Jacka Resources Ltd (JKA)

Transcription

1 Jacka Resources Ltd (JKA) RECOMMENDATION Speculative Buy 12 month price target 12 month volume 12 month share low 12 month share high ISSUED CAPITAL ASX Share price Mkt cap1 Ordinary shares on issue Escrowed Shares Options2 $ m A$0.07 A$0.19 JKA $0.18 $45m 238m 9m 76m 1 Undiluted Source: IRESS 2 Various dates and strike prices DIRECTORS Scott Spencer Chairman Richard Aden Exec Director Justyn Wood Technical Director Brett Smith Non-Exec Director Stephen Brockhurst Non Exec Director The Most Undervalued African Explorer on the Market Scott Spencer (Chairman) and Richard Aden (Executive Director) from JKA gave a highly impressive company update to our dealing desk on 11 April African focussed junior explorers have generally outperformed the market in CY2012 on the back of corporate activity and large discoveries within the region. Our preferred ASX listed exposure in this space is JKA which is up ~26% (YTD) outperforming the Energy 200 which is up ~8% over the same period. JKA has all the key attributes that we look for in quality oil and gas companies which include high calibre management with a strong track record of delivery, a high quality asset portfolio, a fully funded 2012 activity program and near term cashflow generation potential. We believe JKA is an outstanding Speculative Buy and our price target is $0.51/sh. Key Points: New venture entry into Somaliland: On 2 April 2012, JKA announced it had entered into an agreement with Petrosoma Ltd to acquire a 50% interest and become operator of the Habra Garhajis block which is located in the south west of Somaliland and covers an area of 2 22,000km. The geology on the block is estimated to be analogous to the prolific producing basins of Yemen where 9.8bnboe have been discovered or are to be discovered. The prospectivity of the block is highlighted by multiple oil seeps with nine confirmed as light sweet crude/condensate similar to Yemen fields. The addition of the Habra Garhajis block provides JKA exposure to a frontier rift basin with significant blue-sky exploration potential and a competitive in-country operational advantage provided by JV partner Petrosama. High quality and well balanced asset portfolio: We believe JKA has built a high quality and well balanced asset portfolio comprising lower risk/near term cashflow potential assets (Hammamet West, Tunisia and the Aje oil field, offshore Nigeria) and blue-sky exploration potential highlighted by frontier acreage in the prolific East African region (Ruhuhu Basin, Tanzania and the Habra Garhajis block, Somaliland). Aje field undervalued by the market: We believe JKA s 5% revenue earning interest in the Aje field, offshore Nigeria has been undervalued by the market to date. On a valuation basis alone, we estimate JKA s 10mmboe of 2C resources (assuming they are converted to reserves) provides $100m of NPV (unrisked) which is more than double JKA s current market cap. In addition, we highlight the project is technically and commercially de-risked given the field has been successfully appraised with a Final Investment Decision (FID) expected in Q whereby resources will be matured to reserves. Hammamet West appraisal well to be spud in October: JKA expects the high impact Hammamet West appraisal well located in the Bargou block, offshore Tunisia to be spudded in October 2012 which will target an estimated P50 (base case) contingent resource of 111mmbbls oil (17mmbbls net to JKA). The primary target will be the Abiod formation which is a proven producer in the region. The entry of LSE listed Dragon Oil (market cap of ~ 3bn) to the JV provides significant operational capability and enhances the credibility of the permit. MAJOR SHAREHOLDERS Contango Asset Mgmt 6% Source: IRESS 12 MONTH PERFORMANCE Source: IRESS Edwin Bulseco Oil and Gas Analyst ebulseco@djcarmichael.com.au D J Carmichael Pty Limited ABN AFSL Market Participant of ASX Limited Telephone: Facsimile: info@djcarmichael.com.au Webpage:

2 Investment Thesis The key reasons why we believe JKA is an outstanding Speculative Buy are the following: 1. High quality management: Key management of JKA are ex-hardman Resources Ltd which was acquired by Tullow Oil plc during 2006/2007 for $1.5bn. The team has a significant competitive advantage in East Africa given they were pioneers of first oil in the East African Rift and have an existing network of contacts within the region. Management has demonstrated the ability to leverage off its experience in Africa by building a high quality asset base in a short timeframe. 2. High Quality and well balanced asset portfolio: We believe JKA has built a high quality and well balanced asset portfolio comprising lower risk/near term cashflow potential assets (Hammamet West, Tunisia and the Aje oil field, offshore Nigeria) and blue-sky exploration potential highlighted by frontier acreage in the prolific East African region (Ruhuhu Basin, Tanzania and the Habra Garhajis block, Somaliland). Figure 1:Asset Portfolio 3. Undervalued relative to its peers with significant upside: We are always cautious in placing too much emphasis on resource peer comparisons as a number of qualitative factors must also be considered such as geopolitical risk, calibre of management and quality of project to explain variances throughout the market. However JKA is currently trading at a significant discount to its ASX listed peers on an EV/Contingent Resource/Reserve metric which we do not believe is justified given the quality of its management, assets and Joint Venture partners. This view is supported by our valuation of $0.51/sh and our unrisked valuation of over $1.00/sh. 2

3 Figure 2: EV/Contingent Resource/Reserve Comparison 4. High Corporate Appeal: Notwithstanding the intense industry focus on East Africa due to recent corporate activity and the high exploration success of major oil companies, JKA is building a portfolio of strategic assets which is highly attractive to large cap oil and gas companies, in our view. This view is supported by the JV partners JKA is currently working with such as Vitol, Chevron, Dragon Oil and Apache. 3

4 JKA Increases Foothold in World s Hottest Hydrocarbon Region JKA recently announced it had increased its foothold in East Africa by entering into an agreement with Petrosoma Ltd to acquire a 50% interest and become operator of the Habra Garhajis block which is located in the south west of Somaliland and covers an area of 22,000km2. The geology on the block is estimated to be analogous to the prolific producing basins of Yemen where 9.8bnboe have been discovered or are to be discovered. The prospectivity of the block is highlighted by multiple oil seeps, nine of which have been independently tested and confirm light sweet crude/condensate similar to that of the Yemen fields. The addition of the Habra Garhajis block provides JKA exposure to a frontier rift basin with significant blue-sky exploration potential with a competitive in-country operational advantage provided by JV partner Petrosama. The key terms of the farm-in agreement are the following: JKA to earn an initial 50% equity (subject to government approval) by paying a contribution toward past costs on the licence and 100% of the PSA third period minimum work program consisting of studies, gravity survey and a minimum 500 kms of 2D seismic. Petrosoma to provide in-country logistics, security and government relations to the joint venture. If JKA elects to enter the PSA fourth period it has the option to earn additional equity in the licence area (subject to performance and government approval); otherwise if JKA elects not to complete the farm-in it will re-assign its participating interest to Petrosoma with no further obligation. JKA and Petrosoma have agreed the Republic of Somaliland is an area of mutual interest, with any further projects in the region to be pursued on a 50/50 basis. Figure 3:Habra Garhajis block East Africa has been the subject of intense industry focus following Anadarko Petroleum s and ENI s massive gas discoveries offshore Mozambique (estimates are ~30tcf gas and over 40tcf gas respectively), Royal Dutch Shell s $1.6bn bid for East African explorer Cove Energy and a string of significant discoveries announced by Tullow Oil (Ngamia-1 in Kenya which encountered 20m of net oil pay) and the BG Group/Ophir Energy joint venture (JV) which announced its fourth 4

5 discovery in Tanzania with the Jodari-1 well (estimated to hold 2.5tcf to 4.4tcf gas). This discovery increased the JV s gas reserves to 7tcf which is nearing the minimum reserves threshold to underpin a two train LNG development. We believe the recent exploration success offshore Tanzania by the BG Group/Ophir Energy JV provides substantial credibility to JKA s entry into the underexplored onshore Ruhuhu Basin in Tanzania. In addition, global oil and gas companies including Total and Tullow have recently acquired acreage onshore Tanzania. JKA s 100% interest in the Ruhuhu Basin acreage provides a significant opportunity on the back of further study work to farmdown its interest to fund future drilling activity. Figure 4: Ruhuhu Basin, Tanzania Aje Oil and Gas Field Undervalued In September 2011, JKA announced it had entered into an agreement with Providence Resources Plc (Providence) to acquire a 5% revenue earning interest (paying 6.7% of the field development costs) in the discovered Aje field, offshore Nigeria (OML 113). Four wells have been drilled on the field, all of which encountered hydrocarbons. Following a successful appraisal program in which two wells were flow tested (Aje-1 and Aje-2), the JV partners have deemed the field to be commercial. JV partners include YFP (Operator, 25%), Chevron (Technical Advisor, 33.75%), Vitol (24.06%) and Panoro Energy (12.19%). The Aje field is located within the prolific West African transform margin which shot to fame following the discovery of the multi-billion barrel plus Jubilee field, offshore Ghana. The field is located in close proximity (5km) from the West African Gas Pipeline (WAGP) which has available capacity to enable near term monetisation of future gas developments. JKA estimate the Aje field contains ~200mmboe P50 contingent resources (10mmboe, JKA share). Development planning for the field is well advanced with a fast track development option having the potential to realise first production in

6 Figure 5: Aje Field, offshore Nigeria We believe JKA s 5% revenue earning interest in the Aje field, offshore Nigeria has been undervalued by the market to date. On a valuation basis alone, we estimate JKA s 10mmboe of 2C resources (assuming they are converted to reserves) provides $100m of NPV (unrisked) which is more than double JKA s current market cap. In addition, we highlight the project is technically and commercially de-risked given the field has been successfully appraised with a Final Investment Decision (FID) expected in Q whereby resources will be matured to reserves. Figure 6: Aje Field Well Test Results 6

7 Hammamet West Appraisal Well to be Spud in October JKA holds a 15% interest in the Bargou block in the Gulf of Hammamet, offshore Tunisia. Other JV partners include LSE listed Dragon Oil (55%) and ASX listed Cooper Energy (30%). The Bargou block lies in a proven petroleum basin (the Eni Maamoura oilfield development is located 12km to the south) in relatively shallow water (50m to 100m) and is close to shore which should minimise future development costs. Two exploration wells drilled on the block encountered hydrocarbons with the Hammamet West 1 (HW1) well encountering an 8 metre oil column in the Birsa formation and >30 metres of hydrocarbons in the Ain Grab/Fortuna formations in A follow up well (Hammamet West 2) was drilled in 1990 and encountered 3 zones of movable oil over a 192 metre section in the Abiod formation which today is a proven producer in the area. Figure 7: Bargou block The Hammamet West discovery is estimated to contain 111mmbbls of P50 contingent resources (17mmbbls net to JKA) with a high case estimate of up to 213mmbbls (32mmbbls net to JKA). To reduce the estimated recoverable volume uncertainty the JV plans to drill the Hammamet West appraisal well which will assess the tertiary targets via the vertical section of the well followed by an assessment of the Abiod formation with the horizontal section of the well. This will then be followed by an extended well test. The gross drilling and testing costs of the HW appraisal well is ~$US26m (US$7.8m/$A7.2m net to JKA) and the well is scheduled to be spudded in October The key risk will be reservoir quality and well deliverability with surrounding Abiod development wells producing at ~5,000boepd. A development concept for HW has been completed by Worley Parsons which includes an unmanned platform and a pipeline to shore for oil and gas to be processed before being exported to relevant markets. 7

8 Figure 8: HW appraisal well design and development concept The participation of LSE listed Dragon Oil (market cap of over 3bn) to the JV provides significant operational capability and enhances the credibility of the permit. Dragon Oil is an international oil and gas exploration and production company quoted on both the London and Irish stock exchanges. The company has reserves of 639mmbbls of oil and condensate and 1.6tcf gas with its primary producing asset in the Caspian Sea, offshore Turkmenistan. Funding Position and Capital Structure Following a two tranche placement to raise $14.2m at 13.5c/sh JKA is fully funded through its core 2012 activities. Post the capital raise, JKA has ~$13.4m in cash and it has 71.3m listed options (JKAO) with a strike price of 20c/sh on issue (expiring 31/12/12) which has the potential to provide additional funding of ~$14m. We believe given the current share price of ~$0.18/sh that it is a reasonable assumption the options will be exercised by year end which would ensure JKA will be fully funded through JKA currently has no debt. JKA s key activity commitments for 2012 total $12.8m which include the following: Tranche 2 payment for the Aje field acquisition - US$6m/A$5.6m (payable on 30 April 2012) Hammamet West Appraisal well - US$7.8m/A$7.2m (Expected October 2012) JKA currently has 238.1m shares on issue with an additional 9.4m shares not quoted on the ASX (therefore a total of 247.5m shares). As highlighted above, JKA also has 71.3m options on issue with an additional 5m options not quoted on the ASX (exercise price of $0.35/sh, expiring 31 December 2013) and therefore has a total of 76.3m options. At the current share price of $0.18, 8

9 JKA has a market cap of $45m with the register made up of 20% Board and Associates, 30% Institutions/Funds and 50% other. Figure 9: Share register breakdown 9

10 Valuation Jacka Resources Ltd (JKA) Valuation $0.18 A$m A$/sh Aje Field Hammamet West Other Corporate (14) (0.05) Est Cash Debt Total P rice Target Figure 10: JKA Valuation Source: DJC Estimates Our valuation for JKA is $0.51/sh. Our key assumptions are the following: We have used a $/boe metric of $10 to value the contingent resources from the Aje field and Hammamet West discovery. We have applied a Probability of Success (POS) of 60% to the Aje field and 40% to the Hammamet West discovery. As Aje has been fully appraised and deemed commercial with Chevron/Vitol as technical advisor we have confidence in the future development of this project. However, we have still applied a risking of 60% as the final development concept and costs are not finalised and JKA will need to secure funding post project sanction. We have risked Hammamet West more heavily as the discovery will require further appraisal to define the resource size and commercial potential. We have not attributed any value to JKA s exploration portfolio. Although we do recognise the substantial potential and upside that exists, we would prefer to have more visibility on the future exploration program and funding requirements before attributing value. We have not assumed any equity dilution at this stage but will look to incorporate this once future Capex requirements for follow up exploration, appraisal and development are known for We would like to highlight that substantial upside exists in our valuation and if both the Aje field development and the Hammamet West discovery are a success, JKA s valuation on an unrisked basis would increase substantially to over $1.00/sh. 10

11 Key Risks We have outlined the key risks below: Geological Risk. The majority of JKA s asset portfolio is at the exploration and appraisal stage of maturation with the exception being the Aje field which is post appraisal. Hence, JKA is exposed to geological risk of being able to find, appraise and develop commercial resources. Funding risks. We believe JKA is fully funded for its core 2012 program, however increased scope to the current program or substantially higher costs than anticipated on the current program would increase the risk of further funding requirements. Longer term, JKA will need to secure additional funding for the development of the Aje field and HW (assuming a commercial resource is matured). Execution Risks. Offshore oil and gas project execution and drilling is a high cost, complex and high risk operation. This has been demonstrated recently by the Macondo incident and many projects are subject to schedule delays and cost increases. This risk is particularly relevant for the Aje field development and the near term appraisal drilling of HW. Geopolitical risks. JKA operates in geopolitical sensitive environments. Geopolitical risks such as changes in Government, fiscal regimes, safety and environmental approvals and other legislative changes could impact JKA s planned activities. Commodity risk. Significant variations in oil and gas prices can impact market sentiment towards the share price. Investment View JKA is our top pick in the junior African explorer space. JKA has all the key attributes that we look for in quality oil and gas companies which include high calibre management with a strong track record of delivery, a high quality asset portfolio, a fully funded 2012 activity program and near term cashflow generation potential. Management has leveraged off its previous experience at the successful Hardman Resources to build a very impressive African focussed portfolio of assets in a relatively short timeframe which have high corporate appeal. Notwithstanding the strong share price run JKA has had so far in 2012, we believe there is significant upside over the next 12 months. We are comfortable that our valuation of $0.51/sh is relatively conservative given we have not attributed any value to the significant exploration upside from JKA s portfolio. We believe JKA is an outstanding Speculative Buy. 11

12 Key Catalysts The key near terms catalysts for JKA include: Final Investment Decision for the Aje field (Q3 2012) Drilling decision on WA-399-P post 3D seismic interpretation (Q2/Q3 2012) Drilling of Hammamet West appraisal well (Oct 2012) New venture acquisitions (ongoing) Figure 11: Forward Program 12

13 Directors and Management Brett Smith Non-Executive Director Mr Smith had acquired over 20 years of experience in the mining and exploration industry as a geologist, manager, consultant and director. His industry experience is broad, dominated by exploration and resource definition. He is currently Chairman of Australian junior energy company, Blackham Resources Ltd, Director of uranium explorer Cauldron Energy Limited and Managing Director of Corazon Mining Limited. Richard Aden Executive Director Mr Aden has over 20 years oil and gas experience in a variety of senior executive positions worldwide, having worked for Hardman Resources, Enterprise Oil, Tap Oil, and Rialto Energy Limited. Mr Aden has extensive experience in operational and corporate finance including treasury and capital management, financial compliance, project evaluation and commercial screening, M & A, strategic/business planning and government/investor relations. Scott Spencer Non-Executive Chairman Scott Spencer spent nearly 20 years working on international political and economic issues with the Australian Government, including in as Regional Director of the Department of Foreign Affairs and Trade in Western Australia. He then entered the private sector, working on international resources projects. From 1994 he was a Director of Hardman Resources Ltd., the ASX/AIM listed petroleum E & P company which was AIM International Company of the Year in He worked extensively on the establishment of Hardman's successful international exploration portfolio until the $A1.5 bn takeover of Hardman by Tullow Oil in Stephen Brockhurst Non-Executive Director Mr Brockhurst has been a Director of Mining Corporate since 2006 and has been responsible for the preparation of the Due Diligence process and Prospectuses on a number of Initial Public Offers with capital raising in excess of $100 million. Mr Brockhurst s experience includes corporate and capital structuring, corporate advisory and company secretarial services, capital raising, ASX and ASIC compliance requirements. Justyn Wood Technical Director Mr Wood is a Petroleum Geophysicist and Director of Wood Petroleum Exploration Pty Ltd, a technical advisor to Jacka Resources Limited. Mr Wood has 18 years technical, commercial and management experience in exploration, appraisal and development of oil and gas resources in the upstream oil and gas industry with Hardman Resources and Chevron Australia, Mr. Wood has explored more than a dozen basins around the globe and has managed a number of international frontier exploration projects. He is recognised as having played a key role in establishing the East African Rift in Uganda as a new petroleum province, with more than one billion barrels discovered in the Albertine Graben since Mr Wood is a member of PESA, SEG, AAPG and SPE. 13

14 Disclosure RCAN1036 This Research report, accurately expresses the personal view of the Author. All the information utilised in this report is accurate and current at the date stated on this report. DJ Carmichael Pty Limited, members of the Research Team; including authors of this report, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly from client transactions in stocks mentioned in this report. DJ Carmichael Pty Limited participated in a placement for Jacka Resources Ltd and was paid a fee for this service. DJ Carmichael Pty Limited is a wholly owned subsidiary of DJ Carmichael Group Pty Limited ACN In accordance with Section 949A of the Corporations Act 2001 DJ Carmichael Pty Limited advise this contains general financial advice only. In preparing this document DJ Carmichael Pty Limited did not take into account the investment objectives, financial situation and particular needs ( financial circumstances ) of any particular person. Accordingly, before acting on any advice contained in this document, you should assess whether the advice is appropriate in light of your own financial circumstances or contact your DJ Carmichael Pty Limited adviser. DJ Carmichael Pty Limited, its Directors, employees and advisers may earn brokerage or commission from any transactions undertaken on your behalf as a result of acting upon this information. DJ Carmichael Pty Limited, its directors and employees advise that they may hold securities, may have an interest in and/or earn brokerage and other benefits or advantages, either directly or indirectly, from client transactions. D J Carmichael Pty Limited believe that the advice herein is accurate however no warranty of accuracy or reliability is given in relation to any advice or information contained in this publication and no responsibility for any loss or damage whatsoever arising in any way for any representation, act or omission, whether express or implied (including responsibility to any persons by reason of negligence), is accepted by DJ Carmichael Pty Limited or any officer, agent or employee of D J Carmichael Pty Limited. This message is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure under applicable law. If you are not the intended recipient or employee or agent responsible for delivering the message to the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication and its attachments is strictly prohibited. The Author of this report made contact with Jacka Resources Ltd for assistance with verification of facts, admittance to business sites, access to industry/company information. No inducements have been offered or accepted by the company. The recommendation made in this report is valid for four weeks from the stated date of issue. If in the event another report has been constructed and released Jacka Resources Ltd, the new recommendation supersedes this and therefore the recommendation in this report will become null and void. Recommendation Definitions SPECULATIVE BUY 10% out-performance, but high risk BUY 10% or more out-performance ACCUMUATE 10% or more out-performance, buy on share price weakness HOLD 10% underperformance to 10% over performance SELL 10% or more underperformance Period: During the forthcoming 12 months, at any time during that period and not necessarily just at the end of those 12 months. Stocks included in this report have their expected performance measured relative to the ASX All Ordinaries index. DJ Carmichael Pty Limited s recommendation is made on the basis of absolute performance. Recommendations are adjusted accordingly as and when the index changes. To elect not to receive any further direct marketing communications from us, please reply to this and type 'opt out ' in the subject line. Please allow two weeks for request to be processed No part of this report may be reproduced or distributed in any manner without permission of DJ Carmichael Pty Limited. 14