David - TM / Gulfstream Resources
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Summary & Recommendation
Our target price of $25/share during the next year is based on a premium to our NAV 0f $20.09 per share. The justification for the premium is the enormous exploration potential on Block 11, offshore Qator, adjacent to the Al-Rayyan field. The possibility of another oil discovery of the magnitude of Al-Rayyan provides hugh asset value growth potential. At present, the market is also assigning only nominal value to Gulfstream's interest in the gigantic North Field (Qatar) gas reserves. A long term contract in which Qatar would supply up to 1 bcf/d of natural gas from the North Field to Dubai is in the advanced stages of negotiation. We believe that an announcement of North Field gas developement would add $4 to $6 to Gulfstream's share price.
The ability of Gulfstream.s management, led by Angus McKee and Roger Haines, to add value through new international ventures should also not be underestimated. Gulfstream is actively pursuing new international joint ventures, particularly in the Middle East.
Al-Rayyan
Gulfstream is an asset value growth story, which has been fueled during the last year by a large oil discovery called Al-Rayyan off the coast of Qatar. Gulfstream and ARCO (the operator) both hold 27.5% interests in an oil and gas concession which includes the Al-Rayyan oil field, a large part of the huge North gas field, and many oil prospects. British Gas (25%), Wintershall AG (15%), and Preussag Energie GmbH (5%) are the other consortium members.
The initial Al-Rayyan oil discovery was made in early 1996. Production commenced in November 1996, with four horizontal wells now producing approximately 25,000 bpd (25 API gravity). Lifting costs are approximately US$4.00 per barrel, including lease cost and amortized mobilization cost. The wells are tied into a jack-up production platform and a floating storage facility. A fifth well was successfully drilled last fall, 19 kilometers south of the original discovery, and appears to have resulted in an extension of the field to the south.
While resivoir performance of the Al-Rayyan field has exceeded expectations, production levels have been hampered by start-up problems during Gulfstream's second quarter (Jan-Mar 97). Almost 100 well production days were lost over the quarter, equivalent to one well being shut-in for the entire period. Electrical problems involing a connection between the top-side production facilities and the downhole submersible pumps have now been solved. One of the four production wells was, however, drilled to close to the boundary between the oil reservoir and the water below, and as a result is producing 75% water. Recompletion of the well could add another 7,000bpd to production.
As currently envisioned, gulfstream's summer drilling program at Al-Rayyan (commencing mid-July) will include, at least, four wells, two production wells and two appraisal wells. The two production wells are expected to add 15-17,000 bpd of oil production. We anticipate production from Al-Rayyan will exceed 40,000 bpd by early November, 100,000 bpd by mid-1998, 200,000 bpd during 1999 and peak at 285,000 bpd by early 2000. These assumptions are based on an aggressive full field developement plan of 50 wells, with five production platforms. Cash flow will be enhanced by a significant reduction in operating costs as mobilization costs are fully recovered later this year.
From the initial discovery, oil in place was estimated at 1.3 billion barrels, with recoverable reserves (based on 25% recovery factor) of 325 million barrels. From the drilling since the initial discovery and the data from the recent seismic program, we expect the ultimate estimate of oil in place to increase to 3 billion barrels, with recoverable reserves of 1.5 billion (based on a 50% recovery factor.
There is also significant reserve growth potential tied to the evaluation of the other oil prospects on the same concession. In the eastern sub-area of the concession (now called Block 11), over a dozen (potentially oil-bearing) structures have been identified, with four that are look-a-like prospects to the Al-Rayyan discovery. The results of a seismic program shot last March to more closely examine these structures are now being analyzed. The consortum is in the later stages of negotiating with the government of Qatar, which would allow Gulfstream and its partners to evaluate other prospects outside of Al-Rayyan. A favorable conclusion is expected, with the first exploration well in the eastern sub-area possible during the fourth quarter of the 1997 calendar year.
In the western sub area of the concession (currently under force majeure because of a border dispute with Bahrain), three large structures have been identified on trend with the massive Dukhan oil field, w2hich has produced over 3 billion barrels of crude oil. The border dispute is scheduled to be adjudicated by the International Court Of Justice at the Hague during the next year. The dispute is likely to be resolved (thanks to pressure from other Gulf nations) well in advance ofa juddicial hearing. The western sub-area of the consession may be the most prospective undeveloped acreage in the Middle East. A seismic program and the first well on this part of the copncession could occur in the 1998-99 time period, given an early
resolution to the border dispute.
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