Canadian Overseas Petroleum’s ‘blue sky’ is worth US$2.6bn, says GMP

Broker GMP Securities has resumed its coverage of Canadian Overseas Petroleum (CEV:XOP) after the recent fundraising with a ‘speculative buy’ call and 47cents a share price target.

Although the valuation has been tweaked down to account for the issue of new stock and the fact its holding of the Liberia licence has fallen to 17% for 20%, it is still double the current share price.

However investors will be drawn to comments on page two of this short note that ascribes a ‘blue-sky valuation’ of US$2.6bn to the explorer’s share of this highly exciting Liberian asset.

The figure is based on a best estimate 2.6bn gross recoverable resource from Block LB 13, where the company’s senior partner is Exxon Mobil (NYSE:XOM).

The American giant has spent US$127mln so far on the licence and is committed to spending another US$120mln on drilling costs.

“We think that Exxon’s tenacity in pursuing PSC ratification, from the original farm-in announcement in November 2011 to finalisation in April 2013, is a testament to how prospective it thinks the block is,” said GMP.

It points out that Canadian Overseas is one of only two juniors in an area dominated by the big boys – alongside Exxon are Chevron, ENI, Tullow, Repsol and Anadarko.

In fact Chevron has recently contracted Seadrill’s West Tellus vessel to sink two wells in its Liberian blocks (LB-11, LB-12 and LB-14) from this October to next April. Exxon is expected to start drilling in the first half of 2014, with Canadian Overseas carried on the well.

The Toronto-listed oil and gas explorer, which is targeting a listing on London’s AIM in the fourth quarter of this year, has two assets: a reassuringly solid shale oil play in New Zealand, and the almost implausibly (for a junior explorer) prospective deep-water project off the coast of Liberia.

As president and chief executive Arthur Milholland put it: the New Zealand property provides a floor to the company’s valuation – currently just above $75mln – while the Liberian licence provides the upside, and lots of it.

The Waipawa and Whangai shales in the East Coast Basin onshore New Zealand are regarded as the less exciting options in COPL’s portfolio.

They have a lot of similarities to the established Bakken play that has transformed North Dakota as an oil region, and being on a slight tilt they are probably easier to get at.

CEO Milholland told Proactive recently: “New Zealand diversifies our risk profile, because we know there’s oil here. The question is how do we get it out of the ground?”