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Breath-taking - Cove Energy (COV)
18/2/2010
(119264)
Breath-taking
It is tempting to go over the top about Cove Energy (COV) and to say you ain’t seen nothing yet with today’s massive gas find off Mozambique and a share price which has soared from 23.5p to 38.75p (38.25p to 39.5p). The closer you look, the greater the temptation to get seriously bullish.
Share prices do not go up in a straight line, and it was premature to talk about 30p plus in earlier recommendations of Cove, though the hopeful, if speculative comments in December when the price tumbled to 19p (it subsequently went a few pence lower) now look good.
Truth is that any investor requires a little luck, especially if backing a new play in the oil and gas game. But a look at Cove’s powerful early stage support always suggested this could be something special, and so it has proved.
Where the shares go from here as the immediate impact of today’s news fades is anyone’s guess. Over 21m shares traded today, and there was substantial profit-taking. There could be more selling, but any reasonable stab at gauging the odds encourages the notion that Cove could go a whole lot higher yet, and still offers outstanding speculative attractions for the year ahead.
Cove is clinging to the coat-tails of Anadarko Petroleum, one of the world’s largest independent oil and gas exploration companies, with just 10% onshore and 8.5% offshore of whatever Anadarko finds in Mozambique. This is not to deprecate in any way Cove’s position, more to congratulate the board for spotting the opportunity and seizing it. Anadarko is the largest independent deepwater producer in the Gulf of Mexico, and believes that the Rovuma Basin offshore East Africa contains a new hydrocarbon basin comparable to the highly rewarding Gulf of Mexico basin.
The fist significant well – the Windjammer – offshore Mozambique tends to confirm that. The first of a programme of four wells, this has reached an intermediate casing point and hit more than 480 net feet of natural gas in high quality reservoir sands, with a gross column of more than 1,200 feet. These are big numbers by any standards.
So far, the well has drilled to about 14,000 feet in about 4,800 feet of water about 30 miles east of the Mozambique coastline. Anadarko expects to go down 4,100 feet more.
What the announcements do not say is that any oil is normally below the gas. It will take maybe two or three weeks to get to target depth. But this further drilling is not really about finding oil, though it could happen. The impression is that, if there is oil, it is relatively close by, but not necessarily at this location. There might not be an announcement when the drill hits bottom- though if there is a decent show, there could be.
The purpose of drilling on is to gain more information about the geology in the basin, using and confirming seismic.
It is clear that everyone is pretty confident of understanding what there might be in this basin. Nothing can ever be guaranteed, and the odds of success in such things must always be regarded as less than 50/50 (usually much less), but there have been extensive seismic and other indicators (there are oil seeps onshore).
Anadarko’s comments lay out the opportunities – Windjammer is one of seven identified play types and is an excellent indication of the potential of this basin. It de-risks a substantial portion of about 50 leads and prospects identified across a 2.6m acre position.
The rig ship Belford Dolphin is contracted until 2012. After Windjammer it will move back to the Collier prospect some 50 miles to the south-east. Collier was started a few weeks back and initial casing is in place. We could hear more in mid/late April. That result will determine where the next well in a possible programme for two more wells will go. Each well takes about 90 days. Three shallow offshore wells should follow in 2011, but the £42m so far raised by Cove does not cover their capital cost.
Already it is likely that institutional investors have responded to today’s news by offering Cove more money, should it want to take it at this point. The real thrill of Cove is that it is sitting secure with a piece of Anadarko’s exciting immediate and highly promising programme - and already pretty much paid for, with no debt in place. It needs do nothing more than sit back and enjoy it.
Cove has already made it clear that it will take a much more active role, however. Chief executive John Craven and his team are already looking at other deals, backing their stated intentions of growing Cove fast. How long they will wait is not clear. There will be further fund-raising, but the board might well want to pause for a while and to let the current drilling programme put more value in the share price before issuing more stock.
Even with nothing else, today’s news is a triumph. Some tend to discount the value of a gas discovery in this area. But Cove has heavy friends to help again. The Windjammer gas is high quality and could be large enough to develop as a stand-alone field. In fact, that will be reinforced by any gas finds which emerge in the quest for oil in the area.
Cove is already interested in proven gas in the Mnazi Bay area of Tanzania, which borders on Mozambique. There is a group in place looking at the possibility of developing a liquefied natural gas terminal. It includes Mitsui and two Indian companies, Videocon and Bharat Petroleum.
What might all of this amount to in value for Cove shares? House broker Cenkos has produced a report initiating coverage. It takes the price at 23.5p ahead of today’s excitement, though it does discuss what has emerged today. It calls the shares a buy at 23.5p, with a price target of 50p.
There is a notional breakdown of individual assets within Cove. That puts Windjammer with a value of $85m to Cove, or 20p a share. The broker talks about the probability of strong news flow over the next 12 months as the initial four well offshore programme continues.
At this stage, Cove (market capitalisation £90m) is still relatively unknown to UK investors. The board has put together an impressive package since reshaping the company last summer. Any small oil or gas exploration company must rank as speculative, but Cove has the benefit of a fully-funded early programme in an exciting new area with a major operator running the show. If you want to gamble, an oil explorer is as good a play as any in these markets, and Cove might just prove super-charged.
Ends
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