Exploration pure play in Philippines and Tanzania
After completing the sale of its Galoc oil field in the Philippines for US$108m, Otto Energy’s (ASX:OEL) investment case has shifted from a production-driven story to a pure exploration play in the Philippines and Tanzania. It plans to return US$58m to shareholders, leaving enough cash to fund planned exploration activities over the next 18-24 months, a luxurious position for a small-cap E&P in this environment. Otto has farmed down part of its Philippine interests to mitigate risks and fund exploration wells. Although Otto is well funded and is exposed to up to four wells, the stock trades at a discount to cash and our core NAV of A$0.11/share. Our RENAV sits at A$0.22/share, with further upside if Otto secures cost carries and is successful with the drill bit.
Galoc sale shifts story to pure-play exploration
Otto’s exit from the Galoc field, first agreed in September 2014 before the downturn in oil prices, has brought in US$108m in cash and allowed it to refocus on its portfolio of exploration prospects in the Philippines and Tanzania. While a purely exploration-led strategy is risky, Otto has secured attractive acreage and could drill up to four wells targeting c 400mmboe net in the next few years. The operated Philippine SC55 block contains the drill-ready 95mmbbl Hawkeye deepwater oil prospect, the 281mmboe Cinco gassy prospect and eight follow-on leads. The agreement to farm out 15% of SC55 to PNOC announced in January 2015 is likely to include a full cost carry for the Hawkeye-1 well, to be drilled in Q315.
Frontier acreage onshore Tanzania
The Kilosa-Kilombero and Pangani licences (50% WI), operated by junior Swala Energy, are located south of proven basins in Uganda and Kenya in the East African rift basin. After entering Tanzania in early 2012, Otto conducted new gravity and 2D seismic surveys that have shown structural and depositional similarities to the Lake Albert and Lokichar basins. Otto has so far identified the 151mmbbl Kito prospect in the Kilombero basin and hopes to find a drillable prospect in the Pangani licence soon. Drilling at Kito is expected in 2015-16.
Valuation: RENAV of A$0.22/share with further upside
The stock is trading below our core NAV valuation of A$0.11/share, which is based on Galoc sale proceeds minus G&A. Within this, the capital return represents A$0.064/share. Our A$0.22/share RENAV includes Hawkeye (assuming a full cost carry) plus two committed wells in Tanzania, which can be funded at Otto’s current WI. There is further upside if Otto secures carries for its other prospects.
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