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Bulls set to go for Europa

Europa's Irish oil prospects bear a tantilising similarity to hot properties the other side of the Atlantic
September 7, 2017

In tipping shares in Europa Oil & Gas (EOG) – an Aim minnow with limited financial muscle, but enormous speculative oil prospects in the Irish Atlantic margin – we do so with a huge health warning. These shares have the potential to move sharply in one of two directions, possibly in the next few weeks. At the same time, we view the company as an exciting risk-reward play on drilling being done on other companies’ dimes. 

IC TIP: Buy at 5.75p
Tip style
Speculative
Risk rating
High
Timescale
Short Term
Bull points

Huge and enticing prospective resource

Shares below placing price

Cheap UK onshore output

 

Bear points

Hugely speculative

Little cash flow

That statement takes some unpacking, and even more context. Europa may be small, but it has a large acreage position in the South Porcupine basin, offshore of south-west Ireland. In fact, geological work to date has led management to suggest that its four licences in the region might hold 4.2bn barrels of oil equivalent. That estimate is the “gross mean un-risked prospective resource” – ie, potentially or technically recoverable, assuming no drilling risk and Europa’s total ownership.

Why should we give credence to these fanciful figures? The answer can be traced to Bay du Nord, a major discovery made by Norway's national oil company, Statoil (OSE:STL), in offshore Newfoundland in 2013. This exploration pioneered the so-called pre-rift play, which has geological analogies with the Irish Atlantic Margin, and explains why a 2015 licensing round resulted in a flood of applications from the industry’s largest players, including Exxon Mobil (US:XOM). Parallels with Statoil’s discovery are currently being tested by London and Dublin-listed Providence Resources (PVR), which is drilling in an area surrounded by three licences in which Europa has an interest.

The first prospect – Druid – was a disappointment. Providence provided no reference to hydrocarbons when it updated the market on the exploration well last month, which analysts at broker Panmure Gordon said pointed to “a failure”. The drill ship has since moved onto the Drombeg prospect, where it is aiming to determine whether an in-place unrisked prospective resource of 1.9bn barrels is commercially viable. Results are expected imminently. Success could significantly 'de-risk' (read 're-value') Europa’s portfolio. That would attract larger explorers looking to acquire or to farm-in to the Aim company's three 100 per cent-owned licences either side of Drombeg.

Failure wouldn’t be terminal for Europa, which has other catalysts ahead. A fourth field has already attracted one larger player – Cairn Energy (CNE) – which acquired a 70 per cent interest in the licence from Europa in April in exchange for a $6m 3D seismic programme. And even if Cairn ultimately waives its option to drill, Europa has a backstop: sufficiently cheap existing UK onshore production to cover operational cash flows.

EUROPA OIL & GAS (EOG)  
ORD PRICE:5.75pMARKET VALUE:£17.3m
TOUCH:5.25-5.75p12-MONTH HIGH:9.4pLOW: 4.2p
FORWARD DIVIDEND YIELD:nilFORWARD PE RATIO:na
NET ASSET VALUE:1.5p†NET CASH:£1.4m†
Year to 31 JulTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20143.88-0.68-0.21nil
20152.21-4.13-0.86nil
20161.27-1.90-0.67nil
2017*2.200.300.00nil
2018*2.300.000.00nil
% change+5---
NMS:30,000   
Market Makers6   
BETA:0.9   

*finnCap forecasts †As at 31 Jan, excludes proceeds of June's £3.4m placing and open offer.