The City’s analysts reckon Gulf Keystone (LON:GKP) has answered its critics with the latest assessment of the Shaikan oil discovery in the autonomous Kurdistan region of northern Iraq.
The AIM-listed oil company initially struck oil in the Shaikan-1 well back in August 2009. The discovery made Gulf Keystone one of the most talked about and actively traded stocks on AIM.
Shaikan-1 found oil in five reservoir levels, from 1,450 metres through to 2,850 metres. Gulf Keystone had Dynamic Global Advisers (DGA) assess the Shaikan-1 results and it subsequently came up with gross oil-in-place estimates that ranged from 1.9 to 7.4 billion barrels (P90 - P10).
Fox-Davies analyst Lionel Therond said: “There had been questions about the validity of the previous resources assessment by DGA, Ryder Scott being a recognised name we would hope this will settle the argument.”
This morning Gulf Keystone unveiled the findings of the separate third party assessment of Shaikan.
The study was carried out by a more widely known and respected industry group, Ryder Scott. It is broadly comparable to Gulf Keystone’s own estimate and as such it reinforces the potential size of world class Shaikan oil discovery.
Ryder Scott put Shaikan’s total petroleum-initially-in-place (PIIP) resources at 1.52 (P90) to 7.52 (P10) billion barrels of oil, with a mean of 4.04 billion barrels.
David Farrell, oil and gas analyst at Evolution Securities, also reckons the new assessment gives the project more credibility.
“One of the negative arguments levelled at GKP has been that the Shaikan Competent Person Report (CPR) was undertaken by a relatively unknown outfit, Dynamic Global Advisers,” Farrell said in a note to clients.
“The release therefore from Ryder Scott, a far better known CPR auditor, of similar petroleum-in-place numbers as the DGA report should therefore be seen as a positive.”
However although Farrell sees the news as a positive development he reckons GKP’s current valuation has got ahead of events. As such he has a fairly cautious view on the stock.
Farrell adds: “We do not see Gulf Keystone as particularly cheap at present and we await to see whether the rumoured resumption of exports in February brings with it a payment resolution for the operators.”
He gives the stock a ‘neutral’ rating with a 153 pence target – about 10 pence below the current price of 163.75 pence.
Meanwhile Vugar Aliyev, of Matrix Capital, also had mixed feelings.
“The new Ryder Scott report confirming previous estimates of OIIP is positive, and demonstrates that Shaikan could potentially be a very large discovery,” Aliyev said in a note to clients.
“However, with limited well and production data there are still substantial uncertainties on volumetrics and flow rates. Furthermore, it is slightly surprising that the RS report did not provide at least preliminary estimate of potential recoverable volumes.”
Aliyev adds: “Overall, we think this morning’s announcement is positive for GKP and we would expect shares to be stronger today. However, longer term we remain cautious on GKP.”
The analyst maintained his ‘reduce’ rating for GKP, which assigns the stock a 160 pence target.
Elsewhere other analysts took a more forward looking approach, emphasising the potential of Gulf Keystone’s extensive ongoing work programme in Kurdistan.
Gulf Keystone, as part of a separate statement, also updated investors its current operations in Kurdistan where it is currently drilling two wells and two more wells are expected to spud in March. It has also agreed a quarterly sales contract - to sell 2,500 tons of oil, about 16,750 barrels, per week from its extended well tests - and it continues to analyse seismic data across the Shaikan area.
“In our view this is a good update. Volumes are confirmed and most of the drilling is progressing as planned.”
“We would expect that once the 3D seismic is interpreted and additional data, such as the oil / water contact point from appraisal wells is gathered, that there will likely be a new volume assessment.”
Similarly Werner Riding, analyst at Ambrian Capital, reckons there is much more to come for the junior oil company.
“Gulf Keystone is now moving at pace to appraise the extent of the hydrocarbon accumulations that have been identified in its licence blocks in Kurdistan to date,” Riding said.
The analyst adds: “the current drilling programme ought to ensure that 2011 will be a pivotal year as Gulf Keystone looks to prove up what appears to be a monster resource base.”
GKP is already drilling what may be the most important well on Shaikan to date.
The Shaikan-2 deep appraisal well is currently being drilled at a depth of 1,210 metres.
The well is being drilled to a total target depth of 5,000 metres but it will test a number of targets along the way. It is the first deep appraisal well on the new oilfield.
Shaikan-1 tested five levels from 1,450 metres through to 2,850 metres but drilling had to stop at the lowest levels because of a very high pressure zone that was above the tolerance of the well design. The Shaikan-2 deep appraisal well has been designed to overcome this challenge.
If the well is successful, Shaikan-2 is expected to increase the field’s oil-in-place substantially.