Cove Goes Wildcatting - Cove Energy (COV)
7/12/2009
(119264)
Cove Goes Wildcatting
Oh dear. Disappointment that Cove Energy (COV) has not emerged with anything exciting at the Mecupa 1 well onshore Mozambique, and that the shares have drifted to 19p to 19.25p. Happily, a brighter range of possibilities has opened up already offshore Mozambique.
My hopes in September that the shares might rise swiftly from the suspension price of 27.5p on the Artumas acquisition proved way too optimistic, and there was clearly more selling of the shares from the placing at 20p than anticipated. Cautious subscribers who bought at the higher levels might have cut their losses already on a stop loss. I apologise to them.
A few might be considering buying at around current levels. They could yet drift a touch easier, but still look quite tempting for those ready to take a gamble, though there are negatives.
Some will have been hoping for a bullish result at the Mecupa onshore well. The actual result, dependent on what operator Anadarko says, means that there could still be a useful prospect, but not for the time being. There were hydrocarbon shows, but pending further evaluation, the well has been plugged and abandoned.
The area is quite difficult, dense jungle with 2D seismic which could be improved. There are promising indications at greater depth, and there could be a good petroleum system in place, but it needs proving up. This was always a prospect with modest returns at current oil prices, but it could come firmly into play at higher prices.
It was, however, essential to drill this well to meet conditions imposed by the Mozambique government in order to gain permission for petroleum operations in the area. There are other conditions yet to be met, but these are likely to fall in place in the weeks ahead. Satisfaction of those conditions could be confirmed later this month.
The real excitement, however, is in the fully funded four well programme offshore Mozambique. That will be undertaken with Anadarko as operator using the Belford Dolphin drill ship. There is a nice picture of the drill ship on the presentation Cove chief executive John Craven gave to an Oilbarrel conference late last month. It is well worth studying (http://www.cove-energy.com/wp-content/uploads/2009/10/oil-barrel-presentation-26th-nov-2009-version-251109.pdf).
The Belford Dolphin has left port and is close to Collier, the first drill location. The plan is to set the concrete casing for the first well, then to move on to the Windjammer prospect and drill to a depth of 5,500 metres (the first 1,400 is water). Apparently Collier can use seawater rather than mud, and it saves money to get it started first.
Drilling could start on Windjammer in about two weeks, with three target depths, each taking two or three weeks - a third, two-thirds, then the bottom. It should be about two months to hit full target depth.
As one of the shareholders, with 8.5%, Cove has to conform to confidentiality undertakings to operator Anadarko, but these should ease as time goes by. There is good 3D seismic for the area, and new 2D seismic acquired this year. There will be four deep-water wells costing $70m to $80m each over perhaps nine months next year, and all are funded (Cove ‘s fund-raising means it has over $60m with no debt). New prospects are emerging, and there might be up to six wells.
All of this action could attract investor attention as the drilling progresses, and the board is planning a series of presentations early in the New Year to brokers in London. Such an aggressive, well-financed and well-connected drilling programme means there should be a strong news flow in the year ahead.
There could be more. Go back to my earlier Cove reports and the company presentation and there is the clear possibility of more deals as the board tries to build fast. Craven’s Oilbarrel presentation called the Artumas acquisition ‘the ideal starter pack for a small company’, and there are already further possibilities in view. Don’t count on it. In such deals there is many a slip…but keep it in mind.
The negatives mentioned earlier in this report? Non-executive director Ivan Murphy resigned last week, without explanation. He was replaced by Frank Moxon.
Murphy joined Cove when the company effectively emerged from the Lapp Plats shell earlier this year, and is a senior executive at Gazprombank Invest. The support of Gazprombank in developing Cove is one of the elements which makes the company so interesting.
There are assurances that Murphy’s departure does not influence Gazprombank’s position, and suggestions that it is better to have a completely independent non-executive in the shape of Moxon. Murphy is rumoured to be looking to become involved in other companies, perhaps a mining shell.
Whatever the explanations, his resignation after such a short spell on board leaves a question mark.
Disappointment at Mecupa is perhaps more predictable, but it serves as a valuable reminder that all companies in the exploration business carry higher than average risk (hopefully higher rewards, too).
Cove still has heavy friends and an impressive cv. Let us hope it pays off in the New Year.
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