I had a very pleasant discussion with Bruce Vincent today, and below is a summary. He’s really very easy to talk to, so anybody wishing to get some questions answered should give him a call. This was probably my third conversation with him.
To no one’s surprise, the Board has authorized increased drilling activity to be funded with increased cash flow. The company currently has about 8 or 9 rigs working worldwide. One problem the company has had is with government red tape (domestic problems, NZ was not the issue here), in which some of the permits took longer to get than they should have. In one case SFY tried to relocate a rig but the rig crew didn’t want to relocate. Only in boom times would something like this happen. Acquisition targets have virtually disappeared, so don’t be surprised to see acquisition money applied to drilling.
None of the Woodbine prospects are currently drilling, but 1 or 2 of them will start in Q4. Possibly one will be finished by end of year. In case you aren’t aware, the Woodbine prospects are among the largest domestic possibilities.
Regarding NZ exploration and mining permits... when a company applies for a mining permit they should know what areas of their exploration permit have production prospects, so what you have is really a conversion of an exploration permit into a mining permit. Bruce told me something very interesting here. About 10 years ago another company drilled in the Rimu area, and they presumably came within 75-100 feet of one of the Tariki zones, then gave up on their “dry hole” and returned the “useless” Rimu acreage to the NZ government.
Kauri will be drilled late in Q1 next year. Bruce figures the company will be drilling in Kauri long after he’s dead, so take that for what it’s worth.
I asked Bruce what he’d do if he had to drill the first two wells all over again. Would he drill deeper, change locations, whatever. He answered that they were very happy with all of the information they’d gleaned so far and wouldn’t change anything.
Rimu A-1 had some limestone zones with minimal hydrocarbon shows. I understand these zones to be the cretaceous zones encountered in Rimu B-1, in which the porosity was hgiher and the hydrocarbon shows were better (still non-commercial, I think). The key point here is that we have two points that determine a line, with the hope that the cretaceous zones encountered when they drill in Kauri will have excellent porosity and commercial levels of hydrocarbons.
The company anticipates booking some reserves by year end after B-2 is finished. Any bookings at this point will probably be Swiftly conservative. The fact that the upper Tariki zone was faulted out of B-1 is viewed by the company as something of a positive, in that this increases the likelihood of the presence of multiple fault blocks to the south. Truth, can you comment on this? What is the advantage of multiple fault blocks? The official position on NZ reserves at this time is still 20-100mmbl equivalent of recoverable reserves based on A1 alone.
I asked about hedging, and Bruce repeated that the company protects the downside by buying puts, but doesn’t otherwise do much in the way of hedging.
The extent of the Kauri field is still unknown. The discussion on Yahoo about a 30 km2 field size is nowhere near definitive. SFY is still interpreting the data, but it looks like Kauri may extend onshore more than previously believed.
Shell and Fletcher have expressed interest in partnering to help develop Kauri, but if SFY partners with anybody then the partner must bring something to the party besides just money. Some sort of expertise or marketing advantage will be the key to getting a piece of the action. Or somebody who will build an LNG terminal to ship the gas to Japan (enabling SFY to sell gas for more than the prevailing prices in NZ), or a potential power generating customer who would be willing to use the gas. But SFY isn’t going to get a partner until they know what the value is of their currency. Since there’s a whole lot more exploration to be done, I doubt if we’ll hear about a partner anytime soon.
The domestic natural gas market deserves most of the attention, in spite of the amount of press and poster interest in NZ. Floyd keeps us informed of NG prices, and that’s really where this company is going to get most of its near and mid term leverage. After my discussion with Bruce I believe that the company has a long, but not explosive, upside ahead. We’ll probably see $50 soon, then we’ll backfill to the low 40’s where more smart buyers will get in, and the next few years will be very good. I don’t think we’ll see a double in a short period of time, but we could have a steady 30% producer on our hands for the next several years. And I believe that SFY will continue to outperform its peers, rising more in bull markets, and falling less in bear markets. But there will be times when the stock gets ahead of the company fundamentals, and when other investment opportunities come along that offer greater short term risk/reward. Those who want to know everything there is to know about Kauri in the next six months will be disappointed.
As I summarized our conversation, I thought of a great many questions, some of which have been asked on Yahoo. On another call I’d question him about the S&P revision of their credit rating, in which the company’s developed reserve life was placed at only 5 1/2 years. If I knew more about petroleum engineering I could have asked a ton of questions about what they found at the bottom of B-1.
Hope this helps.
pg
p.s. Bruce made some comments about Clinton's SPR action, but I won't print what he said. |
