BULLETIN #127 UPDATED - APRIL 10 2013 IONA ENERGY INA-TSXv COMPANY ANALYSIS Iona Energy right now is a very simple story. They will bring four oil wells into production in the next three years which have no financial or exploration risk, taking production from just over 1500 barrels of oil equivalent per day (boepd) to over 18,000 boepd more than a tenfold increase. All four wells are proven discoveries which Iona has purchased or they have actually been in production. The only well with any exploration risk is a gas well that will be drilled right beside an existing producer in late 2013 or early 2014. But their growth isn t the only thing I like about Iona. The management team is part of the founding group of Ithaca Energy (IAE-TSX), another North Sea producer. This team has shown they can secure both high quality assets and funding for them. With each well costing roughly $100 million to get into production, that is so important. And the third and final key reason I like the stock they are fully funded. With $100 oil, they have enough cash and will generate enough cash flow from their first wells to fund their entire 3-4 year development program. That s what The Street rewards. It should all start to happen in Q2 2013 when their first asset, Huntington, begins production. Trading Symbols: INA-TSXv Share Price: $0.68 Current Production: 1600 boepd 2013 Estimated YE Production: 7000 boepd Basic Shares Outstanding: 366.7 million Market Cap: $249.3 million Estimated Net Debt: $97.2 million Estimated Enterprise Value (EV) $346.6million EV per flowing boe ~$49,500
http://www.ionaenergy.com POSITIVES -Management--founders of Ithaca Energy have built up an international junior play before -Low risk development plays no exploration or financial risk on next five oil wells -Significant near term catalyst with Huntington starting production Q2 13 -Next five oil wells give simple and large growth path what the market likes NEGATIVES -Large offshore developments carry risk of cost overruns and delays -Production will be concentrated on a small number of wells, problems with just a couple of wells would have a big impact on the company PROPERTIES
HUNTINGTON This is Iona s newest property and about to become its cash flow engine. In late December 2012 Iona bought Carrizo Oil & Gas s (CRZO-NASD) 15% non-operated working interest in Huntington. They paid US$152 million of cash and they have to make a US$18 million deferred payment from first revenues. They also get a 2.25 % royalty on total gross oil and gas production at Huntington (so they receive a payment of 2.25% of the gross revenue of Huntington production above and beyond their 15%) of and Carrizo UK's tax losses totaling US$125 million (that effectively reduces the net cost of their acquisition cost by at least 33%). The market expects the first 12 months of cash flow from Huntington, net to Iona, to be roughly $150 million at current oil prices. A one year payout is great! To fund the deal Iona completed a. a $23 million bought-deal financing at $0.55/share, b. a US$60 million hedge deal with a BP subsidiary, c. and a senior lending facility with a group of lenders for up to USD$250 million (US$139 million has been drawn).
Iona will own a 15% working interest on the property along with partners: - E.ON Ruhrgas UK E&P (25% and Operator) - Premier Oil plc (40%) - Norwegian Energy Company ASA (20%) Huntington has three discoveries in three different zones (the Paleocene Forties formation, the Jurassic Fulmar formation and the Triassic Skagerrak formation). The Field will be developed with four production and two water-injection wells that will go after the Forties formation first. Production will be tied back to a Floating Production Storage and Offloading ("FPSO") vessel, the Voyageur Spirit, operated by TeeKay Partners. The oil will be exported from the FPSO with shuttle tankers. The natural gas will be exported through the Central Area Transmission System. When Iona bought their interest, Huntington was expected to: - Flow 30,000 bbls of oil and 27 million cubic feet of gas (mmcf/d) per day - Iona s share of this would be 4,500 bopd and 4.0 mmcf/d, totaling 5,175 boepd (this excludes roughly net 765 bopd and 0.68 MMscf/d attributed to the 2.55% Royalties) - Decline rates in the first 24 months of production are expected to be slight as the FPSO vessel will be producing full out - Produce 43 degree API oil which would get a slight premium to Brent pricing - Iona estimates Huntington holds o 3.5 MMbbls Proved Reserves, o 6.0 MMbbls Proved plus Probable Reserves, and
o 7.3 MMbbls Proved plus Probable plus Possible Reserves (excluding barrels from the Royalties from the Huntington Joint Venture Partners) o Have operating costs of US$12/boe at peak production A reserve report that meets Canadian legal standards (51-101 report) will be released before the end of April 2013. Well testing after the acquisition has resulted in positive surprises and the actual production may be better than Iona expected when it made the deal. Premier Oil, one of Iona s partners in Huntington said in early March that 3 of the 4 wells drilled each already have tested at rates of 10,000 bbls/d of oil (plus gas). This is more than expected and given the FPSO will be operating at its limit should mean that peak production is held longer. First production from the field is expected Q1 2013 with 5,175 Boe/d net to Iona. The acquisition was important for Iona because not only will it provide the cash flows to develop the Orlando property but also because it will allow Iona to tap into its $250 million credit facility. Again, Huntington is the cash cow that sets Iona up to get the next asset, Orlando, into production without having to raise any equity. ORLANDO Iona holds a 75% working interest in the Orlando Discovery which is directly north of the Ninian field and production platform. This discovery was originally drilled by Chevron in 1989 which found 32 degree API oil with a well test of 2,850 Bbl/day. Back in 1989 Brent oil was below US$20/Bbl and an offshore well producing at this rate was not a profitable discovery, so the well was plugged. During the financial crash of 2008, some of the owners of the well wanted out and Iona paid US$3 million to get its 35% interest. In June 2012 Iona bought the 65% of the property it didn t own.
Owning all the well, and obviously becoming operator, was important to Iona because it will allow for cost sharing (synergies) with its nearby Kells property. With control of Orlando in place Iona then farmed out a 25% working interest in both the Orlando and Kells properties to Volantis Exploration Limited in December of 2012. Source: Ricciardi & Associates Inc., Department of Energy and Climate Change Iona is done with the first of its four-phase drilling plan at Orlando, having drilled the first appraisal well. Now Iona is waiting to receive final approval from the Department of Energy and Climate Change (DECC) for the revised Orlando Field Development Plan (FDP). Further drilling cannot continue until FDP has been approved. Once that approval is received the steps to drill the 3/3b-13 well are: - Drill a side-track well and test all three prospective zones to a total depth of 14,300 feet
- Drilling will then be stopped to allow for putting in a subsea pipeline from the well to the Ninian production platform (14km to the southwest). - Iona will then go back into the well and drill a 1,000 foot horizontal well - The well will be completed and tied-back to the Ninian Central platform Iona has agreed to a per-barrel charge of US$8.40/Bbl for Orlando production to be processed at the Ninian Central platform and pipelined to BP s Sullom Voe Terminal. Following this well, Iona plans to drill a second development well (the timing depends on performance of the first well). Iona has US$130 million still to spend at Orlando to reach first oil. The total cost of the project is near US$167 million net to Iona over a two- to three-year period. Iona s reserve engineers have determined Orlando s reserves to be: - 5.9 million barrels of proved reserves - 11.5 million barrels of proved and probable reserves - 16.2 million barrels of proved, probable and possible reserves The 1P case is based on a one well development plan that has a first production of 7,100 Bbl/d net, producing for five years. The 2P and 3P cases include a twowell development plan that have a first production rate of 11,000 Bbl/d net, producing for nine and 17 years respectively. We should get a reserve update from Iona before the end of April. KELLS While Iona s Orlando asset is a discovery that never produced, the Kells project has. Again, first two assets have no exploration risk.
Kells was discovered by BP in 1985 and tested at 9,360 Boe/d. The field started producing in March 1992 at 6,850 Bbl/d and peaked at 11,000 Bbl/d (14,000 Boe/d including gas). In total it produced 5.7 million barrels of oil equivalent (MMBoe) before it was shut in during 1994. Only 9.7% of the oil in the field was produced. The reason production was stopped in November 1994 was several blockages that built up in the pipeline (think wax and ice). With oil prices around US$17 in November 1994, it would have cost more to remove the blockage than could be made by producing the oil. It was a no-brainer decision to stop production. Iona has a plan to avoid blockages like this. The plan involves putting in an insulated pipeline that allows for chemicals to be injected to stop and remove blockages. Oil is also at $100 now instead of $17 back when production at Kells stopped. Source: Ricciardi & Associates Inc., Department of Energy and Climate Change
Iona acquired the field from Fairfield Energy Limited in January of 2012. Because it is close to Iona s Orlando field (discussed earlier) there is a real chance to combine costs between the two fields and make development more profitable. This combined development approach is a key part of Iona owning both the Orlando and Kells properties. The purchase price for Kells included: - Paying Fairfield US$8.6 million for cash Fairfield had already spent on Kells. - A cash payment of US$5 million to Fairfield - Iona will pay US$2.50 per barrel of future production to Fairfield As I said earlier, Iona has farmed out a 25% interest in Kells in late 2012. Kells development will likely not happen until the Orlando s development is done. There is a chance the two properties are developed at the same time to create efficiencies of scale. Iona thinks that it will have to spend another US$113 million to get Kells to first oil. The cash for developing Kells will come from Orlando and Huntington which will both be flowing cash by then. Kells should pay out in well under a year. The first Kells well is expected to produce 7,500 Boe/d net to Iona. After the first well is drilled a second well could be drilled 12 to 18 months after the first Kells well at a cost of US$34million net to Iona. Iona s reserve engineers have determined Kells reserves net to Iona to be: - 2.5 million barrels of proved reserves (1P) - 6.7 million barrels of proved and probable reserves (2P) - 8.0 million barrels of proved, probable and possible reserves (3P) The 1P case is based on a one well development plan that has an initial production rate of 5,700 Boe/d net, producing for 12 years. The 2P and 3P cases include a two-well development plan with the wells drilled 12 to 18 months apart, producing a combined peak rate of 7,500 Boe/d net to Iona.
TRENT/TYNE Believe it or not, natural gas is actually a valuable commodity in other parts of the world. Iona has a gas play called Tyne which is already a producing property with realized natural gas prices hovering over US$10.00/Mcf. Source: Ricciardi & Associates Inc., Department of Energy and Climate Change Iona owns a 20% non-operated Working Interest (WI) in the field with operating partner Perenco UK Limited. Iona bought its share of Trent & Tyne by agreeing to pay the drilling (cost of US$33 million) of the T6 sidetrack well, which was recently finished and IP d at 25 mmcf/d. There are five producing wells at Trent and Tyne and all five produce from the lower Ketch zone. Iona s net exit rate for 2012 was 3MMcf/d and should have exited Q1 2013 at ~9.6 MMcf/d of net production, or 1,600 boepd production. Iona also has the option to increase its interest at Trent and Tyne to 37.5% by paying for an exploration well to test the Tyne North West Prospect. The cost to Iona of that well is capped at US$34 million. Those five well Trent/Tyne wells are drilled into 4 of the 5 fault blocks there. This well will test the fifth--tyne NorthWest Prospect results won t be known until early 2014. This is the only real exploration well in the portfolio and it s a geological dead ringer for the other four zones, but until they hit, it s exploration.
Iona s share of production is expected to reach ~18 MMcf/d, or 3,000 boe/d, if Iona decides to increase its working interest to 37.5%--likely to happen in Q4 2013 but could be Q1 2014. The results from the drilling of the T6 sidetrack well has confirmed a couple more targets in the Tyne field. Each new target could result in 20 to 25 Bcf of gross reserves or 20 to 25 MMcf/d of gross new production (assuming the prospects are similar to the T6 well). Iona s reserve engineers have determined the Trent and Tyne reserves net to Iona at 20% WI to be: - 4.4 Bcf (8.3 Bcf at the 37.5% working interest) of proved reserves - 12.4 Bcf (23.3 Bcf at the 37.5% working interest) of proved and probable reserves - 15.0 Bcf (28.2 Bcf at the 37.5% working interest) of proved, probable and possible reserves this is exploration as we don t know if it will produce it s analogous to developed areas four of five fault blocks are producing, this is exploration very similar geology operator assigned 52 bcf of prospective resources given what they know WEST WICK Just under 4 km to the west of Chevron s Captain Field in the North Sea, Iona owns a 58.7% interest in the West Wick discovery. Amoco drilled a well in 1990 and found the 10 foot oil-bearing Upper Captain Sand, which had 15 to 18 API oil in test samples.
Source: Ricciardi & Associates Inc., Department of Energy and Climate Change Iona thinks West Wick is ready to develop and it has 3D seismic over the entire property. The West Wick play is expected to produce 5,800 Bbl/d net at first oil. Iona s reserve engineers have determined the West Wick reserves net to Iona to be: - 5.1 million barrels of proved reserves - 9.7 million barrels of proved and probable reserves - 12.2 million barrels of proved, probable and possible reserves The 1P case expects a first production of 10,000 Bbl/d, producing for ten years. The 2P and 3P cases expect production for 14 and 21 years each. There are no definitive plans as of yet to develop West Wick, with the Company planning to file an updated FDP and commence drilling after the development programs at each of Orlando and Kells have been completed. FINANCES The best laid plans often need changing, especially when it involves developing offshore oil and gas projects. As of today though, Iona s development plan going forward is fully funded. Iona currently has access to US$274 million, which is made up of: - Equity issue of $23 million
- USD$139 million to come from the Company s Senior Secured Borrowing Base Facility of US$250 million - Iona's recently completed $60 million transaction with Britannic Trading Ltd., a subsidiary of BP International Limited - Sale of a 25% working interest in its UK North Sea Orlando and Kells fields to Volantis Exploration for total gross proceeds of US$34 million The table below shows how Iona s capital and financing plan is currently projected to play out: Asset $ (MM) Capex to First Production Remaining Funds MM Notes Remaining Funds $274 Currently Available Funds Trent & Tyne $34 $240 Funded With Existing Funds Huntington $0 $240 Developed Orlando $178 $62 Funded With Existing Funds Kells $113 ($51) Funded With Cash flow/credit lines West Wick $104 ($155) Funded With Cash flow/credit lines Total $429 Source: Ricciardi & Associates Inc. Iona has enough capital now to get them through the start-up of Orlando. After Orlando the company will have plenty of cash flow and increased borrowing available to tackle Kells and West Wick. VALUATION 2013 is the big year for Iona. Iona will move from being a company with assets and only plans of production to a company with assets and actual production and cash flow.
Then, after 2013 a continued steady ramp up of production should occur. ASSET Timing Net New Production To Iona Huntington Q2 2013 34,500 Boe/d Gross (5,165 Boe/d net plus a ~880 Boe/d GORR) Trent & Tyne Beginning of 2014 20 MMcf/d gross (7.5 MMcf/d net) Orlando Q3/Q4 2014 10,000 Boe/d Gross (7,500 Boe/d net) Kells Q3/Q4 2015 10,000 Boe/d Gross (7,500 Boe/d net) West Wick Likely 2016 10,000 Boe/d Gross (~5,800 Boe/d net) Source: Ricciardi & Associates Inc. Iona s production for 2012 is estimated to average only 330 boe/day. In 2013, with production from the Huntington acquisition starting up Iona is expecting to be producing 7,000 boe/day at year end. Source: Ricciardi & Associates Inc. Iona then expects increases to 12,000 boe/day, 16,000 boe/day and 18,000 boe/day for 2014 through 2016. On a flowing barrel basis Iona s enterprise value looks like this for each of those years (based on $0.68/share):
2013 - ~$345 million / 7,000 = ~$49,500 per flowing barrel 2014 - ~$345 million / 12,000 = ~$28,750 per flowing barrel 2015 - ~$345 million / 16,000 = $21,750 per flowing barrel 2016 - ~$345 million / 18,000 = $19,250 per flowing barrel There is a lot of work to be done between now and then, but if Iona ramps up production within its capital spending plan, the stock price is going to have to at least triple by 2016 just to keep the same conservative Enterprise value to flowing barrel valuation of today. WHAT THE ANALYSTS SAY FIRM TARGET PRICE National Bank Financial $1.35 TD $1.30 Casimir Capital $2.25 Research Mackie $1.65 STOCK CHART
CONCLUSION Iona is one of the best growth stories on the board now both in absolute terms and in per share growth, now that all of its funding is in place. And this growth is going to happen with very low risk just execution risk. And because nothing ever happens on time in the North Sea, it s possible Orlando doesn t get into production until September-October 2014 instead of June-July. But once the market has a strong sense of a firm date, I see close to a triple from my cost base, with current oil pricing.
But in a good market we could also see Orlando and Kells get developed more closely together. This team has shown they can source and fund assets very important in the junior markets. They did it before with Ithaca, and now they re doing it here as well. I am long 70,000 shares at 65 cents.