FoxDavies Daily Monitor - Borders & Southern and Max Petroleum
Monday, January 28, 2013
Borders & Southern (SELL, 19p) (BOR LN, 27.5p, ▲ 14.6%): All Good In Theory - Today's operational update from Borders & Southern, detailing a Darwin development scenario that could be profitable all makes perfect sense, the problem is, the scale of the gas handling facilities would mean that the project was a substantial and more complex undertaking than has been suggested. Not that we doubt that the Company and its advisors have done their homework, just that these things are never the same in operation, and with this much gas handling, there is little margin of error. While this study has indicated there would be benefit to development, we continue to believe that opex costs will be higher than anticipated, and will only climb as the gas production (as a proportion of the liquids production) rises as the field is developed. While we don't doubt the feasibility of this project, this could be akin to the Snorre field in Norway, we are reminded of the oft quoted engineering KISS saying, or "keep it simple stupid." Taking this as a mantra, we believe that given the geographical location of the Falklands, the distance from its markets, that development will ultimately be more akin to Snohvit and Troll where a wellhead production platform merely polishes the produced liquids which are exported in multiphase flow lines for processing at onshore facilities. For this to happen, the Falkland Islands Government must allow an onshore development facility. This time last year, we would have suggested that this was unlikely to happen, but as time has gone on, the response has been more positive on allowing such a development. Once this happens, the outlook for the entire south Falklands basin changes, as does the valuation outlook for Borders and Southern and Falklands Oil & Gas (HOLD, 100p). We are maintaining our Target Price (19p) and Recommendation (SELL) for Borders and Southern solely on the back of the fact that they will need to raise capital to fund the next stage of the programme.
Max Petroleum (MXP LN, 3.9p, ▼ 7.23%): Outlook Diminishing - Drilling a dry hole is never a positive way to start the day, but for Max Petroleum it compounds the fact that dispute having a suite of development wells to drill, it is severely cash constrained. The outlook is further hampered by the fact that they could lose the licence for failure to meet the licence obligations, if the regulatory authorities are not in a generous mood. With all of these issues swirling around the Company at the moment, it is difficult to see how the Company progresses from here without a radical overhaul.
In this news:
- Completed drilling the TOLW-1 exploration well on the Tolegen West prospect on Block E
- Well reached a total depth of 1,540 metres without encountering producible hydrocarbons
- The Zhanros rig will next move to the Zhana Makat field to drill the ZMA-A20 well, the first of five development wells to be drilled in Zhana Makat during 2013
- The Company is currently seeking regulatory approval for a two-year appraisal extension over the entire Blocks A&E Licence (the "Licence") until March 2015
- Allows the Company to drill its two remaining post-salt prospects subsequent to March 2013
- The Company will provide a more comprehensive update on the status of its Licence in the near future.
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