Drill Watch

A subsequent well test flowed at a rate of 6,000 barrels of oil and 8 million cubic feet of gas per day, and did not produce any supplementary water. The company estimates the BT45 reservoir alone could hold between 13m and 133m barrels of oil.

Moreover, the well continues to validate Salamander’s exploration hypothesis in the basin. Indonesia’s main Kutei basin is already a major hydrocarbon province but the northern part of the basin, where Salamander operates, has been overlooked as it was thought to lack a sand system. The company’s Angklung gas discovery in 2010 disproved the theory and opened up the play, but the South Kecapi-1 well has really verified its blue-sky potential not just for gas, but for oil, too.

Salamander will now move the drill rig to test one of the largest structures in the north basin, the North Kendang prospect, before bringing the rig back to drill the Bedug prospect in order to prove the up-dip extent of the South Kecapi oil discovery. Broker finnCap estimates an additional 350m barrels of oil-equivalent resources will be targeted in these two wells alone. But Salamander’s shares have only risen from 192p to 200p since our last note on the company, and we reiterate our ‘buy’ recommendation.

On the horizon

This month we profile three large oil explorers with similar play-opening exploration activity. We have also compiled a table of the exploration wells currently being drilled where results are expected to be released during the next 30 days. As always, there is the risk of slippage into the following month since the speed of drilling and data analysis is often hard for companies to accurately predict. In addition, we review the results of other wells profiled in previous Drill Watch instalments at the end of this article.

Tullow (TLW), Afren (AFR) – Paipai-1

Frontier oil explorer Tullow has one of the most enviable exploration track records in the business. Following on from previous successes opening up new oil basins in Ghana, Uganda and French Guiana, the company had a 76-per-cent success rate with the drill bit in 2012, with 19 of 25 exploration and appraisal wells drilled discovering hydrocarbons.

These included two game-changing onshore wells in Kenya, Ngamia-1 and Twiga South-1 in the Lokichar basin, which discovered over 100m and 30m of net oil pay, respectively. True, the market is still awaiting crucial flow test results from Twiga South-1 that will give a clearer indication of reservoir quality and recovery factors. But the wells have opened up an entire rift basin as a potential major new oil province – indeed it’s the furthest east that oil has been discovered in Africa – and Tullow plans to drill up to 11 further exploration and appraisal wells in Kenya and nearby Ethiopia in 2013.

The first of these wells, Paipai-1, is nevertheless a wildcat well targeting a different structure on Block 10A in riskier northern Kenya. It’s a slightly more complicated, smaller-scale target, but if successful, Paipai would extend the producing plays of Sudan into Kenya and open up a second new petroleum province within Kenya. As a consequence, it’s relatively high-risk: estimates of the well’s chance of success range from 10 to 20 per cent.

Operator Tullow has a 50 per cent working interest in the block, while fellow African oil hunter Afren holds a 20 per cent working interest. Canadian peer African Oil controls the rest. While the well is long overdue, African Oil recently disclosed the well has almost reached target depth and we can reasonably expect results later this month.

IC VIEW: If you’re looking for exposure to this well, we’d go with Afren as it’s likely to have a larger impact on the company’s shares. Broker RBC Capital estimates success at PaiPai could add as much as 15.4p fully derisked to Afren’s share price. Trading on less than nine times forward earnings, Afren’s shares are a fraction of the price, too, with Tullow currently trading on 24 times forward earnings.

SOCO International (SIA) – Marine XI, Lideka East

SOCO International has a solid production base in its Te Giac Trang (TGT) oil development offshore Vietnam, but its exploration assets are of a surprisingly young and risky vintage for a company with a £1.3bn market capitalisation. The most advanced prospect is the Lideka East target in SOCO’s 40-per-cent-owned Marine XI licence, offshore Congo Brazzaville. SOCO began drilling a second test well on the licence near the end of 2012, targeting a whopping 130m barrels of oil in two stacked formations in the shallow-water North Congo basin.

Granted, the Republic of Congo is already one of sub-Saharan Africa's main oil producers thanks to its vast offshore oil fields, so this isn’t exactly a play-opener. But SOCO has other licences in Africa’s emerging oil frontiers, namely in Congo Brazzaville’s boisterous neighbour to the east, the Democratic Republic of Congo. There, the company has two onshore licences, Nganzi and Block V, the latter of which is controversially located around Virunga National Park. In cooperation with the DRC government, SOCO is preparing to conduct an aerial survey of the licence, which would involve flying a helicopter over the park. The company insists an endangered mountain gorilla habitat is not in the flight path.

Meanwhile, SOCO is processing data from a 2D seismic survey at the Nganzi licence, and expects to make a decision with its partners about potential drilling locations shortly.

IC VIEW: Oriel Securities pegs the Lideka East well’s chance of success at 40 per cent, which is relatively high given how high-impact a discovery could be. The broker estimates a successful well result would add 96p per share unrisked to SOCO’s net asset value. We like the odds, but will pass on this one given the morally questionable location of the company’s exploration acreage (having just finished watching David Attenborough’s Africa wildlife series on BBC1).

Premier Oil (PMO) – Matang

Premier Oil may have a reputation for being an 'unlucky explorer', but the company has rewarded investors over the years by making shrewd investments in emerging oil destinations and reaping the benefits from project development amid rising oil prices.

Premier has been active in South East Asia for decades and despite widening its reach to Africa, the Middle East and the Falkland Islands lately, it’s no surprise some of the company’s most promising exploration activity is still found there.

Premier is embarking on a high-impact, four-well drill programme this spring offshore East Vietnam and Indonesia. The first well will test the high-risk but potentially play-opening Ca Voi prospect in Block 121, in the northern part of the frontier Phu Khanh basin, where Premier holds a 40 per cent participating interest. Premier and its partners are targeting the untested “Oligocene play fairway”, which is geologically similar to that of the Cau formation that Premier successfully explored in the Nam Con Son basin.

Before that, however, Premier is drilling the Matang exploration well onshore Indonesia on Block A Aceh, in which it holds a 41.67-per-cent non-operating interest. The well is currently drilling and is expected to reach the “reefal build-up target” during February. Block A Aceh is being developed by Premier and its partners as an onshore gas project, with first gas expected in 2015. Matang is one of about 20 exploration prospects on the licence.

IC VIEW: Premier plans to drill at least 14 wells in 2013 targeting more than 200 million barrels of net unrisked prospective resources. Admittedly, most of the targets this year aren’t especially large. Matang isn’t likely to impact the company’s share price much, but other, higher-impact exploration wells this year in Norway, Vietnam and Pakistan could cause a stir. We currently rate the shares a ‘hold’ but will reassess the company’s prospects upon release of their year-end results in March. The shares currently trade at between 7 and 10 times forecast earnings for 2013, depending on who is doing the forecasting. We include a table setting out Premier’s 2013 exploration timeline below.