RE: New broker note12 May 2021 14:05
part of the report ... 4
A Dry Well – Likewise, in our hypothetical three stage approach, if the Jade well failed to encounter hydrocarbons, the risk associated with the Topaz and Pearl prospects would increase (the risk associated with the Topaz prospect would increase by a greater proportion compared to Pearl, due to Jade and Topaz sharing the same hydrocarbon migration pathway). In this scenario, we would remove Jade from our valuation and argue that the Topaz and Pearl prospects would likely not be drilled.
Oil Price Sensitivity – We model Jade, Topaz and Pearl using the most up-to-date Brent forward curve (long-term price US$57/bbl), inflated by 2% per annum. We assume that the quality of the crude would be similar to the nearby CNOOC discoveries and as such would not receive a discount to Brent. As discussed above, using the latest Brent forward curve we
value a commercial discovery at the Jade, Topaz and Pearl prospects at 41.2p, 85.0p and 5.9p, respectively. Increasing our long-term oil price just slightly from the current forward curve (US$57/bbl) to US$60/bbl increases these valuations to 45.9, 89.1p and 8.1p, respectively. In our upside US$70/bbl case these valuations increase to 60.6p, 98.1p and 14.7p, respectively.
While it is important to analyse the upside from a rising oil price, its equally important to analyse the downside protection, with any discovery needing to be economic if oil prices do fall (such as in 2020). Importantly, even when we reduce our long-term oil price to US$40/bbl, we would value a commercial discovery at Jade and Topaz at 10.6p and 35.8p, respectively.
While Pearl is uneconomic as a standalone development at US$40/bbl, a discovery at Pearl would be economic in the event of a pre-existing discovery on the licence (either Jade or Topaz), where Pearl would be tied back to the existing facilities via a low-cost tie-back? Filled to Spill – With the exception of one field (which is 90% full) all of the CNOOC discoveries situated to the southwest and along the migration pathway to the Block 29/11 prospects are “filled to spill”. In this situation, oil migrates from the source kitchen updip, filling the first structural trap, before moving further updip to the next trap and so on. As such, the CNOOC discoveries to date have often been close to their P0 or at the very least their P10 oil in-place volumes. In our model we use the Pmean volumes as per the 2018 Gaffney, Cline & Associates (GCA) oil in-place audit, but note that there is a distinct possibility that the Empyrean prospects could be “filled to spill” and are in reality closer to the P10 (GCA) oil in place numbers.
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