New World Oil and Gas (LON:NEW), an oil and gas exploration company with experienced management, was incorporated on April 15th2010 and listed on AIM on May 11th 2011. For such a young company it has got off to a rip-roaring start. If management ambition and action is matched by exploration performance then NEW is set to become one of the O&G sector’s stars in the coming years.
In the months from May to November 2011 the company released regular update news outlining progress. The ‘Rip Roaring’ start has continued with the company not only articulating their planned work programme, but also assiduously meeting operational objectives.
We originally brought this company to investor’s attention in June when we conducted a podcast interview with Chairman & CEO Bill Kelleher. Since floating the share price now appears to have found a base at about 6p, giving the company a market capitalisation of £7.67million.
In their interim report dated 30 June 2011 NEW declared $3.27million in cash (£2.1million). This was further supplemented by a secondary placing of 50million shares at 6p in early July 2011. After initial expenditure the cash position is just over £4million providing an enterprise value of approximately £3.5 million at the current share price. As such, it is our view that the company remains clearly undervalued at this time.
The Company’s defined investment strategy is “focused on acquiring interests in oil and gas companies that are underperforming, undeveloped and undervalued”. And in geographical terms they are not restricting themselves either; reviewing a range of projects in areas including Central America, Eastern Canada, Europe, Africa, South America and the Middle East. The ultimate goal is to build New World Oil and Gas into a significant oil and gas exploration and production company. An ambitious goal undoubtedly, but one the company has already made defined steps towards achieving. The demonstrable commitment to delivering shareholder value is critically there for all to see.
NEW people
So how can such a small company claim to have such a global reach? The answer lies in NEW’s management;
- William (Bill) Kelleher (Age:53), a career oil man of 31 years and qualified Petroleum Engineer has a track record of globally sourcing quality oil exploration and production projects and vending into AIM listed companies which he was part of creating. In doing so he has a built a proven track record in building shareholder value.
- Georges Sztyk (Age:64), also a career oil man with over 40 years experience and an MBA has established a long record of building operating companies in developing countries, managing them from exploration through to production.
- Petro (Peter) Sztyk (Age: 40), has a legal background, having worked on a number of major oil and gas deals for the past 15 years.
Details of managements’ CVs can be found here in the “First Day of Dealings Announcement” on May 11th. The three have known each other since 1997 and have worked closely with each other for the past year 10 years.
Management’s combined 86 years in the industry, mainly on projects abroad is encouraging. Their blend of expertise should also serve the company well. Peter and Bill have been working together since Bill’s days at Yukos and subsequently at Victoria Oil and Gas (“VOG”), and clearly have a longstanding and productive working relationship.
At the listing NEW added Steve Polakoff, as a non-Executive director. Steve is also an oil and gas attorney who has worked in the oil and gas for over 15 years and also serves as the one of the world’s largest integrated oilfield services company’s General Counsel, Integra Oilfield Services.
In September 2011 NEW also strengthened the board with the appointment of Fred Hodder as a non-Exec. His introduction to the Company has been timed to help build on the successes achieved to date. Details of his appointment can be found here. Both Fred and Steve serve on the company’s remuneration and audit committees.
In addition to NEW’s board of directors the company has a world class management team which include geologist, geophysicist, petroleum engineering, drilling and production engineering, supervision and management, site permitting, and procurement and materials management services.
NEW’s strategy
NEW are looking to identify oil and gas projects representing viable late-stage exploration opportunities to discover oil and gas reserves capable of taking the company into commercial production.
Their ability to make a transformational oil and gas discovery will ultimately decide the destiny of the share price. Prior to listing, management had spent 12 months examining projects in:
- Central America (which led to current operations in Belize)
- The Baltic, North Seas and Adriatic (which led to the recently announced project in Denmark)
- Eastern Canada (Alberta, Manitoba and Newfoundland)
- Africa (Cameroon, Tunisia, Namibia, Yemen and Chad)
- South America (Columbia, Argentina, Paraguay)
- Middle East (Egypt, Yemen and Oman)
What matters most for investors is that the company ultimately discovers and economically develops commercial oil and gas reserves. The regions it has targeted seem workable, but its operational plan is most encouraging. This comprises two key elements;
-
- The Investing policy; which includes an investment criteria and strategy;
- The Late Stage Exploration and Appraisal strategy.
Combined, these two elements appear to have mitigated a lot of the exploration and financial risks, whilst maximising the probability of making that transformational oil and gas discovery.
Investing Policy
We believe that the Company’s Investing Policy lies at the heart of the opportunity.
New World aims to build a portfolio of oil and gas projects through direct acquisition or farm-in agreements. [A farm-in agreement is an arrangement whereby one oil operator purchases a working interest in a license or concession owned/held by another party. The Company has reserved the option to take minority or controlling interests in investments it makes.
Critically, management stated that its investing policy can “substantially be implemented within 18 months of Admission (to AIM)”.
There are two points worth noting about this statement. Firstly, it gives us a clue that management intends to pursue its goals enthusiastically. The Company certainly has a bullish feel to it and this is borne out in its performance over the six months since listing. Second, such is the dispersed nature of the share ownership of NEW that smaller investors should feel a degree of security that their interests will be protected (i.e. with management, institutional and private individual holdings being reasonably balanced).
In supporting the above, the results of NEW’s investment policy to date are as follows:
- 34 days after listing the company completed its first transaction by acquiring the Blue Creek farmout in Belize (420 km2) including two license blocks.
- 124 days after listing the completed it’s second transaction by acquiring the Danica Jutland Farmout in Denmark (4107 km2) also two license blocks.
- As of the date of this report the company has been listed on AIM for 169 days, demonstrating that NEW is motivated to add value for its shareholders and achieving its primary stated mission to find and produce oil and gas reserves.
Reading through the Company’s literature it would seem that the investment policy can be broken down into 5 main criteria;
1. Geographical location – In its pre-admission announcement the company said it was going to focus on Central America and Eastern Canada. This has changed slightly. The key projects are in Belize and Denmark. This reflects management’s ability and readiness to evolve its approach to capitalise on opportunities. Additionally management are seeking opportunities in politically stable regions where ground floor opportunities can be acquired for a low entrance cost where tremendous upside exists. The reliability of local legal processes also figures prominently in investment decisions.
2. Valuation – New World is seeking “under-performing, undeveloped and under-valued” opportunities. Although as a statement this might seem a little bland, since it came to market this principle has certainly determined the company’s actions. Management clearly believes that it has the necessary expertise, experience and contacts to transform its pipeline of projects into prized assets. Management are looking for projects in regions with prolific oil and gas basins with extensive volumes of proven oil and gas reserves, which it believes will have a high potential of success, at low geologic relative risk, that provide a world oil price for reserves.
3. Piggybacking – This may not be a technical term but it describes the approach the Company is taking to exploration. Management are actively looking for projects with existing large amounts of historic and current seismic data. Both the Belize and Danish projects are stated as being in close proximity to commercially run-fields. An example of this is in the podcast interview we conducted with Chairman Bill Kelleher in June. In the interview Mr Kelleher makes reference to existing 2-D seismic work from 2008/09, which they are going to make use of in exploring the Belizean concessions.
4. Project funding – Management have made clear that each new project they bring into the company will be funded by an additional round of funding. Although this threatens dilution to shareholders (on an incremental basis), it does heighten the company’s chances of making that one transformational oil and gas discovery whilst ensuring the company doesn’t over commit with insufficient financing. As projects pass milestones management has three available options to fund development, which include to farm down exposure (e.g. mid-tier explorers) or to make use of debt. To date both large public oil and gas companies and smaller privately held independent companies have expressed an interest in potentially participating in NEW’s projects.
5. Ease of access to world oil markets – Another principle that seems to guide investment policy is the ease at which any oil found can be produced from the ground and sold on the world market. Belize is mentioned as being “2½ days’ steam from the Gulf of Mexico”, while Denmark’s position speaks for itself.
Late Stage Exploration and Appraisal Strategy
Once opportunities have been identified, the next critical aspect of company strategy is its approach to appraising late stage exploration which the company intends to result in discoveries. We expect the vast majority of company funds will initially be spent on this activity and the success of the business will no doubt be determined by it.
A management mantra exists “not to pick up the drill prematurely”. This sounds eminently sensible and simple but it is also supported by scientific method and geological analysis. 2-D seismic is a term investors will no doubt become familiar with.
In Belize they are conducting a 2-D seismic survey over three phases:
Phase 1 – Establishing if possible productive hydrocarbon structures exist. This was completed in early August 2011.
Phase 2 – Creating a higher density 2-D grid on the best 4 leads from Phase 1 providing more incisive seismic information and, on successful interpretation, dramatically improves the odds of discovering oil with the drill bit. Phase 2 began in September 2011 and has just been completed. The company is now, along with advisors, evaluating the relevant data and expects to be publishing oil in place P10, P50 and P90 volumetric estimates within the coming month. The company also intends to release an estimated market value (EMV) for the Blue Creek project in Belize by mid December this year.
Phase 3 – Is currently due to start with results expected in Q1 2012.
Throughout this process the Company has regularly provided updated Competent Persons Reports (“CPRs”) the next of which is due, as stated above, in respect of Belize. The CPR is an official document generated by a third party independent company stating the outcome of all exploration and production operations and provides investors with the latest detail concerning the success and or update of on-going operations. The Independent third party company which is generating the CPR’s in RPS Energy Services.
In the pre-drill phase, the CPR containing volumetrics and EMV data is the critical document, so there will no doubt be some interest amongst investors as to the content of the CPR update from Belize due in December.
Company Funding
Evidence of the viability of New World’s strategy can be found in how well financed the company is. The Company has been through two public rounds of fundraising;
- The IPO on May 11th raised £3million at 5p a share;
- A secondary placing on July 6th, which raised a further £3million at 6p a share.
According to the published letter of intent (“LOI”) up to US $2million has been allocated to the Belize project for 2-D Seismic testing of the Blue Creek and Blue Creek south concessions. The LOI for the Danica project in Denmark states that a further US $2.5million has been allocated for the same purpose.
In simple terms, after acquisition costs and the implementation of initial 2D seismic programmes, the company will still have material cash balances, providing underpinning security for investors.
The management has stated their intention to maintain tight management of the Company’s finances, and this has been borne out to date with field operations being achieved within budget.
Current Projects
The manner in which Management has quickly moved to deploy capital is another reason we are impressed. Our own research has also confirmed that the regions being explored in Belize and Denmark are in the vicinity of existing prosperous oil production. As the company continues to grow it will likely reach into and pull out its “pipeline of projects” other quality projects which fit within its stated investment criteria. For now the focus remains on Belize and Denmark.
Belize – Blue Creek
On 23rd of May 2011, within 2 weeks of listing, the Company announced a Letter of Intent, granting 45 days exclusive exploration at two oil concessions in the Peten Basin of Northwest Belize (see map below).
The Company’s concessions are at Blue Creek and Blue Creek South, which management are keen to point out are near the oil-producing Spanish Lookout field. The reserves of Spanish Lookout have recently been revised considerably higher to 25million barrels, up from the original 6million barrel estimate.
The Spanish Lookout success story is certainly encouraging for the Company, but this alone does not tell the whole story. Oil exploration and production in Belize has been controversial. As of one year ago, there were 18 companies operating concessions in Belize and only one, Belize Natural Energy (“BNE”) was producing.This report in 2006 for the American Association of Petroleum Geologists helps explain why the region is an enticing target for exploration.
Although Belizean oil exploration is littered with the corpses of many who have tried unsuccessfully to strike oil before, we believe this risk is properly accounted for in the CPRs published for Belize.
We would certainly recommend investors read the latest updated CPR dated 20th September 2011.
No-one really expects management to set out, armed with shovels and divining rods, and to strike oil in the first hole they drill. There is a clear methodical approach and a set of well thought out scientific methods behind their efforts. In the case of New World, the venture is sufficiently-backed financially and management’s approach to reducing risk and optimising exploration appraisal seems to offer a keen competitive edge. The local geology also appears to be favourable and, importantly, relatively under-explored.
NEW’s progress in Belize has reinforced this view. The latest audio interview provides detail of developments at Blue Creek. The highlights of the discussion include the mention of improved geological odds of a strike (from 1/12 to 1/8), confirmation of the link between Blue Creek and Spanish Lookout (indicating potential oil migration to Blue Creek) and further clarification of what the market can expect at the end of Phase 2 seismic. As Mr Kelleher states at this point NEW should be able to report volumetric findings (including a P10 P50 and P90 report) as well as the scoping econometrics. The latter will allow NEW to place a Net Present Value on its asset and EMV. This, in itself, does not monetise the asset, however it does articulate to shareholders the value generated by the company to date and provides a benchmark against which investors can assess whether that value is properly reflected within the current market capitalisation.
Apart from the improvement in the updated CPR, NEW also received the first formal assignment of a 12.5% working interest in Blue Creek from the Belize Ministry of Natural Resources and the Environment on October 17th 2011. This marked the successful completion of the first exploration milestone ahead of budget and deadline. The next 12.5% working interest will be earned on completion of Phase 2 seismic. The remaining 75% working interest will be earned in two equal stages on completion of two commitment wells.
The Company maintains a unique view through a sophisticated multiphase approach as to it’s determination of geologic risk at Blue Creek. First, it is well documented that oil source rock which has generated the oil production from the nearby Spanish Lookout and Never Delay fields is the same source rock which will fill accumulations in Blue Creek. The oil comes from the same source for both areas as they are very close together. Secondly, the fault system which exists in the producing Spanish Lookout and Never Delay fields that sets up the subsurface traps which has caused oil accumulations to exist that BNE produces from, was created at the same time geologically as Blue Creek. “We can see this on seismic from our phase two seismic program”, the Company maintains. So “did the oil migrate from its source before the subsurface traps were formed and only residual oil exists in place?” “Or were the subsurface traps formed before oil migration arrived at Blue Creek and large productive oil accumulations exists?” The company believes that because the oil originates from the same source, and the timing of the subsurface traps is the same as the producing field next door, it has a very good chance of making a discovery at Blue Creek.
Denmark – Danica
On July 4th this year the Company announced they had signed a Letter of Intent, granting exclusivity for 65 days of due diligence on two oil concessions totalling 4,107 sq km, located in the productive Jutland onshore area in South Western Denmark. Denmark is a net exporter of oil and gas. After successful due diligence, NEW has an option to earn into 80% of each. An initial 12.5% interest will be earned at the conclusion of the first phase of the seismic program. This transaction wascompleted on October 11th 2011, just 124 days after listing. Then on November 23rd 2011 confirmation was received from the North Sea Fund (the project’s partner) that NEW could be named on the Joint Operating Agreements for both licenses. It is important to note the NSF is owned by the Danish government and will be paying 20% of the costs throughout the project.
As with Belize, we would certainly recommend reading the CPR dated August 16th2011.Information on The Danish North Sea fund website certainly seems to support the prospectivity of the two concessions.
So with confirmation of the region’s general prospectivity, the CPR also gives some exciting insight as to what might NEW might actually have within these licenses. In particular the early indicators reveal the presence of reef build-ups, which could act as excellent reservoirs. Additionally gas shows over a significant stratigraphic interval of the Novling-1 well on site are indicative of the presence of a working hydrocarbon system. NEW now intends to explore 200km² using 2-D seismic.
Over the 6 year term of the two licenses the Danish Government required the following minimum work programme to be conducted; (the project is into the 3rdyear now)
- Years 1 & 2 – Evaluate available data and create geological model. This phase has been completed.
- Years 3 & 4 – Acquire 2-D to delineate better leads in the license areas and complete either a 2-D or 3-D survey over selected leads. At the end of Year 4 a “drill or drop” decision will be made.
- Years 5 & 6 – A well must be drilled on each license by the end of Year 6.
The Southern Permian Basin, which stretches across Northern Europe is the geological twin to the Northern Permian Basin and has been a prolific region of oil and gas production for many years with a substantial level of activity across this area.
So given the depth of knowledge about this region, why is it that New World can suddenly take advantage of such an opportunity?
Answering the question we must remember that we are living in a high-price environment for oil, which changes the economics for many previously unprofitable exploration projects, making them now viable. Additionally it must be remembered that New World is targeting finds of around 25million barrels. This is well below the threshold for which the majors, or even the mid-range explorers, are prepared or able to work towards.
The CPR for Danica Jutland also reveals a great deal of promise for the Triassic interval on block 2/09. Enhanced seismic processing and interpretation has resulted in the CPR reporting a 1 in 5 chance of geological success at two drill-site locations. The question in the company’s mind is not “is there gas present”, but rather, “how big are the reserves”. The technique used to provide this level of confidence is AVO processing or amplitude versus offset. This technique is known as a “DHI” or direct hydrocarbon indicator and may well prove out to be an early source of cash flow for the company.
Overall the speedy acquisition of the Danica Licenses and initial exploration seems to be an astute move and demonstrates management’s ability to deliver upon its strategy.
NEW stock popularity; a proxy-indicator?
Researching NEW revealed several pointers that this stock is heading in the right direction;
1. At the second placing, director Peter Sztyk bought 833,333 shares at 6p each, increasing his holding to 5.68%.
2. On 27th May, 28th June and 6th July 2011 the company issued equity to professional advisers as payment for services
3. AXA Investment Managers hold 9.98% of NEW shares as of October 18th 2011.
4. The Geologic and Geophysical team has also requested shares as partial payment for their remuneration. This provides a high degree of confidence in the potential of the company’s projects.
5. The Seismic contractor has requested to take shares as partial payment for their services. This also provides a high degree of confidence in the potential of the company’s Blue Creek project.
6. All of the company’s technical and management staff, as well as the directors are also taking shares as partial payment for their remuneration.
In all, these indicators suggest those who come into contact with the stock want to own it. The willingness of professional advisers to accept stock in lieu of fees and the increased insider involvement are both positive, but the AXA purchase is especially noteworthy. Such institutional interest in a stock of New World’s maturity strikes us as particularly significant. How often do we hear of institutions not wanting to take equity positions until companies have secured market capitalisations of £20million or more? Not so in the case of New World Oil and Gas, it seems!
Promotion of the NEW stock
Shareholder value will be derived principally from growth in the share price, something boards of listed companies often tend to forget in the quest for technical development in their business. The Management team recognise the importance of delivering value and their ability to promote the stock widely will be vital to achieving this goal. So far the signs are positive.
For such a small company a good degree of press coverage has been achieved and it has been well received at investor presentations. Mr Kelleher comes across as an assured and confident communicator (you only need listen to the recent MiningMaven podcast interview with him for evidence of this). Oil and Gas discoveries generate a lot of publicity anyway and so far it looks like the company will be able to take full advantage of the promotional opportunities its success creates.
Market valuation
Of late the share price has been trading around 6.0p. This gives the company a market-cap of about£7.67million. With around £4million in the bank, this leaves NEW with an enterprise value of around £3.5million.
Currently the projects are at an early stage and one should expect moderate values attaching. That said, it could be argued that given the thoroughness of management’s preparation for listing, their diligent approach to selecting potential high value acquisitions and their disciplined technical and operational drive, we are of the view that there is justification for a higher capitalisation.
In any event, if the news expected from Belize and/or Denmark continues to be positive then the share price should be poised for substantial growth.
But consider this. If the company does find one 25million barrel oil resource in Belize (as that is the first project underway) the value creation will be immediate and substantial. Ascribing a cautious nominal in-situ value of $10 per barrel would create a resource worth some $250million or around £160million. With the current 128million shares in issue that would equate to approximately £1.20 per share (compared to the current share price of 6p). If we were to apply currentworld oil prices, which ultimate production would command, then you would need to multiply all these figures by a factor of about 10! Either way it’s not bad for starters - and it should also be kept firmly in mind that they are not looking to make just the one discovery!
The question then becomes a personal one for each investor; whether to enter at the beginning, when the share price and market cap are extremely low, or wait for more assurance accepting the likely materially higher prices and competing investor demand that should accompany solid positive news.
Market turmoil has kept the company share price suppressed and this has presented something of a potential opportunity for bolder investors. How long this stays the case remains to be seen!
What next for NEW?
Belize – The coming months will be very important in the life of the Belize project. The Company recently just completed its Phase 2 2D seismic programme. Presently the seismic data is being processed and interpreted. We now await release of the latest CPR with volumetrics and EMV, expected during December 2011.
Denmark – With the first CPR in place 2D seismic is scheduled to begin. This will reveal much more about the viability of this project. The planned seismic will be undertaken in Q1 2012 with an updated CPR expected in Q2.
New projects – £6million has been raised. With two projects already underway and a substantial bank of potential projects in the pipeline, it remains possible that further projects could be brought into the company. That said, the company has clearly stated the emphasis on ensuring operational focus, driving shareholder value particularly through Belizean and Danish activities.
To Download and save a PDF version of this article click here
Disclosure: The Authors hold shares in New World Oil & Gas
Copyright © MiningMaven 2011
MiningMaven is licensed under a Creative Commons Attribution-Non-Commercial-No Derivative Works 2.0 UK: England & Wales License. Permissions beyond the scope of this license may be available at http://www.miningmaven.com/
PLEASE DO NOT "CUT AND PASTE" THIS COPYRIGHT PROTECTED CONTENT ONTO BULLETIN BOARDS! DOING SO BREACHES TERMS OF USEAGE POLICIES AND MAY RESULT IN DIRECT ACTION BEING TAKEN BY BULLETIN BOARD OPERATORS. IF YOU WOULD LIKE OTHERS TO VIEW THIS ARTICLE THEN PLEASE POST THE LINK TO IT.
For free subscription to MiningMaven updates go to our website at:
All figures quoted have been obtained from publically available management information and the respective Company websites with links provided where available. Errors & omissions excepted.
This summary represents the views and opinions of MiningMaven, has been prepared for information and educational purposes only and should not be considered as investment advice or a recommendation to buy shares in the company. All opinions expressed are those of the author/s and unless otherwise stated, should not be construed as being made on behalf of any featured Company. From time to time MiningMaven principals may take equity positions in companies. Readers are advised to do their own extensive research before buying shares which, as with all small cap exploration stocks, should be viewed as high risk. Investors should also seek the advice of their investment adviser or stockbroker, as they deem appropriate.
Users may print extracts of content from the MiningMaven for their own personal and non-commercial use only. Republication or redistribution of MiningMaven content is expressly prohibited without the prior written consent of MiningMaven. However, linking directly to the MiningMaven website is permitted and encouraged. All rights reserved. All Logos and Trademarks displayed are the property of the respective trademark owners.
Remember to go to the MiningMaven website for free subscription to all our latest updates.
About MiningMaven
There is no doubt that the resource sector is where the action is right now, though much of the coverage out there can be too technical for the average person to understand. Our objective is to empower the private investor and encourage more people to take an interest in the sector, so we will ensure that our content is straight talking, accessible to all and as jargon free as possible. We are building a network of investors who are, like us, on the lookout for value propositions and prefer a no nonsense approach to investing in the natural resource sector.
All are welcome - mavens & novices! - be part of the MiningMaven network and watch our numbers grow!!
You can join Mining Maven and subscribe for updates (we never give out your email addresses to third parties) or join us on Twitter and ourFacebook group where you can put forward and discuss value proposition of your own. Please feel free to email us with your comments or suggestions. Likewise we are always keen to hear from companies operating in the resource sector with a value proposition for investors: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
