Thursday

Pan Pacific Petroleum | Close to Cash Backing

Post a Comment March 4, 2010 – 7:35 am |   | Permalink |  Print This Post |

PPP got pounded hard after the latest quarterly. We bought some PPP during the height of crisis at 20c in 2008 and got out at 35c feeling great (only to see it go all the way up to 63c!) on the back of speculation of a takeover from JV partner NZ Oil in the Tui fields. Since then its been in free fall, closed today at 24c. We picked up 20000 shares at 23.5c. As usual we are always early, so 23.5c will soon look like we overpaid.

From the latest report:

Cash held at 31 December 2009 was A$68.0 million equivalent including A$0.8 million held in the accounts of various joint ventures, but excluding current receivables of A$19.0 million and $6.0 million used to cash collateralize the Letter of Credit. Movements in forex rates accounted for a reduction of A$4.2 million, compared the rates prevailing at 30 June 2009.

Revenue was lower than in the previous corresponding period (Half Year Ended 31 December 2008) due to expected natural decline in production rates (3,106 bbls per day compared to 1,282 bbls per day), and a lower average oil price of USD$90 (Dec 2008) versus USD$69 (Dec 2009).

It has 588 million shares outstanding, so at our purchase price thats $138 mil market capitalization. (against $93mil in cash if we read the above statement correctly). So, in effect we are paying $45 mil for:

1. A declining oil field producing $15-17 mil per half year (after costs of bringing it to surface: 24 m oil revenue against 7.6m of production and other costs). The oil fields are continuing to decline rapidly so the concerns of the market are very real. In the report PPP spent ~21m in exploration costs, with no new fields identified hence the disappointment.

2. Permits to the following:

PMP 38158 Tui Area Oil Project ? Taranaki Basin (PPP interest 10%)

Production from the Tui Area oil fields totalled 2.7 million barrels (PPP 0.27 million barrels) for the half?year, averaging 14,788 barrels a day. Cumulative field production to the end of December 2009 was 26.1 million barrels (PPP share 2.6 million barrels). Operating revenue from Tui during the half year was A$24.0 million (net PPP).

The Tui Area Joint Venture has continued planning for the forthcoming exploration drilling campaign, including a review of the preferred drilling prospects. The semi?submersible drilling rig Kan Tan IV has been contracted to drill at least two exploration wells, with the campaign likely to begin around end March?early April 2010, based on the current rig schedule. Successful discoveries would likely be developed by low?cost tie?back to the existing Tui facilities.

PEP38483 ? Taranaki Basin (PPP interest 14.1%)

An application has been made to the Ministry of Economic Development to reschedule permit commitments, and proposing a partial relinquishment. Evaluation of the shallow gas play has been completed, and this will now be marketed as a farmin opportunity by the Operator (AWE) on behalf of the JV partners.

WA?33R Maitland Gas Field (PPP interest 10%)

The WA?33R retention lease has been renewed for a term of five (5) years with effect from 30 November 2009.

Block 07/03 Vietnam

PPP has been advised that PetroVietnam (PV) have authorised PetroVietnam Exploration Production Corporation Ltd (PVEP) to exercise its pre?emptive right and to acquire a 10% participating interest out of the 15% assignment proposed in the Premier Oil Vietnam South B.V farmout of Block 07/03 to Pan Pacific Petroleum (Vietnam) Pty Ltd (PPPV), a subsidiary of the Company. PPPV is currently progressing assignment of the remaining 5%, which remains subject to formal PV and Vietnam Government approval.

The second Block 07/03 commitment exploration well Cá Rong Vàng well was drilled to a total depth of 3980m MDRT without encountering any significant hydrocarbons, and was plugged and abandoned as planned. Although the results are disappointing, the well has provided important pressure data which will be used in assessment of the discovery made in June 2009 at Cá Rong ?o (Red Emperor).

JPDA Timor

Pan Pacific Petroleum (JPDA 06?103) Pty Ltd (“PPPJ”), a wholly owned PPP subsidiary, has progressed and completed its earning obligations in respect of the farmin to 15% equity in JPDA 06?13. An application for approval of the interest assignment has been made to the Autoridade Nacional do Petróleo of Timor Leste, the Designated Authority.

The first two exploration commitment wells targeting the Loré and Lolotoe prospects were spudded in December 2009.

The first well Loré?1 was drilled to test the Elang and Plover objectives, but encountered only minor shows with no zones of significant moveable hydrocarbons, and the well was plugged and abandoned.

The second well, Lolotoe?1 targeting the same objectives was spudded on 17th December 2009, and was still drilling at the end of December 2009. The well has since been drilled to a TD of 3935m MDRT, and log evaluation of the primary objective Elang/Plover Formation sandstones indicated that no commercial hydrocarbon zones are present. The well has now been plugged and abandoned.

The JPDA 06?103 contract area contains over 20 further prospects with the potential to host significant oil reserves. Most of these prospects are located to the north of, and have different geological characteristics in varying degrees, to the structures drilled by Lore?1 and Lolotoe?1 wells which were the two easternmost of the prospects identified in the southern part of the contract area. The contract area is located near to a number of existing producing fields further to the west as well as Eni’s Kitan oil discovery.

PPP Chart since 2007

Conclusion:

• Our trading colleagues think PPP “will die a slow death” with huge cash burn so the cash it has means little if its only revenue is declining rapidly. Our argument is - YES, its got some pretty bad news, hence the drop in share price, but not many oil companies with a market cap of 138 mil has an oil field producing ~$30 m per annum in revenues (after producing costs) and assets in producing fields. Nothing goes up or down in a straight line. It may go lower (15c) before bouncing - but even then I think the downside is limited barring a market meltdown.
• Our next entry (in the absence of other bad news) is about 18c - double up.
• Better communication with shareholders would help. Investors have tried contacting Pan Pacific Petroleum on DearCEO to clarify on production, without much success. I guess in hindsight, if there is no good news, better not to say anything.
• We are bullish on PPP in the short term, and are quite happy for it to keep free falling to our next target entry of 18c.