Progress continues at Gulf Keystone. The company could have 50kbd of gross production capacity online by mid-2013 (40kbd at Shaikan and 10kbd at Bijell). These first steps underline the scale of future development yet to come for Gulf Keystone and Kurdistan in general. A new light oil discovery at the Bakrman well on the Akri-Bijeel block is very encouraging, and more could come from this well. This has to be balanced with disappointment at both Gulak and Bijell-3. We have moved our valuation to account for these changes, which leaves a core NAV of 227p a share. Litigation is ongoing, with closing arguments next week before the judge retires to consider his opinion.
Shaikan PF-1 to start in March, PF-2 in mid-2013
The production facilities at Shaikan are nearing completion and first commercial oil should be in March. Production levels of up to 20kbd growing to 40kbd will give early revenues, and, perhaps more importantly, will enable engineers to learn how the reservoir will react under sustained production. It may take some time (and higher production) until the company can definitively state the drive mechanism and recoverability of matrix vs fractures, but it is a testament to the size of Shaikan that 40kbd facilities are just the start of the development. The Extended Well Test at Bijell will push gross production capacity for GKP assets to 50kbd by mid-2013. We are keen to see developments in export routes as a pipeline is critical to Shaikan value.
Well results: More to come from Bakrman?
Though disappointed with the failure of Bijell-3 and the limited shows of oil from Gulak-1 so far, the results of Bakrman-1 are very encouraging. We were hopeful pre-drill of a possible read-across from Atrush, and flow rates of 2.6kbd of light oil from the lower intervals are positive. Importantly, the MOL update talks of five further tests yet to be performed. As tests are done from the bottom up, it's likely these will include the BSAM and Butmah intervals. If we look at the Atrush discovery wells, these are the most productive reservoirs. We await further results.
Valuation: Minor adjustments
We have adjusted valuation for the events in the recent update. Our model rolls over to 2013 and we adjust to reflect the success in Bakrman and disappointment at Bijell-3 and Gulak. We also reduced our CoS to reflect lukewarm body language on Ber Bahr from Genel. Our core NAV moves slightly to 227p (from 224p), and our RENAV is now 278p. For long-term investors, our “look forward” model indicates that Shaikan’s value will increase markedly in the next few years, increasing to nearly 450p by 2016 on a risked basis, assuming a ramp up to plateau rates of over 400kbd.
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