these two
fields. The company will be the operator of the block but has not yet disclosed its
working interest.
5 November 2008
Caribbean Report
38
Figure 39: 7th of November Block located on the border of Tunisia and Libya
Source: Company Reports, Canaccord Adams
Western Canada
The company’s production currently resides in its western Canadian properties.
Essentially, the Canadian assets are used to finance the larger and riskier projects for the
company. Management has stated that, owing to future capital requirements for the
development drilling of the Trinidad Block 5(c) prospects, these assets may be put up for
sale as soon as this winter.
Figure 40: Western Canadian assets
Source: Company Reports, Canaccord Adams.
South American Offshore
5 November 2008
39
Offshore eastern Canada
Canadian Superior Energy is the largest offshore exploration acreage holder in offshore
Nova Scotia, with approximately 1.2 million net acres residing in five exploration
licences. The company holds a 100% interest in these five licences. The first exploration
well (I-85) in the area was drilled in March 2004 on the Mariner prospect. The well
encountered non-commercial quantities of natural gas pay. However, the well provided
insight into the geology of the prospect. The company has a preliminary plan to drill a
second offset exploration well at Mariner in March 2009. The company has identified
possible potential unrisked reserves of as much as 2.5 trillion cubic feet.
Ideally, Canadian Superior would like to decrease the risk and cost of this well by
bringing in some private investors for 50% of the interest. The company has not finalized
any farm-out arrangements as of yet, but recently signed an agreement whereby the
Tunisian/Libyan Joint Exploration, Production, and Petroleum Services Company (Joint
Oil) was awarded an overriding royalty interest and optional participating interest to
Joint Oil, in Canadian Superior’s Mariner Block.
Figure 41: Canadian Superior offshore eastern Canada blocks
Source: Company reports
Liberty Natural Gas
Canadian Superior is also in a 50/50 LNG joint venture project with Excalibur Energy
USA Inc. called Liberty Natural Gas. The proposed project will provide LNG to the largest
and highest price yielding area in the United States – the greater New York City area.
The project is unique in that it provides LNG to the city without being an eye sore to the
residents and is safe from terrorist threats since it is submerged below the ocean
surface. Canadian Superior’s management team believes it has the government onside
for the project and feels comfortable that it can finance the project, since many
institutional investors have approached the company already. If completed, the project
would have a payback period of approximately one year and would generate about $600700 million in cash flow each year.
5 November 2008
Caribbean Report
40
VALUATION
We value Canadian Superior using a sum-of-the-parts valuation methodology. Within our
valuation we have taken into account the company’s Canadian asset value as well as an
estimated value of the company’s Block 5(c) assets. We have assumed no value from the
company’s exploration prospects on the M/G Block, in the frontier offshore blocks held in
eastern Canada, and in the offshore block on the border of Libya and Tunisia. We also note
that, due to the uncertainty around final approval of the Liberty Gas project, we have not
included any value for this asset. This results in what we view as a very conservative value
for the company which is appropriate in today’s current capital markets.
Currently all of Canadian Superior’s production resides in Canada. As mentioned, this
asset provides the company with cash flow to fund a portion its operations in Trinidad.
The reserves for the Canadian assets have been determined by independent third-party
engineering at December 31, 2007, for proven plus probable reserves along with the
associated values. We note that these reserves estimates themselves are likely conservative
given the different commodity prices as well as any reserve additions or adjustments that
may be made as a result of the company’s 2008 drilling program. Including estimated
company debt, the net asset value of the company’s Canadian assets is outlined in the
figure below.
Figure 42: Canadian net asset value
Proven Reserves
Probable Reserves
Total Proved plus Probable
NPV 10% Before Tax ($mm)
103.8
44.5
148.4
Estimated net debt
(4.7)
Total Value
143.7
NAV: $/ basic share
NAV: $/FD share
0.91
1.13
Source: Canaccord Adams, company reports
Additionally, Canadian Superior has a 45% interest in Block 5(c) offshore Trinidad, which
has two confirmed discoveries on the block and a highly prospective third discovery
currently drilling. As such, we present a potential value grid by which we have run various
development scenarios related to reserve size, production and gas price. Our economics
assume generic LNG costs for the offshore development and assume a cost-recovery/tariff
model for the new pipeline from the block to Trinidad as well as for the construction and
operation of a fifth LNG processing train.
Our assumptions for the economic analysis are reflected in the figure below. We have
assumed gross capital expenditures to develop the three Block 5(c) prospects to be US$1.2
billion. Included in this capital are development drilling capital and a production platform.
We have also assumed two different sets of operating costs that are dependent on the final
destination of the LNG. We have assumed operating costs of US$3.25/mcf if the LNG is
transported to North America and US$4.25/mcf if the LNG is transported to an
international destination.
South American Offshore
5 November 2008
41
Figure 43: Assumptions for discounted cash flow evaluation of Block 5(c)
Gross Capital Expenditures (US$M)
1,160
Operating Costs - North America Freight ($US/mcf)
Operating Costs - International Freight ($US/mcf)
3.25
4.25
Commencement of Production
July 2014
Source: Canaccord Adams
Figure 44: Valuation grid for Block 5(c)
Gross Recoverable
Reserves (Tcf)
5.0
4.5
4.0
3.5
3.0
$5.00
($264.7)
($311.2)
($318.5)
($345.1)
($395.6)
$6.00
$51.8
($36.5)
($47.9)
($98.9)
($213.5)
NPV (US$MM) After-Tax @ 10%
Long-term Natural Gas Price (US$/mmbtu)
$7.00
$8.00
$9.00
$10.00
$12.50
$209.7
$195.2
$332.0
$487.6
$821.0
$100.5
$88.6
$212.6
$321.6
$584.8
$85.0
$186.6
$192.9
$297.8
$550.6
$19.4
$124.0
$202.6
$209.4
$422.7
($112.2)
($37.1)
$33.5
$100.6
$237.8
$15.00
$1,087.6
$819.8
$775.3
$630.1
$384.9
$17.50
$1,466.2
$1,059.2
$1,004.3
$841.1
$454.2
$20.00
$1,713.8
$1,358.9
$1,293.6
$1,021.1
$594.8
* Includes all three exploration prospects on Block 5(c) to the combined total gross recoverable reserves
** The values in the areas of grey shading assumes gas delivery to North America only
Source: Canaccord Adams
Figure 45: Valuation Grid for Block 5(c) – per share (in Canadian dollars)
Gross Recoverable
Reserves (Tcf)
5.0
4.5
4.0
3.5
3.0
$5.00
($1.77)
($2.08)
($2.13)
($2.30)
($2.64)
NPV After-Tax @ 10% per Basic Share Outstanding (C$)
Long-term Natural Gas Price (US$/mmbtu)
$6.00
$7.00
$8.00
$9.00
$10.00
$12.50
$0.35
$1.40
$1.30
$2.22
$3.26
$5.48
($0.24)
$0.67
$0.59
$1.42
$2.15
$3.90
($0.32)
$0.57
$1.25
$1.29
$1.99
$3.68
($0.66)
$0.13
$0.83
$1.35
$1.40
$2.82
($1.43)
($0.75)
($0.25)
$0.22
$0.67
$1.59
$15.00
$7.26
$5.47
$5.18
$4.21
$2.57
$17.50
$9.79
$7.07
$6.71
$5.62
$3.03
$20.00
$11.44
$9.07
$8.64
$6.82
$3.97
* Includes all three exploration prospects on Block 5(c) to the combined total gross recoverable reserves
** The values in the areas of grey shading assumes gas delivery to North America only
Source: Canaccord Adams
Clearly, the valuation of Block 5(c) is a function of resources discovered and sales price.
Even with double-digit natural gas prices available in North America, the smallest
recoverable reserve size is only marginally economic based on the capital expenditures
required to develop the resource. Given the world’s demand for energy and current LNG
markets, it is our view that the successful development of the discoveries made on Block
5(c) will be sold to LNG buyers around the world. This would argue for a value based on
natural gas prices of better than US$10.00/mmbtu.
The next component of the valuation relates to the total size of the discoveries on the block.
To date, the first discovery at Victory is estimated to be 0.6-1.1 Tcf in size. The second
discovery at Bounty is estimated to have a potential size of up to 2.6 Tcf of natural gas.
Therefore, the resource potential identified so far could be as high as
3.7 Tcf of natural gas.
5 November 2008
Caribbean Report
42
Given the history of production and resource size from the area, we have a degree of
comfort in the potential resources discovered to date and are not risking the size of the
prize, but have instead risked the development costs and assumptions,
Combining the value of the Canadian assets with the value attributable to Trinidad, we
have set a 12-month target price of C$4.50. For the Trinidad assets, we assume a
contribution of C$3.65 per share. We base this on the assumption that the recoverable
resources will prove to be at the low end of the range shown above and ultimately sold for
a gas price in the range of $10.00-15.00/mmbtu. However, we note that the upside value
from this level in terms of reserves and price likely makes this target price conservative.
South American Offshore
5 November 2008
43
Figure 46: Summary of estimates
Analyst: J. Frederick Kozak, P.Eng.
Associate: Timothy Clark
CANADIAN SUPERIOR ENERGY INC.
Recommendation
12-month target price
November 3, 2008
Share Information
Market cap ($M)
Shares O/S – basic (M)
Shares O/S – float (M)
Shares O/S – f.d. (M)
52-week range
Avg Daily Trading Volume (year)
Valuation
Net asset value (CCI estimate)
Price/NAV
Enterprise value ($M)
EV/proven reserves ($/boe)
2008E
$97,792
10%
11%
2009E
$89,809
5%
5%
Current
$305.8
157.6
94.0
179.1
C$5.01
147,777
Current
$4.56
43%
$366.7
$70.11
2010E
$89,808
4%
5%
2007A
566
656
516
638
594
2008E
590
766
800
842
750
2009E
750
750
750
750
750
2010E
750
750
750
750
750
2006A
13.6
12.7
13.0
18.4
14.4
2007A
14.0
11.8
12.8
15.4
13.5
2008E
15.1
18.6
18.0
20.2
18.0
2009E
20.0
20.0
20.0
20.0
20.0
2010E
20.0
20.0
20.0
20.0
20.0
2006A
2,888
2,682
2,809
4,300
3,173
24%
7%
2007A
2,897
2,623
2,656
3,197
2,843
21%
-10%
2008E
3,111
3,870
3,800
4,214
3,750
20%
32%
2009E
4,083
4,083
4,083
4,083
4,083
18%
9%
2010E
4,083
4,083
4,083
4,084
4,083
18%
0%
C$1.27
EV/production ($/boe/d)
Return on equity (%)
Return on capital employed (%)
2006A
2007A
NA $128,976
-8%
-5%
-6%
-5%
Oil & Liquids Production (b/d)
First quarter
Second quarter
Third quarter
Fourth quarter
Annual
2006A
625
570
645
1,235
770
Natural Gas Production (mmcf/d)
First quarter
Second quarter
Third quarter
Fourth quarter
Annual
Total Production (boe/d) - 6:1
First quarter
Second quarter
Third quarter
Fourth quarter
Annual
% crude oil & liquids
Production growth
Reserves - 6:1
Equivalent reserves (mmboe)
Proven
Proven + probable
% Proven producing
% Proven
% Crude oil & liquids
Reserve life – proven (yrs)
Proven F&D costs ($/boe)
P+P F&D costs ($/boe)
Proven reserve replacement ratio
SNG
Current price
Total projected return*
* includes dividends payable
SPEC BUY
C$4.50
(at December 31, 2007)
Oil
Gas
Total
1.0
4.2
5.2
1.9
6.5
8.5
96%
77%
80%
52%
65%
62%
19%
4.3
4.5
4.5
1 Year
3 Year
0.00
6.17
0.00
4.76
1.0x
1.1x
(403) 508-3836
(403) 508-3824
C$1.94
132%
Market Multiples
Discretionary cash flow multiple
Debt-adjusted multiple
Earnings multiple
Target multiple
Debt-adjusted target multiple
2006A
13.1x
12.1x
NA
26.8x
27.1x
2007A
21.4x
15.9x
NA
45.6x
36.7x
2008E
7.8x
8.8x
10.3x
15.4x
18.4x
2009E
6.8x
10.1x
17.1x
15.7x
18.5x
2010E
7.2x
12.5x
18.1x
16.6x
20.9x
Net Income
Net income ($M)
EPS (basic)
EPS (f.d.)
2006A
NA
($0.09)
($0.10)
2007A
($9.9)
($0.07)
($0.07)
2008E
$29.4
$0.19
$0.19
2009E
$17.9
$0.11
$0.11
2010E
$16.9
$0.11
$0.11
Cash Flow
Cash flow ($M)
CFPS (basic)
CFPS (f.d.)
CFPS (f.d.d.)
2006A
$22.1
$0.17
$0.15
$0.15
2007A
$13.9
$0.10
$0.09
$0.09
2008E
$46.0
$0.30
$0.30
$0.25
2009E
$45.3
$0.29
$0.29
$0.29
2010E
$42.7
$0.27
$0.27
$0.27
Capital Expenditures & Debt
Capital expenditures ($M)
Year-end net debt ($M)
Average net debt/cash flow
Year-end net debt/cash flow
2006A
$11.4
$16.1
1.0
0.7
2007A
$0.0
$0.9
NA
0.1
2008E
$149.9
$60.9
0.2
1.3
2009E
$135.0
$150.6
0.8
3.3
2010E
$135.0
$242.9
1.5
5.7
Commodity Prices
WTI oil (US$/bbl)
NYMEX gas (US$/mmbtu)
Realized oil & NGL (US$/bbl)
Realized natural gas (US$/mcf)
2006A
$66.13
6.73
53.62
7.18
2007A
2008E
$72.29 $104.97
6.97
9.25
67.95
96.46
6.72
8.55
2009E
$80.00
8.75
76.68
8.39
2010E
$90.00
8.75
86.36
8.39
2006A
$42.68
$7.12
$7.81
$27.18
$12.26
2007A
$46.73
$7.63
$9.52
$28.96
$8.78
2008E
$60.99
$10.26
$10.09
$40.00
$31.60
2009E
$55.18
$8.28
$10.00
$36.90
$30.37
2010E
$56.98
$8.55
$10.00
$38.43
$28.66
2006A
$0.00
1.2%
$0.00
2.0%
2007A
$0.00
1.5%
$0.00
3.2%
2008E
$0.00
0.6%
$0.00
1.3%
2009E
$0.00
0.5%
$0.00
1.2%
2010E
$0.00
0.6%
$0.00
1.5%
Banker
Canadian Western Bank
Bank Lines - Q2/08
2008E
$45
135%
2009E
335%
2010E
540%
Netbacks ($/boe)
Revenue
Net royalties
Operating costs
Operating netback
Cash flow netback
CFPS (f.d.d.) Price Sensitivity
+/- US$1.00/b WTI
+/- C$0.10/mcf Gas
Management Team
Craig McKenzie, CEO
British Gas
Michael Coolen, President and COO Mobil Oil, ExxonMobil
Robb Thompson, CFO
Berkana Energy, KPMG
Reservoir Engineer
GLJ Associates Ltd.
Auditor
Meyers Norris Penny LLP
Source: Canaccord Adams
5 November 2008
Caribbean Report
44
Investment risks
Risks to our investment thesis include:
South American Offshore
•
An investment in the company’s securities would be speculative due to the nature of
the company’s involvement in the exploration, development and production of oil and
natural gas and its present stage of development.
•
Capital requirements and liquidity risks associated with the development and
production of natural gas from the company’s Block 5(c) property as well as future
projects.
•
Commodity price swings in crude oil and natural gas could impact Canadian
Superior’s profitability.
•
Adverse changes to government regulations and fiscal terms. Any adverse changes
could impact Canadian Superior’s execution and profitability.
•
A left-leaning government that is less business friendly could affect the profitability of
the company’s operations.
5 November 2008
45
CGX Energy Inc.
SPECULATIVE BUY
OYL : TSX-V : C$0.49
Target: C$1.80
COMPANY STATISTICS:
Forecast Return %:
52-week Range:
Avg. Daily Vol. (000s):
Shares Out (M) basic:
Shares Out (M) fd:
Market Cap (M):
Net Debt (2008E) (M):
Enterprise Value (M):
267%
C$0.42–4.60
203.4
125.6
135.2
C$60.9
C$(23.3)
C$37.6
EARNINGS SUMMARY:
FYE
Oil & NGL (b/d):
Natural Gas (mmcf/d):
Total (boe/d):
EPS (fd)
CFPS (fd):
Commodity Prices
WTI (US$/b):
NYMEX Gas (US$/mmbtu):
2007A
NA
NA
NA
2008E
NA
NA
NA
2009E
NA
NA
NA
($0.04) ($0.14) ($0.02)
($0.02) ($0.02) ($0.03)
2007A 2008E 2009E
$72.29 $104.97 $80.00
$6.97
$9.25 $8.75
SHARE PRICE PERFORMANCE:
J. Frederick Kozak, P.Eng.
1.403.508.3836
[email protected]
Timothy Clark
1.403.508.3824
[email protected]
Energy – Oil and Gas, Exploration and Development
SWINGING FOR THE FENCES
Initiating research coverage
Our 12-month target price of C$1.80 is based on the assumption that the
company is able to develop successfully a 50 million barrel offshore
discovery from offshore Guyana with internal expertise and capital
resources. We note that independent third party evaluation of the best
prospects on the company's landholdings put the resource potential at
1.1 billion barrels on a low estimate basis, implying that this prospect
has an approximate 5 percent chance of success. We rate CGX Energy
SPECULATIVE BUY.
Overview
CGX Energy is an international oil and gas exploration and production
company that is headquartered in Toronto with exploration properties
in the South American country of Guyana. The company’s business
focus is to explore for oil in the unproved high-risk Guyana-Suriname
Basin. The United States Geological Survey (USGS) has identified the
Guyana-Suriname Basin as having one of the largest unexplored oil
basins in the world with estimated recoverable oil reserves of 15.2
billion barrels and gas reserves of 42 trillion cubic feet.
A recent dry hole drilled by Repsol and Noble Energy on Block 30 in
offshore Suriname has created some speculation about the commerciality
of the basin. While a success would have been favourable for companies
such as CGX, that dry hole does not mean the basin is uneconomic as the
targeted play type was different than what CGX is focusing on.
COMPANY SUMMARY:
CGX Energy is a Canadian-based oil and gas company
focused on offshore and onshore oil exploration in the
Guyana-Suriname basin.
All amounts in $US unless otherwise noted.
5 November 2008
Significant presence in Guyana-Suriname
CGX Energy has interest in four Petroleum Prospecting Licences (PPL),
which are offshore holdings in Guyana that amount to a total 7.2 million
net acres. The presence of oil on a portion of one block alone
(Corentyne, 100% interest) has been evaluated to contain an estimated
resource potential of 2.7 billion barrels of oil. The company plans to drill
its first well on the Corentyne PPL in late 2009 or early 2010.
The Caribbean Report
46
RECOMMENDATION
We are initiating coverage on CGX Energy Inc. with a SPECULATIVE BUY
recommendation and a 12-month target price of C$1.80. Our 12-month target price of
C$1.80 is based on the assumption that the company is able to develop successfully a 50
million barrel offshore discovery from offshore Guyana with internal expertise and
capital resources. We note that independent third party evaluation of the best prospects
on the company's landholdings put the resource potential at 1.1 billion barrels on a low
estimate basis, implying that this prospect has an approximate 5 percent chance of
success. We rate CGX Energy SPECULATIVE BUY.
CORPORATE PROFILE
COMPANY HISTORY
In 1996, the company’s founders began the process of acquiring its first offshore
concession with the Government of Guyana. Two years later in June 1998, a wholly owned
subsidiary, CGX Resources Inc., was granted a 10-year licence called the Corentyne
Licence. The licence covers 3.8 million acres of land located offshore Guyana. The following
year the company conducted a 2D seismic program over the most prospective offshore
portion of the licence. The seismic identified two turbidite deep-sea fan targets called Eagle
and Wishbone, and two stratigraphic-trap targets called Horseshoe West and Horseshoe
East. In 2000, following the prospect identification and seismic interpretation, the company
planned to drill an exploration well on the Eagle prospect. However, the rig that was
contracted to drill the well was forced off location by the Surinamese navy due to an
offshore border dispute with neighbouring Suriname. CGX Resources then proceeded to
drill a lower-grade target, Horseshoe West, which ended up being a dry hole.
The altercation with the Surinamese navy sparked a dispute between Suriname and
Guyana regarding the location of each country’s offshore borders lasting almost seven
years. In September 2007, the maritime border dispute was resolved between the two
countries, with CGX Resources playing a pivotal role in the negotiations. The company
now has the go-ahead to pursue its exploration leads that reside close to the maritime
border between the two countries.
BUSINESS STRATEGY
CGX Energy’s business model is based around the expertise of its technical team and the
strategic relationships it has in Guyana. The company’s strategy is to create value through
high-risk oil exploration and future development. The company is chasing a resource in an
unproven area of the world. This high-risk business plan could prove to be extremely
valuable if commercial hydrocarbons do actually reside in the Guyana-Suriname basin.
MANAGEMENT AND DIRECTORS
The management group and board of directors consist of professionals with considerable
international oil and gas industry experience.
•
South American Offshore
Kerry E. Sully, President, Chief Executive Officer and Director. Prior to his role as
CEO, Mr. Sully was a co-founder and worked at Ranchmen’s Resources (bought by
Crestar Energy for $260 million) as Chief Executive Officer. He held a position on
5 November 2008
47
Texaco Exploration Canada’s mergers and acquisitions team, was a consultant for
Lewis Engineering Co. and DR McCord & Associates, and worked as a reserve
evaluator and engineer for various oil and gas companies. The roles provided him
with the skill set required to run a successful international exploration and
production company. He was responsible for business development, exploration
operations, commercial evaluations, government and partner relations, planning
and budgeting, environmental health and safety, security. Mr. Sully holds a Bachelor
of Science, specializing in chemical engineering, from the University of
Saskatchewan.
•
James N. Fairbairn, Chief Financial Officer, Secretary and Treasurer. Mr. Fairbairn
has over 20 years of publicly traded company experience in various executive roles.
He joined CGX in 1997 and he is currently a Director of Vena Resources and Black
Pearl Minerals. He is a Chartered Account and holds a Bachelor of Arts from the
University of Western Ontario.
•
Warren Workman, VP Exploration. Mr. Workman holds over 30 years of petroleum
engineering and project management experience attained while working at Amoco,
Unocal and Ranchmen’s Resources. Most recently, through Apex Engineering he has
consulted domestically and internationally as a geophysicist, geologist and engineer.
He holds a Bachelor of Science in geology from Queens University.
•
Charlotte May, Investor Relations. Ms. May has over 20 years of experience in the
brokerage, oil and gas, and industrial industries. She currently provides consulting
services to a number of junior resource companies in the area of investor relation,
marketing and public company administration.
In addition to Mr. Sully the company’s board of directors consists of Denis Clement (Chairman
of Dumont Nickel), John Cullen (Director of Candax Energy), Adrian Jackson (Director of
Candax Energy), and Oliver Lennox-King (Chairman of Aurora Energy Resources).
CAPITALIZATION
CGX Energy’s capital structure is designed to support an exploration growth-oriented model.
The company’s most recent equity issue was in October 2007 and raised total gross proceeds of
$35 million at a price of $2.00 per share through the issue of 17.5 million shares. The company
currently has 125.6 million common shares outstanding and approximately 9.6 million stock
options. The stock options have a weighted average exercise price of $1.29 per share.
Figure 47: CGX Energy’s capital structure
Shares O/S - Basic
Options (average price $1.29)
Shares O/S – Fully Diluted
Market capitalization
Net Debt
Enterprise Value
(M)
125.6
9.6
135.2
$60.9
($23.3)
$37.6
Source: Company reports, Canaccord Adams research
5 November 2008
Caribbean Report
48
Institutional investors own approximately 22% of the issued and outstanding shares of CGX
Energy. According to Thomson Financial, the major institutional shareholders of CGX
Energy include: Sprott Asset Management Inc. (12.5 million shares), AGF Management Ltd.
(5.8 million shares), OppenheimerFunds Inc.(4.5 million shares), and Sceptre Investment
Counsel Ltd. (3.6 million shares). CGX Energy’s directors and management team own
approximately 4% of the issued and outstanding shares of the company.
South American Offshore
5 November 2008
49
AREA OF OPERATIONS
SIMPLIFIED GEOLOGY
The company is in a highly prospective portion of South America. The geology of the
Guyana-Suriname Basin goes back more than 250 million years ago when North
America, South America and Africa were essentially a single landmass.
Figure 48: Plate tectonics – 250 million years ago
North America
Caribbean
South America
Africa
Source: Atlas of Plate Reconstructions, Lawver, Dalziel, Gahagan, Martin and Campbell, 2002
As the earth’s geology evolved, these plates started to move apart, ultimately ending up
where the continents are located today. But the movement of the individual plates
created stresses in the earth’s crust. The movement of the three continents away from
each other resulted in several geological formations, most notably in the GuyanaSuriname Basin, where the continent of South America started to rise up. With this
process, significant erosion off the continental landmass into the ocean created large
sedimentary sequences. These sedimentary sequences have overlaid the existing
carbonate formations that were created, while the continents were mostly connected and
likely resulted in the source rock for the sedimentary sequences.
5 November 2008
Caribbean Report
50
Figure 49: Geology of Guyana-Suriname Basin
Source: CGX Energy
As a result of the erosional deposition, there is now estimated to be more than 3,000
metres of sedimentary rock in the Guyana offshore, containing turbidite and
stratigraphic deposits that may hold a wealth of crude oil and natural gas reserves.
According to the US Geological Survey, the basin’s potential could exceed 15 billion
barrels of oil with natural gas potential of 42 trillion cubic feet with approximately 84%
of the oil potential in the Late Cretaceous and Tertiary-aged play types.
South American Offshore
5 November 2008
51
Figure 50: Location map
Source: CGX Energy
EXPLORATION BLOCKS
The company has working interests in four petroleum prospecting licences, accounting for
9.5 million gross (7.2 million net) acres, which are located predominantly offshore Guyana.
5 November 2008
•
100% working interest in the offshore Corentyne Concession and in the Corentyne
Annex Concession (Western Annex);
•
25% working interest in the offshore Georgetown Concession;
•
100% working interest in the offshore Pomeroon Concession; and
•
62% working interest in the onshore ON Energy Block.
Caribbean Report
52
Figure 51: CGX’s holdings in Guyana/Suriname
Source: Company reports, Canaccord Adams
Corentyne and Corentyne Annex PPL, Guyana
CGX holds a Petroleum Prospecting Licence (PPL) in this offshore area, which consists of
approximately 3.8 million acres. The company has a 100% working interest in both the
Corentyne and Western Annex areas. Offshore water depths in the Corentyne/Western
Annex area range between 0 and 1,000 metres. Targeted zones in the area include the
Lower Tertiary-aged turbidite sand reservoirs (~3,200 metres deep) and the Cretaceousaged basin floor fan (~5,400 metres deep).
The company has commenced shooting on a 536 square kilometre 3D seismic program
on its Corentyne licence in October 2008. This seismic program is being conducted in
conjunction with a 1,650 square kilometre 3D seismic program on the adjacent
Georgetown Block (25% CGX) and will fulfill the minimum work commitment through the
First Renewal Phase Two of the Correntyne licence. Total cost to CGX is estimated at
approximately US$16 million.
Interpretation of the 3D seismic will take place in early 2009 with drilling location(s)
selected prior to mid-year. CGX could be ready to drill before the end of 2009. However,
funding will be an issue, as the first exploration well to be drilled to approximately
19,500 feet is estimated to cost approximately US$85 million with the potential of the
well being drilled to 22,000 feet at a cost of approximately US$90 million.
Prior to commencement of the 3D seismic program, CGX was marketing the offshore acreage
as a potential farm-out deal. Apparently no acceptable farm-in offers were received and CGX
has decided to proceed to the drill-ready stage before offering the block again. With the 3D
data, the company should be in a much better position to attract a partner.
South American Offshore
5 November 2008
53
If commercial production takes place, the licence is structured such that, once
commercial production takes place, for the first three years CGX can recover all capital
and operating costs from “cost oil”, allowing up to 75% of production revenues to be
used. After the first three years of production, CGX may then use 65% of production as
cost oil. CGX’s share of “profit oil,” or the oil it produces after “cost oil,” for the first five
years is 50% of the initial 40,000 bbl/d and 47% for additional production. Once the five
years are finished, the company is entitled to 45% of production in fulfillment of income
tax and royalty regulations. Taking into account the life and requirements of the
contract, it is estimated that the company’s gross share of revenue will be 63%.
Gustavson Associates has conducted studies on a number of prospects in the Corentyne
Concession. Figure 52 displays the company’s prospects on the northern end of the
Corentyne block as well as on a portion of the adjacent Georgetown block.
Figure 52: CGX’s resource assessment
Source: Corporate presentation
Figure 53: Prospective oil resources (billion barrels)
Prospect
Eagle (shallow)
Wishbone (shallow)
Eagle Deep West
Eagle Deep East
Sum of Prospects
Low Estimate
P90
0.1
0.2
0.4
0.4
1.1
Best Estimate
P50
0.5
0.4
0.9
0.9
2.7
High Estimate
P10
2.0
1.0
1.6
1.6
6.2
Source: Company reports
5 November 2008
Caribbean Report
54
Georgetown PPL, Guyana
In early 2002, CGX acquired a 25% participating interest in the Georgetown PPL with
Repsol holding the other 75% interest. The licence is subject to a confidentiality
agreement with Repsol and the Government of Guyana; however, the terms of the work
program and fiscal regime are believed to be similar to the company’s Corentyne licence.
The property consists of approximately 2.8 million acres located offshore in water depths
range from 30 to 200 metres. In October 2008, the company commenced the shooting of
a 1,651 square kilometre 3D seismic survey on the block.
CGX has identified two potential play types on this block. The map in Figure 52 shows
the outline of several prospects on the block, notably the Cretaceous-aged Abary Deep,
and the Tertiary-aged prospects identified as F1, F2 and F4 East and F4 West. A well
drilled in 1975 by then operator of the block, Shell Oil, had a downhole blowout that
prevented proper testing of the Abary prospect. However, the well drilled at Abary-1 had
numerous oil and gas shows.
The Cretaceous-aged basin fan features have resulted as an erosion of the underlying
rock swept sediment further out from the continent. Clearly identified on seismic, the
prospect has not been evaluated. However, on the 100% interest Correntyne block, the
Eagle Deep East and West Prospects range in size from 0.4 billion to 1.6 billion barrels of
prospective oil resources.
Pomeroon PPL, Guyana
CGX holds a 100% interest in approximately 2.8 million acres in the area. This offshore
property has water depths ranging from 20 to 500 metres. The area is located between
CGX’s Georgetown Annex block and the Plataforma Deltana (offshore Venezuela).
The western boundary of this block remains unresolved with Venezuela and is not
currently subject to any technical work. We note that the proximity of the block and the
trend of the geology through the area make this block highly attractive for future
exploration work, however no published assessment of the potential currently exists. CGX
has made an application to extend the term of this block to November 2013. All work
commitments on the block up to the end of the initial period are deemed to be completed.
Berbice Block, Guyana
The company holds a 62% interest in 384,000 acres in this onshore area through its
ownership in subsidiary ON Energy Inc. The area is located on the southeastern coastal
plain of Guyana on the border Suriname (Figure 51). The company is currently working
on the extension of this licence as well as its work program.
South American Offshore
5 November 2008
55
VALUATION
RESOURCE POTENTIAL
Given the exploration nature of the region and the unknown production potential of the
offshore blocks, it is difficult to know what a development scenario for the area might look
like. However, with the resource potential as identified by the company’s independent
evaluators, the total resource size and potential value to the company as shown in the
following tables are immense.
Figure 54: Gustavson reserves
Prospect
Eagle Shallow
Wishbone
Eagle Deep West
Eagle Deep East
Sum of prospects
Prospective Oil Resources (mmbbl)
Low Estimate
Best Estimate
High Estimate
153
545
1,956
186
439
1,043
379
859
1,590
415
904
1,636
1,133
2,747
6,225
*Please refer to Figure 52 – Resource Assessment
Source: Gustavson Associates
Figure 55: Gustavson values
Eagle Deep & Eagle Shallow Prospects
Eagle Shallow
Eagle Deep
Net Present Values (US$mm)
11,744
4,314
7,296
Source: Gustavson Associates
VALUATION
Given the unknown nature of the area, we have made some simplifying assumptions to assist
investors in determining a potential value of exploration success to the company. We have
determined that there is a high likelihood of an oil discovery on the company’s block.
However, the ability of CGX to mount the development of the resources as highlighted above
in the resource assessment by Gustavson is, in our opinion, not an option.
For our analysis we have assumed a “typical” offshore discovery scenario whereby CGX
could potentially discover a 50 million barrel field or a 100 million barrel field and be able
to develop these discoveries with the resources and capabilities of the company.
Our assumptions for the economic analysis are reflected in Figure 56, which lists our
assumptions for the analysis of these two possible development scenarios. For the first
scenario, we are assuming that CGX makes a deep 100 million barrel discovery. We have
assumed gross capital expenditures to develop this prospect to be US$600 million.
Included in this capital is US$85 million for one exploration well, US$300 million for
development drilling, and US$215 million for a production platform. We estimate
commencement of production for the company to occur in January 2012 with the company
holding a 100% working interest. As a result of the high working interest and the
significant costs associated with this scenario we have assumed the company will fund
5 November 2008
The Caribbean Report
56
50% of the project costs with equity. This results in the issuance of 100 million additional
shares for the company in two tranches, which is reflected in our per-share discounted
cash flow values in Figure 58 below.
For the second scenario, we are assuming that CGX discovers and develops a shallow 50
million barrel oil prospect. We have assumed gross capital expenditures to develop this
prospect to be US$375 million. Included in this capital is US$85 million for one exploration
well (the same well as drilled for the 100 million barrel prospect), US$150 million for
development drilling, and US$140 million for a production platform. We estimate
commencement of production for the company to be earlier than the 100 million barrel
scenario, with production starting in April 2011 (100% working interest). We have assumed
project financing in this case to be 80% equity reflecting the riskier nature of the
development. This results in the issuance of 100 million additional shares for the company in
two tranches, which is reflected in our per-share discounted cash flow values in Figure 60.
Figure 56: Assumptions for discounted cash flow evaluation
100 mmbbl scenario
Exploration Wells
Gross Exploration Capital (US$mm)
1
85
50 mmbbl scenario
Exploration Wells
Gross Exploration Capital (US$mm)
1
85
Development Wells
Gross Development Capital (US$mm)
4
300
Development Wells
Gross Development Capital (US$mm)
3
150
Platform Capital (US$mm)
215
Platform Capital (US$mm)
140
Gross Capital Expenditures (US$mm)
600
Gross Capital Expenditures (US$mm)
375
Commencement of Production
Jan 2012
Commencement of Production
Apr 2011
Peak Production Rate (mbbl/d)
50
Peak Production Rate (mbbl/d)
30
Working Interest Assumption (%)
100
Capital Structure for financing project
50/50 Equity Debt
$100mm Financing @ $2.00/share (mm)
$200mm Financing @ $4.00/share (mm)
Total Shares Raised (mm):
50
50
100
Total basic shares outstanding (mm)
225.6
Working Interest Assumption (%)
100
Capital Structure for financing project
80/20 Equity Debt
$100mm Financing @ $2.00/share (mm)
$200mm Financing @ $4.00/share (mm)
Total Shares Raised (mm):
Total basic shares outstanding (mm)
50
50
100
225.6
Source: Canaccord Adams
Figure 57: Valuation grid – 100 million barrel scenario
Operating Costs (US$/bbl)
$5.00
$7.50
$10.00
$12.50
$15.00
$50
$502
$451
$429
$374
$343
$60
$654
$605
$595
$543
$491
NPV (US$millions) After-Tax @ 20%
Long-term Crude Oil Price (US$/bbl)
$70
$80
$90
$100
$842
$964
$1,143
$1,322
$793
$918
$1,097
$1,276
$744
$874
$1,051
$1,230
$694
$836
$1,005
$1,184
$645
$797
$959
$1,138
$110
$1,424
$1,380
$1,341
$1,302
$1,264
$120
$1,595
$1,552
$1,508
$1,465
$1,421
$130
$1,767
$1,723
$1,680
$1,636
$1,593
Source: Canaccord Adams
South American Offshore
5 November 2008
57
From our analysis of the best-case scenario, we see above that the economics of a 100
million barrel offshore oil discovery in Guyana are very robust. As we highlight above,
even a low-price scenario would have a material return on investment.
Figure 58: Valuation grid – 100 million barrel scenario (per share)
NPV After-Tax @ 20% per FD Share Outstanding ($C)
Operating Costs (US$/bbl)
Long-term Crude Oil Price (US$/bbl)
$50
$60
$70
$80
$90
$100
$110
$120
$130
$5.00
$2.34
$3.05
$3.93
$4.50
$5.33
$6.17
$6.64
$7.44
$8.24
$7.50
$2.10
$2.82
$3.70
$4.28
$5.12
$5.96
$6.44
$7.24
$8.04
$10.00
$2.00
$2.78
$3.47
$4.08
$4.90
$5.74
$6.26
$7.04
$7.84
$12.50
$1.74
$2.54
$3.24
$3.90
$4.69
$5.53
$6.08
$6.83
$7.63
$15.00
$1.60
$2.29
$3.01
$3.72
$4.47
$5.31
$5.90
$6.63
$7.43
Source: Canaccord Adams
While we have provided a range of operating costs for the 100 million barrel case, we are
of the opinion that the offshore development of such a field is more likely to be in the range
of $10-15/bbl for operating costs. We have highlighted what we believe is the most likely
area of long-term crude oil prices to assess the potential value per share of this discovery
on the company.
Figure 59: Valuation grid – 50 million barrel scenario
Operating Costs (US$/bbl)
$5.00
$7.50
$10.00
$12.50
$15.00
$50
$309
$276
$264
$229
$210
$60
$402
$371
$340
$334
$301
NPV (US$M) After-Tax @ 20%
Long-term Crude Oil Price (US$/bbl)
$70
$80
$90
$100
$481
$554
$661
$768
$452
$527
$634
$741
$423
$502
$607
$714
$398
$479
$580
$687
$386
$455
$552
$659
$110
$875
$848
$821
$793
$766
$120
$982
$955
$928
$900
$873
$130
$1,089
$1,062
$1,034
$1,007
$980
Source: Canaccord Adams
From our analysis of this modest discovery scenario, we see above that the economics of a
50 million barrel offshore oil discovery in Guyana are also very robust. As we highlight
above, even a low-price scenario would have a material return on investment.
Figure 60: Valuation grid – 50 million barrel scenario (per share)
NPV After-Tax @ 20% per FD Share Outstanding ($C)
Operating Costs (US$/bbl)
Long-term Crude Oil Price (US$/bbl)
$50
$60
$70
$80
$90
$100
$110
$120
$130
$5.00
$1.44
$1.88
$2.25
$2.59
$3.09
$3.58
$4.08
$4.58
$5.08
$7.50
$1.29
$1.73
$2.11
$2.46
$2.96
$3.46
$3.96
$4.45
$4.95
$10.00
$1.23
$1.59
$1.98
$2.34
$2.83
$3.33
$3.83
$4.33
$4.83
$12.50
$1.07
$1.56
$1.86
$2.23
$2.70
$3.20
$3.70
$4.20
$4.70
$15.00
$0.98
$1.41
$1.80
$2.12
$2.58
$3.08
$3.58
$4.07
$4.57
Source: Canaccord Adams
As in the 100 million barrel case, we have provided a range of operating costs for the
development of a 50 million barrel discovery. While operating conditions would be similar,
5 November 2008
The Caribbean Report
58
due to the shallow nature of our hypothetical discovery, the offshore development of such
as field is more likely to have operating costs in the range of $7.50-15/bbl. We have
highlighted what we believe is the most likely area of long-term crude oil prices to assess
the potential value per share of this discovery on the company.
Our 12-month target price of C$1.80 is based on the assumption that the company is able
to develop successfully a 50 million barrel offshore discovery from offshore Guyana with
internal expertise and capital resources. We note that independent third party evaluation
of the best prospects on the company's landholdings put the resource potential at 1.1
billion barrels on a low estimate basis, implying that this prospect has an approximate 5
percent chance of success. We rate CGX Energy SPECULATIVE BUY.
South American Offshore
5 November 2008
59
Figure 61: Summary of estimates
Analyst: J. Frederick Kozak, P.Eng.
Associate: Timothy Clark
CGX ENERGY INC.
Recommendation
12-month target price
November 4, 2008
OYL
Current price
Total projected return*
* includes dividends payable
SPEC BUY
C$1.80
EV/production ($/boe/d)
Return on equity (%)
Return on capital employed (%)
2006A
NA
49%
-73%
2007A
NA
-17%
-18%
2008E
NA
23%
32%
2009E
NA
-3%
-4%
Current
$60.9
125.6
93.3
135.2
C$4.60
203,367
Current
$4.00
12%
$37.6
NA
2010E
NA
-2%
-2%
Oil & Liquids Production (b/d)
First quarter
Second quarter
Third quarter
Fourth quarter
Annual
2006A
0
0
0
0
0
2007A
0
0
0
0
0
2008E
0
0
0
0
0
2009E
0
0
0
0
0
2010E
0
0
0
0
0
Natural Gas Production (mmcf/d)
First quarter
Second quarter
Third quarter
Fourth quarter
Annual
2006A
0.0
0.0
0.0
0.0
0.0
2007A
0.0
0.0
0.0
0.0
0.0
2008E
0.0
0.0
0.0
0.0
0.0
2009E
0.0
0.0
0.0
0.0
0.0
2010E
0.0
0.0
0.0
0.0
0.0
Total Production (boe/d) - 6:1
First quarter
Second quarter
Third quarter
Fourth quarter
Annual
% crude oil & liquids
Production growth
2006A
0
0
0
0
0
NA
NA
2007A
0
0
0
0
0
NA
NA
2008E
0
0
0
0
0
NA
NA
2009E
0
0
0
0
0
NA
NA
2010E
0
0
0
0
0
1%
NA
Proven F&D costs ($/boe)
P+P F&D costs ($/boe)
Proven reserve replacement ratio
C$0.49
271%
ALL $ AMOUNTS ARE IN US$ UNLESS OTHERWISE NOTED
Share Information
Market cap ($M)
Shares O/S – basic (M)
Shares O/S – float (M)
Shares O/S – f.d. (M)
52-week range
Avg Daily Trading Volume (year)
Valuation
Contingent Net asset value (CCI estimate)
Price/NAV
Enterprise value ($M)
EV/proven reserves ($/boe)
Reserves - 6:1
Equivalent reserves (mmboe)
Proven
Proven + probable
% Proven producing
% Proven
% Crude oil & liquids
Reserve life – proven (yrs)
(403) 508-3836
(403) 508-3824
C$0.42
(at December 31, 2007)
Oil
Gas
Total
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1 Year
3 Year
NA
NA
NA
NA
NA
NA
Market Multiples
Discretionary cash flow multiple
Debt-adjusted multiple
Earnings multiple
Target multiple
Debt-adjusted target multiple
2006A
NA
NA
NA
NA
NA
2007A
NA
NA
NA
NA
NA
2008E
NA
NA
3.5x
NA
NA
2009E
NA
NA
NA
NA
NA
2010E
NA
NA
NA
NA
NA
Net Income
Net income ($M)
EPS (basic)
EPS (f.d.)
2006A
NA
($0.07)
($0.08)
2007A
($4.5)
($0.04)
($0.04)
2008E
$17.6
$0.14
$0.14
2009E
($2.4)
($0.02)
($0.02)
2010E
($1.4)
($0.01)
($0.01)
Cash Flow
Cash flow ($M)
CFPS (basic)
CFPS (f.d.)
CFPS (f.d.d.)
2006A
($5.5)
($0.03)
($0.03)
($0.05)
2007A
($2.8)
($0.02)
($0.02)
($0.02)
2008E
($2.9)
($0.02)
($0.02)
($0.02)
2009E
($4.3)
($0.03)
($0.03)
($0.03)
2010E
($3.3)
($0.03)
($0.03)
($0.03)
Capital Expenditures & Debt
Capital expenditures ($M)
Year-end net debt ($M)
Average net debt/cash flow
Year-end net debt/cash flow
2006A
$0.0
($0.7)
NA
0.1
2007A
$0.0
($37.0)
NA
13.4
2008E
$0.0
($23.3)
NA
8.0
2009E
$89.0
$70.0
0.3
(16.1)
2010E
$145.0
$218.4
1.0
(65.3)
Commodity Prices
WTI oil (US$/bbl)
NYMEX gas (US$/mmbtu)
Realized oil & NGL (US$/bbl)
Realized natural gas (US$/mcf)
2006A
$66.13
6.73
NA
NA
2007A
2008E
$72.29 $104.97
6.97
9.25
NA
NA
NA
NA
2009E
$80.00
8.75
NA
NA
2010E
$90.00
8.75
NA
NA
Netbacks ($/boe)
Revenue
Net royalties
Operating costs
Operating netback
Cash flow netback
2006A
NA
NA
NA
NA
NA
2007A
NA
NA
NA
NA
NA
2008E
NA
NA
NA
NA
NA
2009E
NA
NA
NA
NA
NA
2010E
NA
NA
NA
NA
NA
CFPS (f.d.d.) Price Sensitivity
+/- US$1.00/b WTI
2006A
$0.00
0.0%
$0.00
0.0%
2007A
$0.00
0.0%
$0.00
0.0%
2008E
$0.00
0.0%
$0.00
0.0%
2009E
NA
NA
NA
NA
2010E
$0.00
0.0%
$0.00
0.0%
+/- C$0.10/mcf Gas
Management Team
Kerry Sully, President and CEO Birch Mountain, Ranchmen's Resources
Warren Workman, VP Exploratio Amoco, Unocal, Ranchmen's
James Fairborne, CFO
Vena Resources, Black Pearl Minerals
Reservoir Engineer
Gustavson Associates
Auditor
Parker-Simone LLP
Banker
N/A
Bank Lines - Q2/08
N/A
2008E
N/A
2009E
N/A
Source: Canaccord Adams
5 November 2008
The Caribbean Report
60
Investment risks
Risks to our investment thesis include:
South American Offshore
•
An investment in the company’s securities would be speculative due to the nature of
the company’s involvement in the exploration, development and production of oil and
natural gas and its present stage of development.
•
Capital requirements and liquidity risks associated with the exploration, development
and production of oil and natural gas from the company’s Guyana assets.
•
Commodity price swings in crude oil and natural gas could impact CGX Energy’s
profitability.
•
Adverse changes to government regulations and fiscal terms. Any adverse changes
could impact CGX Energy’s execution and profitability.
•
A left-leaning government which is less business friendly could affect the profitability
of the company’s operations.
5 November 2008
61
Challenger Energy Corp.
SPECULATIVE BUY
CHQ : TSX-V : C$2.20
Target: C$5.25
COMPANY STATISTICS:
Forecast Return %:
52-week Range:
Avg. Daily Vol. (000s):
Shares Out (M) basic:
Shares Out (M) fd:
Market Cap (M):
Net Debt (2008E) (M):
Enterprise Value (M):
139%
C$0.42–4.60
67.1
52.8
67.9
C$116.2
C$15.6
C$131.7
EARNINGS SUMMARY:
FYE
Oil & NGL (b/d):
Natural Gas (mmcf/d):
Total (boe/d):
EPS (fd)
CFPS (fd):
Commodity Prices
WTI (US$/b):
NYMEX Gas (US$/mmbtu):
2007A
NA
NA
NA
2008E
NA
NA
NA
2009E
NA
NA
NA
($0.14)
$0.35 ($0.02)
($0.02) ($0.05) ($0.05)
2007A 2008E 2009E
$72.29 $104.97 $80.00
$6.97
$9.25 $8.75
SHARE PRICE PERFORMANCE:
J. Frederick Kozak, P.Eng.
1.403.508.3836
[email protected]
Timothy Clark
[email protected]
1.403.508.3824
Energy – Oil and Gas, Exploration and Development
A VICTORY-OUS, BOUNTY-FUL
ENDEAVOUR
Initiating research coverage
We are initiating coverage on Challenger Energy Corp. with a
SPECULATIVE BUY recommendation and a 12-month target price of
C$5.25. Our target price is based on a risked net asset valuation of the
company’s working interest in Block 5(c) located in offshore Trinidad
and Tobago.
Overview
Challenger Energy Corp. is a Calgary-based oil and gas exploration and
production company with operations in offshore Trinidad and Tobago.
The company has a 25% working interest in Block 5(c), which has
estimated reserves of 3-4 Tcf or more of natural gas. As identified on
seismic, Block 5(c) has three separate potential hydrocarbon targets:
Victory, Bounty and Endeavour. Exploration wells on the Victory and
Bounty prospects have been successfully drilled and have been
demonstrated to be world-class natural gas discoveries. The tested
capabilities of Victory and Bounty are approximately 100 mmcf/d and
200 mmcf/d respectfully, which would be suitable to support a new
future liquified natural gas processing train on the island of Trinidad.
Recommendation
COMPANY SUMMARY:
Challenger Energy is a Calgary-based oil and gas
exploration and production company. The company is
currently in exploration projects in offshore Trinidad and
Tobago.
We are initiating coverage on Challenger Energy Corp. with a
SPECULATIVE BUY recommendation and a 12-month target price of
C$5.25. Our target price is based on a risked net asset valuation of the
company’s working interest in Block 5(c) located in offshore Trinidad
and Tobago.
All amounts in $C unless otherwise noted.
5 November 2008
The Caribbean Report
62
CORPORATE PROFILE
COMPANY HISTORY
Challenger Energy was formed through the merger of Challenger Energy Corp. and
Global Energy Express Inc. on December 1, 2005. The company entered into a farm-out
agreement on Canadian Superior’s Block 5c asset in November 2004. In December 2006,
Challenger Energy commenced trading on the Toronto-Venture Exchange (TSX-V) under
the symbol “CHQ” with a subsequent listing on the American Stock Exchange (AMEX) in
late January 2007.
BUSINESS STRATEGY
Challenger Energy’s business focus is towards international high-impact growth potential
focused primarily in Trinidad and Tobago. More forward-looking, this company will be
sold to either a joint venture partner on Block 5c or an international E&P company that
wants to penetrate the highly lucrative natural gas industry of Trinidad and Tobago.
MANAGEMENT AND DIRECTORS
The management group and board of directors consist of professionals with considerable
international oil and gas industry experience.
•
Daniel MacDonald, President, Chief Executive Officer and Director. Mr. MacDonald
has over 20 years of experience in the oil and gas industry. His most recent role
prior to joining Challenger Energy was advisor to various companies on
international exploration opportunities, oil sands transactions and western Canadian
petroleum activities. Mr. MacDonald was also the previous President and Chief
Executive Office of Voyager Energy, which operates in Canada and also has assets in
Trinidad and Tobago. Additionally, he was employed at Amoco Canada, Canadian
88 Energy and Canadian Superior. Mr. MacDonald is a Professional Landman and
holds a Bachelor of Arts in Business Administration with a major in Finance and
Economics from Washington State University.
•
Manjeet Dhillon, Chief Financial Officer. Mr. Dhillon became VP Finance and Chief
Financial Officer on February 1, 2006. He was previously employed at Shaw
Cablesystems from August 2004 to January 2006. Additionally, he also was Vice
President and Controller of Boardwalk Real Estate Investment Trust from August
1999 to August 2004. Mr. Dhillon holds a Bachelor of Commerce degree from the
University of Alberta and is also a Chartered Accountant.
The board of directors consists of Dan MacDonald, James Brown (CEO of Mill City Gold
Corp.), Joe Chatoor, Michael Hibberd (CEO of MJH Services), Timothy Lindsey
(Consultant).
CAPITALIZATION
Challenger Energy’s capital structure is based to support a growth-oriented model. The
company recently raised new equity with an issue that closed on October 2, 2008.
Challenger was able to raise total gross proceeds of C$30 million at a price of $3.00 a
share through the issue of 10 million shares. The company currently has 52.8 million
South American Offshore
5 November 2008
63
common shares outstanding and approximately 15.1 million dilutive securities,
consisting of 5.5 million options with an average exercise price of $1.76 a share and 9.6
million warrants at an average exercise price of $3.68 a share.
Figure 62: Capital structure
Shares O/S - Basic
Options (average price $1.76)
Warrants (average price $3.68)
Shares O/S – Fully Diluted
Market capitalization
Net Debt
Enterprise Value
(M)
52.8
5.5
9.6
67.9
$116.2
$15.6
$131.7
Source: Company reports, Canaccord Adams
Institutional investors own approximately 6% of the issued and outstanding shares of
Challenger Energy. According to Thomson Financial, the major institutional
shareholders of Challenger Energy include: Cambrian Capital LP (1.8 million shares),
Driehaus Capital Management LLC (1.1 million shares), Wellington Management
Company, LLP (0.7 million shares), and BlackRock Financial Management Inc. (0.2
million shares).
Canadian Superior’s directors and management team own approximately 19% of the
issued and outstanding shares of the company, with Greg Noval owning approximately
7.3 million shares, or 11% of the company.
5 November 2008
The Caribbean Report
64
OPERATIONS
BLOCK 5(C) – OFFSHORE TRINIDAD
This block is located approximately 86 kilometres off the east coast of Trinidad, where
the water depths range from approximately 500 to 1,500 feet. All wells on this block are
drilled with a semi-submersible drilling rig. The company is paying 33% of the block’s
exploration costs in three wells to earn a 25% working interest in the entire block.
Figure 63: Joint Venture Partner Working Interest on Block 5(c)
Canadian Superior
British Gas
Challenger
Exploration Program Capital
Commitment
27%
40%
33%
100%
Production Sharing Contract
Interest
45%
30%
25%
100%
Source: Company reports
Over the last several years, the company identified three large separate and distinct
potential hydrocarbon structures on the Block which were named the Victory, Bounty,
and Endeavour prospects. Challenger Energy and its joint venture partners have drilled
the Victory and Bounty prospects this year, with great success. The third prospect,
Endeavour is currently being drilled with completion expected late in the late fourth
quarter of this year. The block is adjacent to several large gas fields including British
Gas’ Dolphin and Dolphin Deep natural gas fields (Figure 64).
Figure 64: Challenger Energy’s Block 5(c) operations
Source: Corporate website
South American Offshore
5 November 2008
65
An early victory
In early 2008, the company finished drilling the first well on the block in the Victory
prospect. The well tested natural gas in two formations, with the first zone being
condensate rich. The first zone tested natural gas at rates averaging between 40 mmcf/d
and 45 mmcf/d with high gravity condensate of approximately 30 bbl/mmcf (or
approximately 1,200-1,350 bbl/d of condensate). The second zone tested at rates
averaging 30 mmcf/d. Combined, the two zones could be able of producing gas at rates
of approximately 150 mmcf/d and 3,000 bbl/d of condensate. Reserves for the prospect
are estimated to be between 0.6 Tcf and 1 Tcf with associated natural gas liquids
(condensate etc) of 2.4 million to 3.7 million barrels.
Figure 65: Offshore Block 5(c) stylized cross section
Source: Canadian Superior Energy
The second prospect is Bounty-ful
In July 2008, the company completed drilling of the Bounty prospect to a total depth of
17,360 feet. This prospect, located approximately 2.2 miles from the Victory well was
drilled to test a new fault-defined trap on the block. The well encountered gas-bearing
zones with the main targeted zone having approximately 200 feet of pay. A flow test of
the high pressure zone (bottom hole pressure of 7,186 psi) was limited by the capacity of
the test equipment, but a stabilized flow rate of 60 mmcf/d was achieved. The well’s flow
test indicated productive capability of approximately 200 mmcf/d of natural gas from this
main targeted zone. The operator of the block, Canadian Superior believes that the
Bounty structure has up to 2.6 Tcf of natural gas resource potential.
5 November 2008
The Caribbean Report
66
Endeavour-ing to make another discovery
The company is now in the process of drilling the final prospect on Block 5(c). The well
spud at the end of August 2008 and is expected to take approximately 120 days to drill.
Testing time could be as much as an additional 30-45 days. The Endeavour prospect is a
prospect that is independent of Victory and Bounty. While confidence in the prospect
potential is higher due to the two previous exploration successes on Victory and Bounty,
management believes that the chance of success for Endeavour is unchanged at
approximately 30%.
Figure 66: Horizon amplitude – “I” Sand
Source: Canadian Superior Energy Inc.
The Endeavour exploration well will test the same prospective reservoir (the “I” Sand) as
was found in the Bounty well approximately five miles away. Geologically, it is possible
that the fault block containing the Endeavour prospect could be connected to the fault
block that contains the Bounty prospect. In reviewing the seismic shot over the block, we
note the lack of a clearly defined boundary between the two prospects as shown in the
seismic map above. Should this be the case and the two are actually connected, the size
potential of a combined Endeavour-Bounty prospect would be very significant.
We expect that drilling will be completed in the late fourth quarter with testing results
due in the early first quarter of 2009.
Future development potential
Regardless of the current and future success of these three prospects, the company still has
the problem of bringing Block 5(c) gas onstream. However, once the exploration drilling is
completed, the operations of the block will be turned over to partner BG, who have
extensive operating experience in the region. Future drilling timing remains unknown.
Challenger and its partners are considering two options. The first one is to build a
pipeline from Block 5(c) to the island of Trinidad. This would require the construction of
a new fifth LNG-processing train to accommodate the new gas as the other four existing
South American Offshore
5 November 2008
67
trains are operating at capacity. A fifth train on the island has been proposed for
sometime, however, the Trinidad government has yet to make a decision until a “new
substantial gas discovery” can be made to justify the construction. Challenger’s
management believes a discovery containing over 4.5 tcf of natural gas should be
sufficient to justify the construction of a fifth train. To date, it appears that Blcok 5(c)
could be the catalyst for this new LNG train.
The second option is to liquefy the gas on a purpose-built ship with onboard LNG
processing capacities and then transport the LNG to a sales point. This appears to be the
favoured option of one of the partners, but does not appear to have significant support
within the Challenger management team.
M/G BLOCK
Another opportunity that Challenger could pursue in Trinidad and Tobago is farming in on
the Mayaro/Guayaguayare M/G Block. Currently its partner in Block 5(c), Canadian Superior
holds a 100% working interest the near-shore M/G Block. The Block is off the east coast of
Trinidad and consists of 58,080 gross acres. Reserves are estimated to be approximately 1030 million barrels. The block is also in close proximity to several large onshore and offshore
oil and natural gas discoveries. It is located 1.5 miles away from the Navette field which has
produced over 60 million barrels of oil, making this block highly prospective. Also nearby is
the Angostura field, which while not fully analogous to the M/G Block geology, has estimated
reserves of approximately 1.75 Tcf of natural gas and 450 million barrels of oil.
As operator, Canadian Superior is currently in the process of obtaining permits for the
drilling of two locations on the block. Both wells are planned to be drilled in the first
quarter of 2009 pending approval from the government. The wells are expected to cost
approximately $12 to $14 million at 100% interest. If the exploration wells are
successful, there would be the need to follow-up with additional 3D seismic in the area to
determine a full field development plan.
Figure 67: Canadian Superior’s M/G operations
Source: Canadian Superior
5 November 2008
The Caribbean Report
68
VALUATION
As the company has not yet signed an agreement to farm in on the M/G Block, we have
excluded the potential value of this in our valuation of Challenger. We note that the
company is in essence a one-play company – it has a 25% interest in Block 5(c) offshore
Trinidad which has two confirmed discoveries on the block and a highly prospective third
discovery currently drilling.
We have run discounted cash flow models to estimate the value of the gas discoveries on
the block to Challenger. At this early stage, there are many unknown factors that can
impact the valuation of the block, but it is clear that there is significant value that has been
found and potentially significant upside value to follow.
As such, we present a potential value grid by which we have run various development
scenarios related to reserve size, production and gas price. Our economics assume generic
LNG costs for the offshore development and assume a cost-recovery/tariff model for the
new pipeline from the block to Trinidad as well as for the construction and operation of a
fifth LNG processing train.
Our assumptions for the economic analysis are reflected in Figure 68. We have assumed
gross capital expenditures to develop the three Block 5(c) prospects to be US$1.2 billion.
Included in this capital is development drilling capital and a production platform. We have
also assumed two different sets of operating and transportation costs which are dependent
on the final destination of the LNG. We have assumed operating and transportation costs of
US$3.25/mcf if the LNG is transported to North America and US$4.25/mcf if the LNG is
transported to any of the numerous international destinations.
Figure 68: Assumptions for discounted cash flow evaluation
Gross Capital Expenditures (US$M)
1,160
Operating Costs - North America Freight ($US/mcf)
Operating Costs - International Freight ($US/mcf)
3.25
4.25
Commencement of Production
July 2014
Source: Canaccord Adams
Figure 69: Valuation grid for Block 5(c)
Gross Recoverable
Reserves (Tcf)
5.0
4.5
4.0
3.5
3.0
$5.00
($187.1)
($212.9)
($217.0)
($231.7)
($259.8)
$6.00
($11.3)
($60.3)
($66.6)
($95.0)
($158.6)
NPV (US$MM) After-Tax @ 10%
Long-term Natural Gas Price (US$/mmbtu)
$7.00
$8.00
$9.00
$10.00
$12.50
$76.4
$68.4
$144.4
$230.9
$416.1
$15.8
$9.2
$78.1
$138.7
$284.9
$7.2
$63.7
$67.1
$125.4
$265.9
($29.2)
$28.9
$72.5
$76.3
$194.8
($102.3)
($60.6)
($21.4)
$15.9
$92.1
$15.00
$564.2
$415.4
$390.7
$310.1
$173.8
$17.50
$774.5
$548.4
$517.9
$427.2
$212.3
$20.00
$912.1
$714.9
$678.7
$527.3
$290.4
*Includes all three exploration prospects on Block 5(c) to the combined total Gross Recoverable Reserves
**The values in the areas of grey shading assumes gas delivery to North America only
Source: Canaccord Adams
South American Offshore
5 November 2008
69
Figure 70: Valuation grid for Block 5(c) – per share (in Canadian dollars)
Gross Recoverable
Reserves (Tcf)
5.0
4.5
4.0
3.5
3.0
$5.00
($3.73)
($4.25)
($4.33)
($4.62)
($5.18)
NPV After-Tax @ 10% per Basic Share Outstanding (C$)
Long-term Natural Gas Price (US$/mmbtu)
$6.00
$7.00
$8.00
$9.00
$10.00
$12.50
($0.22)
$1.52
$1.36
$2.88
$4.60
$8.30
($1.20)
$0.32
$0.18
$1.56
$2.76
$5.68
($1.33)
$0.14
$1.27
$1.34
$2.50
$5.30
($1.89)
($0.58)
$0.58
$1.45
$1.52
$3.88
($3.16)
($2.04)
($1.21)
($0.43)
$0.32
$1.84
$15.00
$11.25
$8.28
$7.79
$6.18
$3.46
$17.50
$15.44
$10.93
$10.33
$8.52
$4.23
$20.00
$18.18
$14.25
$13.53
$10.51
$5.79
*Includes all three exploration prospects on Block 5(c) to the combined total Gross Recoverable Reserves
**The values in the areas of grey shading assumes gas delivery to North America only
Source: Canaccord Adams
Clearly, the valuation of the Block 5(c) is a function of resources discovered and sales price.
Even with double-digit natural gas prices available in North America, the smallest
recoverable reserve size is only marginally economic based on the capital expenditures
required to develop the resource. Given the world’s demand for energy and the current
LNG markets, it is our view that the successful development of the discoveries made on
Block 5(c) will be sold to LNG buyers around the world. This would argue for a value based
on natural gas prices of better than US$10.00/mmbtu.
The next component of the valuation relates to the total size of the discoveries on the block.
To date, the first discovery at Victory is estimated to be from 0.6 Tcf to 1.1 Tcf in size. The
second discovery at Bounty is estimated to have a potential size of up to 2.6 Tcf of natural
gas. Therefore, the resource potential identified so far could be as high as
3.7 Tcf of natural gas.
Given the history of production and resource size from the area, we have a degree of
comfort in the potential resources discovered to date and are not risking the size of the
prize, but have instead risked the development costs and assumptions,
Our 12-month target price of C$5.25 is based on the assumption that the recoverable
resources will prove to be at the low end of the range shown above and ultimately sold for
a gas price in the range of $10.00/mmbtu to $15.00/mmbtu. However, we note that the
upside value from this level in terms of reserves and price likely makes this target price
conservative.
5 November 2008
The Caribbean Report
70
Figure 71: Summary of estimates
Analyst: J. Frederick Kozak, P.Eng.
Associate: Timothy Clark
Challenger Energy Corp.
Recommendation
12-month target price
November 3, 2008
CHQ
Current price
Total projected return*
* includes dividends payable
SPEC BUY
C$5.25
Share Information
Market cap ($M)
Shares O/S – basic (M)
Shares O/S – float (M)
Shares O/S – f.d. (M)
52-week range
Avg Daily Trading Volume (year)
Valuation
Contingent Net asset value (CCI estimate)
Price/NAV
Enterprise value ($M)
EV/proven reserves ($/boe)
EV/production ($/boe/d)
Return on equity (%)
Return on capital employed (%)
2006A
NA
NA
NA
2007A
NA
NA
NA
2008E
NA
NA
NA
2009E
NA
NA
NA
Current
$116.2
52.8
33.6
67.9
C$4.60
67,077
Current
$5.25
42%
$131.7
NA
2010E
NA
NA
NA
Oil & Liquids Production (b/d)
First quarter
Second quarter
Third quarter
Fourth quarter
Annual
2006A
0
0
0
0
0
2007A
0
0
0
0
0
2008E
0
0
0
0
0
2009E
0
0
0
(0)
0
2010E
(0)
(0)
(0)
(0)
(0)
Natural Gas Production (mmcf/d)
First quarter
Second quarter
Third quarter
Fourth quarter
Annual
2006A
0.0
0.0
0.0
0.0
0.0
2007A
0.0
0.0
0.0
0.0
0.0
2008E
0.0
0.0
0.0
0.0
0.0
2009E
0.0
0.0
0.0
0.0
0.0
2010E
0.0
0.0
0.0
0.0
0.0
Total Production (boe/d) - 6:1
First quarter
Second quarter
Third quarter
Fourth quarter
Annual
% crude oil & liquids
Production growth
2006A
0
0
0
0
0
NA
NA
2007A
0
0
0
0
0
NA
NA
2008E
0
0
0
0
0
NA
NA
2009E
0
0
0
(0)
0
NA
NA
2010E
(0)
(0)
(0)
(0)
(0)
NA
NA
Reserves - 6:1
Equivalent reserves (mmboe)
Proven
Proven + probable
% Proven producing
% Proven
% Crude oil & liquids
Reserve life – proven (yrs)
Proven F&D costs ($/boe)
P+P F&D costs ($/boe)
Proven reserve replacement ratio
C$0.42
(at December 31, 2007)
Oil
Gas
Total
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
3 Year
1 Year
NA
NA
NA
NA
NA
NA
(403) 508-3836
(403) 508-3824
C$2.20
139%
Market Multiples
Discretionary cash flow multiple
Debt-adjusted multiple
Earnings multiple
Target multiple
Debt-adjusted target multiple
2006A
NA
NA
NA
NA
NA
2007A
NA
NA
NA
NA
NA
2008E
NA
NA
6.2x
NA
NA
2009E
NA
NA
NA
NA
NA
2010E
NA
NA
NA
NA
NA
Net Income
Net income ($M)
EPS (basic)
EPS (f.d.)
2006A
NA
($0.08)
($0.08)
2007A
($4.4)
($0.14)
($0.14)
2008E
$18.3
$0.35
$0.35
2009E
($1.2)
($0.02)
($0.02)
2010E
($1.2)
($0.02)
($0.02)
Cash Flow
Cash flow ($M)
CFPS (basic)
CFPS (f.d.)
CFPS (f.d.d.)
2006A
($0.5)
$0.00
$0.00
($0.00)
2007A
($0.7)
$0.00
$0.00
($0.02)
2008E
($2.3)
($0.05)
($0.05)
($0.05)
2009E
($2.4)
($0.05)
($0.05)
($0.05)
2010E
($2.4)
($0.05)
($0.05)
($0.05)
Capital Expenditures & Debt
Capital expenditures ($M)
Year-end net debt ($M)
Average net debt/cash flow
Year-end net debt/cash flow
2006A
NA
NA
NA
NA
2007A
$17.6
$6.2
NA
(9.3)
2008E
$74.3
$15.6
0.1
(6.8)
2009E
$56.9
$71.9
0.8
(29.9)
2010E
$56.9
$128.1
1.8
(53.2)
Commodity Prices
WTI oil (US$/bbl)
NYMEX gas (US$/mmbtu)
Realized oil & NGL (US$/bbl)
Realized natural gas (US$/mcf)
2006A
$66.13
6.73
NA
NA
2007A
2008E
$72.29 $104.97
6.97
9.25
NA
NA
NA
NA
2009E
$80.00
8.75
NA
NA
2010E
$90.00
8.75
NA
NA
Netbacks ($/boe)
Revenue
Net royalties
Operating costs
Operating netback
Cash flow netback
2006A
NA
NA
NA
NA
NA
2007A
NA
NA
NA
NA
NA
2008E
NA
NA
NA
NA
NA
2009E
NA
NA
NA
NA
NA
2010E
NA
NA
NA
NA
NA
CFPS (f.d.d.) Price Sensitivity
+/- US$1.00/b WTI
2006A
$0.00
0.0%
$0.00
0.0%
2007A
$0.00
0.0%
$0.00
0.0%
2008E
$0.00
0.0%
$0.00
0.0%
2009E
$0.00
0.0%
$0.00
0.0%
2010E
($0.00)
0.0%
($0.00)
0.0%
+/- C$0.10/mcf Gas
Management Team
Dan MacDonald, CEO
Manjeet Dhillon, CFO
Canadian Voyager Energy, Canadian 88
Boardwalk REIT, Shaw Cable
Reservoir Engineer
N/A
Auditor
Meyers Norris Penny LLP
Banker
CIBC
Bank Lines - Q2/08
$0
2008E
N/A
2009E
N/A
Source: Canaccord Adams
South American Offshore
5 November 2008
71
Investment risks
Risks to our investment thesis include:
5 November 2008
•
An investment in the company’s securities would be speculative due to the nature of
the company’s involvement in the exploration, development and production of oil and
natural gas and its present stage of development.
•
Capital requirements and liquidity risks associated with the development and
production of natural gas from the company’s Block 5(c) property as well as future
projects.
•
Commodity price swings in crude oil and natural gas could impact Challenger Energy’s
profitability.
•
Adverse changes to government regulations and fiscal terms. Any adverse changes
could impact Challenger Energy’s execution and profitability.
•
A left-leaning government which is less business friendly could affect the profitability
of the company’s operations.
The Caribbean Report
72
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South American Offshore
5 November 2008
73
Petro Andina Resources Inc.
NOT RATED
PAR : TSX : C$4.16
COMPANY STATISTICS:
52-week Range:
Avg. Daily Vol. (000):
Shares Out. (M) basic:
Shares Out. (M) fd:
Market Capitalization (M):
Net Debt (surplus) (M):
Enterprise Value (M):
$3.49-17.11
66.4
42.8
45.9
$178.0
($12.0)
$166.0
SHARE PRICE PERFORMANCE:
Energy – Oil and Gas, Exploration and Production
Recent news highlights
September 15, 2008: Petro Andina announced that it has been awarded
exploitation concessions in Argentina. Specifically, the exploitation
concessions will cover the El Renegado and Gobernador Ayala Este
fields in the Gobernador Ayala III concession and the Puesto Pinto field
in the La Pampa portion of the company’s CNQ-7/A concession.
Company highlights
COMPANY SUMMARY:
Petro Andina is an oil and gas exploration and production
company with assets in the Neuquen Basin of Argentina
and recently entered into a joint venture agreement in
Trinidad and Tobago.
All amounts in C$ unless otherwise noted.
5 November 2008
•
The company has a sizeable presence in Argentina and Trinidad. It
holds 598,500 gross undeveloped acres (331,500 net) in Argentina
and 214,000 gross undeveloped acres (107,000 net) in Trinidad.
•
The company’s current production is approximately
13,000 boe/d, all of which comes from its operations in Argentina.
•
In early 2008, the company entered into a joint venture agreement
with private company Voyager Energy, which granted Petro Andina
a 50% operating working interest in two onshore exploration blocks
– Central Range Shallow and Central Range Deep – in Trinidad and
Tobago. The agreement is subject to a production-sharing contract
with minimum work commitments. The company expects to spend
$15 million on seismic coverage in the area during 2008 and to
commence exploration drilling in 2009.
The Caribbean Report
74
OPERATIONS
Trinidad and Tobago
•
In January 2008, Petro Andina entered into a joint venture agreement with Voyager
Energy Ltd. The agreement grants the company a 50% working interest and allows it
be the operator of the two onshore exploration blocks. The two blocks are in close
proximity to producing areas and recent discoveries. Under the conditions of the
arrangement, the company will act as the operator of the Central Range Shallow and
Central Range Deep blocks, which consist of approximately 214,000 gross (107,000
net) acres. Both of the areas are subject to a production-sharing contract that has been
awarded to Voyager and the Petroleum Company of Trinidad and Tobago. The
Petroleum Company of Trinidad and Tobago, if it chooses, can exercise an option to
take a 35% working interest in any developments on the Central Range Shallow Block
and a 20% working interest in any developments on the Central Range Deep Block.
•
The production-sharing contract has minimum work commitments (during the first
four-year term), which include 100 kilometres of 2D seismic, 250 square kilometres of
3D seismic, and the drilling of one deep well to a minimum depth of 12,000 feet and
three shallow wells to a depth of 4,500 feet. The company’s minimum work
commitment over the first four years is an estimated $25.25 million.
Figure 72: Petro Andina’s Trinidad operations
Note: Corporate website
South American Offshore
5 November 2008
75
Other operations
•
The company’s holdings in Argentina are in the Northeast Platform of the Neuquen
Basin. The Neuquen Basin is the most prolific producer of hydrocarbons in Argentina;
current production surpasses 275,000 barrels of oil and 2.75 Bcf of gas per day. The
basin’s estimated reserves are 1.2 billion barrels of oil and 14 trillion cubic feet of
natural gas.
•
Currently, Petro Andina is analyzing and executing specific enhanced oil recovery (EOR)
techniques such as water flooding and steam flooding in its El Corcobo Norte and Cerro
Huanul Sur operations in CNQ7/A Block in Argentina. The company anticipates that
every 1% of additional recovery will add 1 million barrels of recoverable reserves to the
company. It is estimated that primary recovery rates are 5-10%, water flood recovery
rates are 15-35%, and steam injection recovery rates are 50-80%.
•
The company plans to continue its development program in Argentina by drilling
additional wells, exploring current land positions, and possibly increasing its acreage
position through acquisitions.
Figure 73: Petro Andina’s Argentina operations
Note: Corporate website
5 November 2008
The Caribbean Report
76
MANAGEMENT AND BOARD OF DIRECTORS
Figure 74: Petro Andina’s management team and board of directors
Name
Wayne K. Foo
Barry B. Larson
Kenneth G. Pinsky
Jose M. Ronchino
David R. Taylor
Norman F. McIntyre
Curtis D. Bartlett
Ron D. Miller
W.A. (Alf) Peneycad
David I. Holm
Position
President & Chief Executive Officer
VP Operations & Chief Operating Officer
VP Finance & CFO
General Manager, Argentina
VP Business Development
Chairman
Director, Member of Operations & Reserves Committee
Director, Chair of Finance & Audit Committee
Director, Member of Finance & Audit and Corporate
Governance & HR Committee
Director, Member of Finance & Audit and Corporate
Governance & HR Committee
Source: Company reports
South American Offshore
5 November 2008
77
Primera Energy Resources Ltd.
NOT RATED
PTT : TSX-V : $0.22
Energy – Oil and Gas, Exploration and Production
COMPANY STATISTICS:
52-week Range:
Avg. Daily Vol. (000):
Shares Out. (M) basic:
Shares Out. (M) fd:
Market Capitalization (M):
Net Debt (surplus) (M):
Enterprise Value (M):
C$0.16-0.49
23.8
40.9
44.1
$9.0
($4.8)
$4.2
SHARE PRICE PERFORMANCE:
Recent news highlights
September 22, 2008: Primera Energy Resources announced that it has
voluntarily requested a halt of trading of its common shares on the TSX
Venture Exchange as the company is in advanced negotiations with a
related party concerning the acquisition of production. Additionally, the
company mentioned it is considering a private placement.
Company highlights
•
The company’s assets reside in Trinidad’s onshore Block WD-4,
onshore Cory Moruga Block (Cory “E”), and offshore Block 3(b).
•
The company’s assets in Block WD-4 consist of 700 acres, where it
currently has 10 wells on production at an average production rate
of 205 barrels of oil per day.
•
The company’s holdings in the Cory Moruga Block account for 7,443
acres. The company is in the process of obtaining a Certificate of
Environmental Clearance for exploratory drilling after having
completed 3D seismic of the area.
•
The company’s holdings in the Block 3(b) farm-in are subject to
ministerial approval. Primera has conducted extensive 3D seismic of
the area and is currently waiting for approval before funding any
exploration farm-in activities.
•
At both the Cory Moruga Block and Block 3(b), Primera is awaiting
the Ministry of Energy’s approval for future farm-in terms before
beginning any exploration and production activities.
COMPANY SUMMARY:
Primera Energy is a junior oil and gas exploration
company with acquired assets in onshore Trinidad and is
currently pursuing several other opportunities in both
onshore and offshore Trinidad.
All amounts in C$ unless otherwise noted.
Tobago
Trinidad
5 November 2008
The Caribbean Report
78
OPERATIONS
Block WD-4 – onshore
•
The company’s holdings are in the southern part of the basin and consist of 700 acres.
The target formation depth is estimated to be between 3,000 and 7,500 feet. Expected
initial production is 80-100 barrels a day per well. Currently 10 wells are on
production with an average production rate of 205 barrels a day. As of January 1,
2008, there are an estimated 1.119 million barrels of oil in remaining reserves (2P).
•
The company is currently optimizing existing wells. During 2008, Primera plans to
drill six wells at a total cost of $4.7 million.
Figure 75: Primera’s Block WD-4 operations
Note: Corporate presentation
Cory Moruga Block “E” – onshore
South American Offshore
•
The company’s holding in the Cory Moruga block consists of 7,443 acres. Primera’s
holding is in close proximity (approximately 4 kilometres) to existing crude oil and
natural gas infrastructure. The target formation depth in the area is between 3,500
and 12,000 feet, targeting Herrera and Karamat sands of Miocene age. The estimated
potential of the block is 60 million barrels of oil equivalent.
•
Primera recently completed a full 3D seismic of the block and is currently processing
the data. The company is awaiting a Certificate of Environmental Clearance for
exploration drilling and approval to be allowed farm-ins on the block. If the farm-in
contract is approved, the company will have to pay 25% of minimum exploration costs
(approximately $7.7 million) to earn a 25% interest in the block. Exploration costs will
include the 85 square kilometre of 3D seismic and the drilling of a minimum of two
exploration wells (approximately $5.1 million).
•
Future work commitments include the drilling of two exploratory wells at a capital cost
of $20.4 million.
5 November 2008
79
•
Exploration drilling adjacent to the block has resulted in several natural gas discoveries
ranging from 8.2 million cubic feet a day to over 62.5 million cubic feet a day.
Figure 76: Primera’s Cory Moruga Block “E” operations
Note: Corporate presentation
Block 3(b) – offshore
5 November 2008
•
The company’s holding in Block 3(b) consists of approximately 64,463 hectares, with a
water depth range of 300-1,500 feet. The company is currently applying for farm-in
rights on the block. If the Ministry of Energy approves the farm-in, then Primera will be
granted a 15% working interest in the block. The current partners on the block are KerrMcGee TT Offshore Petroleum Ltd. (34.5% WI), BHP Billiton Trinidad & Tobago (25.5%
WI), Primera Block 3(b) Ltd. (25% WI), and Diamond Energy T&T Ltd. (15% WI).
•
The estimated initial production from a successful well in this area is approximately
8,000-12,000 barrels a day.
•
The company’s farm-in terms include paying 15% of total exploration expenditures
(approximately C$7.4 million) excluding the first exploration well that has been drilled,
to be granted a 15% interest in the block.
•
The property has a minimum work commitment, which includes Phase 1 of the
commitments, that has a four-year duration (ending in July 2009). Phase 1 includes
acquiring a minimum 3D seismic, conducting geological studies, and drilling two
exploration wells. To date the company has completed a 3D seismic program and is in
the process of conducting geological studies. Additionally, Primera has drilled one well,
which proved to be uneconomic. The location of the second exploratory well is under
review; however, a Certificate of Environmental Clearance must be acquired before
drilling can commence.
The Caribbean Report
80
Figure 77: Primera’s Block 3(b) operations
Note: Corporate presentation
MANAGEMENT AND BOARD OF DIRECTORS
Figure 78: Directors and officers
Name
Patrick Acham
Philip E. Collins
William Koenig
Kelvin Bainey
Timothy Gabriel
Denesh Ramnarace
Gary Weir
Trevor Wong-Chor
Geoffrey Leid
Gordon Harris
Johannes Kingma
Position
Chief Executive Officer & Director
President & Proposed Director
CFO &Director
Country Manager (Trinidad)
Joint Venture Advisor
Joint Venture Advisor
Geoscience Advisor
Corporate Secretary
Director
Director
Director
Source: Corporate website
South American Offshore
5 November 2008
81
Voyager Energy Ltd.
PRIVATE COMPANY
COMPANY SUMMARY:
Voyager Energy Ltd. is a private oil and gas exploration
and production company with operations in Canada and
onshore Trinidad.
NOT RATED
Energy – Oil and Gas, Exploration and Production
Recent news highlights
October 16, 2008: Voyager Energy announced that it has entered into a
strategic alliance with Niko Resources Ltd. Specifically, the strategic
alliance will enable the company to pursue opportunities in the
Caribbean region as well as in Ghana in South America.
Company highlights
The company holds two onshore exploration rights to Trinidad’s Central
Range Block. Voyager holds 181,262 acres in the Shallow Horizon Block
and 211,475 acres in the Deep Horizon Block. A minimum work
commitment includes 2D seismic, 3D seismic, and the drilling of three
shallow wells and one deep exploration well. Total estimated costs are
$42.5 million.
5 November 2008
The Caribbean Report
82
OPERATIONS
Central Range blocks
South American Offshore
•
The company completed negotiating a production-sharing contract with the Ministry of
Energy and Energy Industries (MEEI) to acquire exploration rights in the Deep Horizon
Block and Shallow Horizon Block in the Central Range Block. The company was
awarded 211,475 acres in the Deep Horizon Block and 181,262 acres in the Shallow
Horizon Block.
•
Currently, the company is a joint venture partner with Petro Andina in the area. Petro
Andina will earn a 50% working interest in exchange for carrying out $5.0 million
worth of the seismic program costs and guaranteeing any restrictions according to the
production-sharing contract.
•
According to the contract, there is a minimum work commitment over four years that
includes 100 kilometres of 2D seismic, 250 square kilometres of 3D seismic, the
drilling of three shallow wells and one deep well. Additionally, the company paid a
$5.5 million signing bonus to be awarded the contract. The total estimated costs of the
work commitment are $42.5 million, of which Voyager will pay $16.5 million. The
company’s total commitment costs are approximately $20.5 million.
•
The company has the option to extend the minimum work commitment period through
two optional phases, each consisting of one year. Abandoning 40% of the original area is
required after the first phase of the exploration period. Additionally, the Petroleum
Company of Trinidad and Tobago (Petrotin) has the right to participate for a 35%
interest in the Shallow Horizon Block and a 20% interest in the Deep Horizon Block
during any development of either of these blocks. According to the production-sharing
contract, a profit-sharing system is in place for the sharing with MEEI on a sliding scale
basis that is dependant upon commodity prices and production volumes.
•
Up to 50% of oil and 60% of gas revenues are available for cost recovery, while profit
petroleum is divided between the MEEI and the contractors. Dependant upon
production volumes and commodity prices, the contractor can keep up to 75% of oil
and 84% of gas revenues. The company will be taxed at 55.1% of net profits.
5 November 2008
83
Figure 79: Voyager’s Central Range Block interests
Note: Corporate presentation
MANAGEMENT AND BOARD OF DIRECTORS
Figure 80: Voyager’s management team and board of directors
Name
Gerold U. Fong
Tony D. Pantalone
Geoffrey P. Bury
Marshall Abbott
Peter Salamon
John Poetker
Position
President & Chief Executive Officer
Director, Executive Vice President, Exploration & Operations
Chief Financial Officer & Vice President, Finance
Director
Director
Director
Source: Company reports
5 November 2008
The Caribbean Report
84
APPENDIX: IMPORTANT DISCLOSURES
Analyst Certification:
Each authoring analyst of Canaccord Adams whose name appears on the front page of this investment research
hereby certifies that (i) the recommendations and opinions expressed in this investment research accurately
reflect the authoring analyst’s personal, independent and objective views about any and all of the designated
investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and
(ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed by the authoring analyst in the investment research.
Site Visit:
An analyst has visited Canadian Superior Energy Inc.’s head office in Calgary, Alberta. No payment or
reimbursement was received from the issuer for the related travel costs.
An analyst has visited CGX Energy Inc.'s material operations head office in Calgary, Alberta. No payment or
reimbursement was received from the issuer for the related travel costs.
An analyst has visited Challenger Energy Corp.'s material operations head office in Calgary, Alberta. No
payment or reimbursement was received from the issuer for the related travel costs.
Distribution of Ratings:
Global Stock Ratings
(as of 4 November 2008)
Canaccord Ratings
System:
Rating
Buy
Speculative Buy
Hold
Sell
Coverage Universe
#
%
371
62.1%
68
11.4%
139
23.3%
19
3.2%
597
100.0%
IB Clients
%
34.5%
52.9%
18.0%
10.5%
BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.
HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.
SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.
NOT RATED: Canaccord Adams does not provide research coverage of the relevant issuer.
“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the
designated investment or the relevant issuer.
Risk Qualifier:
SPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental
criteria. Investments in the stock may result in material loss.
Canaccord Adams Research Disclosures as of 5 November 2008
Company
Canadian Superior Energy Inc.
CGX Energy Inc.
Challenger Energy Corp.
Disclosure
7
1A, 2, 7
1A, 2, 7
1
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companies. During this period, Canaccord Adams or its affiliated companies provided the following services
to the relevant issuer:
A. investment banking services.
B. non-investment banking securities-related services.
C. non-securities related services.
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Corporate Finance/Investment Banking services from the relevant issuer.
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of securities of the relevant issuer or in any related derivatives.
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7
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South American Offshore
5 November 2008
85
8
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10
11
12
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5 November 2008
The Caribbean Report
86
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South American Offshore
5 November 2008