Yesterday’s acquisition of a controlling stake in Libyan oil services group Sahara Oil Services by Heritage Oil (LON:HOIL, TSX:HOIL) could be a move “to access some big field opportunities” as the country emerges from civil conflict, according to J P Morgan.
“We note that over the last five months, Heritage Oil has established a base in Benghazi and has been in discussions with senior members of the NTC [National Transitional Council] and the National Oil Company of Libya,” said the investment bank in a research note today.
Heritage also plans to use Sahara Oil Services to assist it to drill targets offshore Malta and it is actively looking for a rig to drill Area 7 – where data indicates the presence of many prospects and leads.
The first well will target a prospect potentially containing 0.5 billion barrels of oil equivalent, where the estimated risk is one in five.
J P Morgan described the acquisition of Sahara as “another off-piste move”, but that “this is a company that makes unexpected strategic moves as per its recent acquisition of a 12.46 per cent stake in PetroFrontier Corporation”. (The latter firm could hold a "potentially interesting" tight gas opportunity onshore Australia, said the bank.)
Indeed, J P Morgan said that Heritage Oil “cannot afford to move with the herd” and that its “core shareholders ought not to be too surprised by this kind of move”.
The bank added that, with net cash of US$468 million at the end of its first half, a modest investment by Heritage “could unlock material upstream growth options in Libya”.
Importantly, noted the bank, Heritage Oil “is not targeting to dilute the rights of any incumbent western companies” and that there are a number of undeveloped and undermanaged oil fields in Libya owned by the Libyan National Oil Company.
J P Morgan also noted that Libya is similar to Kurdistan, where Heritage was among the first independent oil companies on the ground after the invasion of Iraq. Like Kurdistan, western companies have underinvested in the country (due to a history of economic sanctions, administrative bureaucracy and state oil company funding issues).
The bank said that it expects details to be announced by Heritage on any specific field opportunities once formal agreements are in place.
Another point made by J P Morgan was that the acquisition of Sahara could also help to unlock the border dispute that has prevented drilling action on Heritage’s Maltese acreage. 5,000 kilometres of 2D seismic data has been shot and interpretation of this is continuing. The well on Area 7 (where Heritage has 100 per cent ownership) may be drilled by mid-2013, noted the bank.
This morning, Heritage announced mixed results from its latest well on the Miran West structure in Kurdistan. A restricted flow rate was seen at Miran West-3 – which achieved a maximum of 1,950 barrels per day from the Upper Cretaceous zone.
However, Heritage also uncovered the oil-water contact point, which means the firm has been able to estimate the gross oil in place at between 53 and 75 million barrels on a 50-to-90 per cent probability of crude being produced.
At lunchtime today, Heritage’s share price was up 5.65 per cent at 230 pence.