Petrofac, Shale gas/IGas, and Gulf Keystone part 1

WTI $93.27 +1.30; Brent $101.68 +1.65; Natural Gas $3.99 n/c

Good morning

So, I am back from Kurdistan where I spent a fascinating week with Gulf Keystone, I will be writing a detailed note, with interviews in due course but will give some brief thoughts today.

Elsewhere a number of things have been going on, not least an Opec meeting where the ‘head in the sand’ attitude prevailed and all numbers, bad or good add up to an Opec production target of 30m b/d. There is no need to worry about the USA increasing production hand over fist, nor internal increases from Iraq or Libya or even a potential 4m b/d from Iran should they elect a more ameliratory president in two weeks’ time.

The hurricane season started on Saturday and the US weather people say that there is a 70% chance of 13-20 named storms, 7-10 hurricanes of which 3-6 will be major ones in categories 3,4 and 5.

Oil Price

The oil price fell whilst I was away with Brent drifting below $100 at one stage after Opec left its production unchanged and the US inventory figures showed higher stockpiles. You will want to know how those brainy analysts in New York did, well they predicted a fall of 377,000 barrels and the actual was a build of 3 million barrels.

Natural gas stays around $4 but the March data from the EIA was most interesting showing total consumption during the month of 2.508 BCF which is the highest figure ever recorded for March.

Petrofac

Two contracts for Petrofac this morning which should help sentiment which has only recently been picking up after the lousy first quarter. Firstly, its JV with Mubadala Petroleum has been awarded a $500m EPC contract by the Abu Dhabi Company for Onshore Oil Operations for compression facilities at the Bab Field 150 km south-west of Abu Dhabi City. Secondly, the same JV has been awarded an onshore EPC contract worth $187m for the development of the Bab Habshan-1 project. I reiterate my view that at these prices PFC should be treated as a very attractive stock for the long term.

Shale/ IGas

The papers today are full of the announcement yesterday by IGas in which they significantly raised their shale gas in place numbers from 9TCF to a range of 15.1-172.3 TCF. These numbers which have been published following a ‘very thorough’ study by the IGas technical team would, if to any degree be recoverable make a significant change to the company and indeed the country.

I think that the more important angle might be the gas-in-place per square mile which equates to 330 BCF, or in places 600 BCF per sq m which is a lot on a single site. The thought of say, ten sites with 600 BCF each being able to be developed, might mean that the company could to a certain extent pick and choose some more favourable and less sensitive sites at least in the early stages of the campaign. I reiterated my very strong buy recommendation when the shares retraced 50% from the 150p peak and have no reason to change that view any time soon.

Gulf Keystone Petroleum- Part One

I visited Gulf Keystone last week and will issue a fuller report in the next few days, however it is worth noting a few points that became obvious either in extended viewing of the facilities, primarily in Shaikan or in conversation with senior management. I was accompanied by COO John Gerstenlauer and also had a number of conversations with Chairman and CEO Todd Kozel as well as other members of the GKP team who were in Erbil including the CFO Ewen Ainsworth. I was the only member of the financial community present and thus was fortunate to have access to the top management team all week as well as local politicians and senior officials who we met during the process.

The overriding view of GKP remains the significant upside waiting to be crystallised as and when either the market place, or maybe more likely an industry competitor, appreciate the huge potential of the prospect being accumulated in Kurdistan. With the KRG targeting 1m b/d by 2015 and 2m b/d by 2019, any chance of those forecasts being achievable must depend on a number of key projects and companies, in this case GKP in general and Shaikan in particular.

I visited all the wells in the region from the first to the most recent and also, maybe more importantly the two production facilities being built at the moment. Production facility 1 is virtually ready to go, some final electrical and cabling work and within weeks PF-1 will be able to produce 20,000 b/d and maybe more. PF-2 is a massive facility and should be ready to produce in early autumn and has larger storage tanks capable of taking 50,000 barrels each, although these facilities are designed at present for tanker distribution a tie-in to nearby pipeline facilities is the eventual goal. With another 20,000 target at PF-2 and opportunities with de-bottlenecking to expand to 60,000 – 75,000 of production from Shaikan and possibly Sheikh Adi as well longer term. After these are completed two more production facilities and maybe a central hub will take the company’s targets to as high as 150,000 b/d which is in the Shaikan field development plan currently waiting for approval.

A lot depends on FDP approval as well as the opportunity to sell in country and to potentially export, but the will is there and the oil ministry seem keen not to disappoint the large number of companies that have arrived in Kurdistan of late.

At this stage it is worth noting that the Genel Energy operated Ber Bahr-1 was announced as a commercial discovery whilst I was in the country and they will begin a phased development of the field in the second half of this year.

There are one or two potential reasons for the shares to hold back at the moment, the market is a touch optimistic about timings, for the completion of the production facilities and Shaikan wells 7 and 10 are a little behind mainly due to bad weather and at number 10 the need to build a new road to the site. At 7 the rig is a bigger one that ever used here in an attempt to reach the Permian successfully, at 10 the first real production well is going to be shallower.

There is also the court case which has finished but still awaiting a verdict, a loss would be bad for GKP but even that would still be bearable given the huge discount the shares trade at, a win would surely release the hand brake for the shares and pave the way for the premium listing expected to come in H1 2014.As this should be accompanied by a new CPR, the prospects at that stage would indeed look good.

Dougie has a target price of 475p for GKP and this is, in my view extremely realistic, if not in the longer term conservative which is why I have selected the 2 year chart in this case.

And finally…

Whilst I was away someone did something to the England cricket team, certainly they seem to have fallen apart before our very eyes just when they were meant to be filling up at the tank of confidence, maybe the thought of Ravi Bo Peep appearing on the team sheet got the opponents rubbing their hands with glee….

So, the special one is back and what with Big Frank signing for another year the old gang is getting back together for a revival who’s to say…….

Finally, as is too often nowadays I have to sadly report that Tom Hall, an excellent stockbroker if ever there was one died at the weekend.

Kind regards

Malcolm