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OPINION

Global Energy sell-off

Global Energy sell-off
July 31, 2014
Global Energy sell-off
IC TIP: Hold at 56p

The well was stimulated using 27,000 barrels of water pumped into the Simiti formation with mixed results. Although the simulation fluids initially began to flow back from the formation into the wellbore at high rates, the rate of flow quickly declined. The cause of which has been identified as the presence of an emulsion which substantially blocked most reservoir fluids from reaching the wellbore. The use of sand in the stimulation process is likely to have collected at the oil-water interface and acted as the agent to create the emulsion.

The company is currently working to remove this blockage by inducing pressure surges within the formation, in order to form a corridor to allow oil to pass through the emulsion. This process should ultimately cause the emulsion to break to allow fluids, both oil and water, to pass into the well at higher rates. However, if the surging process is not effective in removing the emulsion blockage, then other techniques for dealing with the emulsion, including a work over of the well to chemically remove the emulsion, will be looked at.

Despite the initial set back, Global Energy’s managing director Steve Voss remains “very optimistic that oil exists within the Simiti reservoir and can be produced at economic rates. We will continue to apply the two methods (discussed above) to remove the emulsion blockage which is preventing higher production rates, and we hope to have an update on our progress on this activity in August. We have learned valuable information from this test well that will benefit the remainder of our development project at Bolivar."

Analyst Andrew McGreary at the company’s nominated advisor Northland Capital is maintaining his profit forecasts for this year, his target price of 181p and buy rating on the shares. However, the initial market reaction was negative with shares in the company slumping 18 per cent from the 70p level I last recommended buying at in May ahead of these drill results (‘Farmed out for profit’, 13 May 2014). In the process the shares have taken out the 70p support level which has provided strong support over the past couple of the years.

That said, I am loathe to bail out at this depressed level especially as Global Energy could yet provide a positive update at the end of August. In any case, the company is hardly a one-trick pony. Indeed, the farm-out agreement signed with Everest Hill Energy means that the company retains a 50 per cent interest in its Bolivar license area and has a fully carried interest on three wells, comprising re-entry and fracking of two existing wells (including Catalina) and completion of one new exploitation well. Analysts Conor Fahy and Andrew Edmond at broking house Equity Development estimate Everest will incur total drilling costs of $24m (£14m) on these three wells, on which Global Energy has a free carry and also recoups $5m of its previous development costs.

True, oil exploration is inherently a risky business and there is no guarantee that Global Energy and Everest will hit pay dirt. But it’s worth noting that Global Energy still has its valuable Llanos oil producing fields which analysts at Equity Development believe are capable of producing $30m of revenue this year (based on an average oil price of $82.2 a barrel) and turn in pre-tax profits of $7.5m. Based on 3.4m barrels (1P-proved), 5.6m barrels (2P-proved and probable), and 6.3m barrels (3P- proved, probable and possible), analysts have a risked valuation on these fields of $77.8m (£45m), or more than double Global Energy’s current market value of £20m.

In other words, at these depressed levels, the development activity on both the Bocachico and Bolívar Association Contract areas is now in the price for free. In the circumstances, I am happy to recommend holding Global Energy shares on a bid offer spread of 55p to 56p, ahead of a further update on Catalina at the end of August and the interim financial results in September. Hold.

■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'