North Sea Energy: Unlocking The Upside
Edison | Sep 24, 2012 02:32AM ET
With the release of a new independent economic report valuing North Sea Energy's (NUK.V) two primary assets, Norfolk and Badger, at US$525m on a net un-risked basis, North Sea Energy is demonstrating that it is obtaining a clearer picture of the potential value in its portfolio. Our immediate focus remains on the high-impact Norfolk exploration well, expected in Q413/H113, which drives our overall valuation. Beyond this, the farm-out of Badger, possibly in Q412, could provide further newsflow and investor upside.
Independent economic evaluation demonstrates upside
In September, independent consultant Acquidis performed an economic evaluation valuing North Sea Energy’s key two assets, Norfolk and Badger, at an un-risked US$525m on a net P50 NPV10 basis, equivalent to C$8.97 per share. While these results are success-case based, the completion of an independent evaluation is encouraging as it demonstrates the growing confidence the company has in its assets.
Norfolk drives valuation disconnect
With gross P50 resources of 63mmboe (13mmboe net) and an independent un-risked net P50 valuation of US$206m (C$3.5 per share), Norfolk, (20% NSE), represents substantial upside. The asset is in shallow water, close to infrastructure and exhibits a flat spot that partners, First Oil, Premier Oil and Cairn Energy, believe could indicate the presence of hydrocarbons. However, the well remains high risk with a geological chance of success of 21%. We believe the potential value will only be un-locked through successful exploration, which we anticipate to occur in Q413/H114.
Badger: Next focus and farm-out dependent
Badger is part of an ongoing farm-out that management expects to be finalised in Q412. Due to the company’s relatively high working interest, Badger’s gross P50 35mmboe (18mmboe net) resources and its independent un-risked net valuation of US$319m (C$5.5 per share), the asset could prove as important to the company as Norfolk. For now we await the result of the farm-out to fully understand the time frame for further seismic and potential drilling of Badger.
Valuation: Success at Norfolk bridges the disconnect
Our risked exploration of 33c incorporates the sole producing asset, Jacky, and its two risked assets Norfolk and Polly. As the company prepares to drill Norfolk, we expect the valuation gap to close, with the well result having a material impact on the share price. We expect to introduce Badger into the valuation following the farm-out.
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