Raymond James on BZP...great read!
Raymond James still extremely bullish in June 19 report
BZP: Only Scratching the Surface; Reiterating $40 Target
- After a number of meetings with management on and off the road, we are reaffirming our Strong Buy rating on BZP and highlighting key things to focus on over the next several months and longer term. In particular, we again note that the company has significant nearterm upside with its drilling program at Corvina and will be generating a significant amount of cash flow during 2H08.
- At Corvina, the 20XD is drilling on schedule and is expected to add 23 MMbbl of oil in place (OIP) at the field. Using a recovery factor of approximately 25%, which could increase significantly as the natural water drive kicks in, we estimate that the well will add approximately 5-6 MMbbl to proved reserves. The well should hit total depth in July and we anticipate completion results sometime in August. After the platform rig hits total depth in July, it will move to the next location at Corvina, the 15D, which will convert additional reserves from probable to proved. This location should be completed sometime by October.
- We believe that the growing excitement for the stock—especially heading into 2009—will be with the Albacora project, which has the potential (and geological indication) to be larger than the entire Corvina complex, which includes Corvina, Mero, and Delfin. Recently, the company completed well control at each of the three shut-in oil wells (drilled by previous operators) at the existing Albacora platform. Platform refurbishment continues and drilling of the 8-X-2 twin will begin once this is finished, likely in December for results sometime in March/April 2009. For context, the 8-X-2 tested at 5,000 bbl/d and 21 MMcf/d when it was completed by Tenneco (TEN/$18.62) in the 1970s.
- Our $40 target price is based on a 10x forward EBITDA multiple for 2009 EBITDA of $325 million, which is notably higher than the traditional E&P valuation range of 5-7x, but is justified given BPZ’s extremely bullish reserve, production, and cash flow growth profile. We believe the risk-reward profile for the story is compelling, given management experience and drilling in areas that are proven hydrocarbon-bearing regions.
Corvina: Recap on timeline and current operations. After (1) getting approval to transport volumes to the Talara refinery onshore Peru and (2) positioning the floating-production-storage-and-offloading (FPSO) vessel next to the field, the company should ramp up to 6,000 bbl/d by the end of June and expects to reach 8,000 bbl/d by 4Q08. The FPSO is able to process about 10,000 bbl/d of liquids, including a 20% water cut, which means that the company will be producing at a capped rate of 8,000 bbl/d.
BPZ’s transport barge can hold about 35,000 bbls of liquids, including water. On average, it takes the transport barge 3-4 days roundtrip to the refinery and back, assuming a 1-2 day wait time at the refinery while the delivery is unloaded. Currently, each delivery brings in $3+ million obviously, this varies according to oil prices). Corvina oil is 23° API and currently gets a ~$10/bbl discount at the refinery. Including this discount and costs of about $10/bbl (royalties and operating expenses), the company is getting a unit netback of NYMEX minus $20/bbl—a very attractive return.
Currently, the company is developing engineering designs for the second platform at Corvina (CX-14), which is expected to have 16 slots that will allow for the company to complete development of Corvina. In total, draining Corvina will take about 24 wells, which will be comprised of the 12 wells on the CX-11 platform (15D will be the sixth) and 12 wells at the CX-14 platform. The CX-14 platform will be built upstructure from the CX-11 and construction will likely be finished by 2010 (for around $25-26 million), at which point the company will begin drilling from the platform. In all, Corvina is comprised of over 40,000 acres; wells drilled on the CX-11 and CX-14 platforms will delineate only 3,500 acres of this area. Each well in the area is estimated to cost $12-15 million. Assuming the high end of this range and an average 6 MMbbl recovery for each well drilled so far, this implies a $2.50/bbl finding and development cost easily one of the best economics we have seen. BPZ estimates that it will deploy approximately $400 million through 2011 to fully develop Corvina.
Updip from Corvina: the Mero and Delfin prospects. The Mero prospect is part of the entire Corvina complex and lies structurally updip, as shown in Graphic A. While Mero is likely not a near-term project (as BPZ wants to move over to Albacora, its higher potential project first), the reprocessed seismic gathered from the prospect indicates a cap that could contain 65 MMbbl of OIP.
The Delfin prospect could have very significant amounts of oil in the ground (2x that at Corvina). As shown in Graphic B, the 39-X-1 well that was drilled by Tenneco in the past (tested at a limited rate of ~350 bbl/d) identified 106 MMbbl of OIP in zones 22 and 26 only and 185 Bcf of gas in place in zones 1-6. Belco’s well, the B-17-X, was not tested but identified 199 MMbbl of OIP from zones 22-26. This means that from zones 22-26 alone there could be more than 300 MMbbls of oil in place. BPZ believes that more oil lies from zones 16 to 30, where the water contact comes in at 7,749 feet (anything above water contact should have hydrocarbons). Delfin oil is rich at 36° API (no discount at refinery). Building a platform will cost about $15-20 million and should be similar in design with the Corvina platforms. BPZ’s first Delfin well, outlined as Delfin 1X on the graphics, will spud in 2010 on the structural high.
Albacora: the Mega prospect. Albacora is the up and coming project for BPZ, with potential to more than double reserves at the entire Corvina complex. As detailed in prior comments, optimal results come from drilling in the turbidite lobes, where we saw excellent tests in the past by Tenneco (the 8-X-2 tested at 5,000 bbl/d and 21 MMcf/d) and Belco. BPZ will recomplete three of Belco’s wells, and initial volumes from these wells will be about 4,000 bbl/d from temporary facilities in 3Q09. Refurbishment of the existing platform continues and total costs, including equipment and other items, will be about $9 million.
Management breaks Albacora in two sections, Albacora North and Albacora South, the latter of which lies updip and is the “crest” of the field. The entire mapped area (shown in Graphic C) comprises about 6,000 acres. North Albacora (shown in Graphic D) has been testing oil in zones 4 and 6-10 (delineating 31 MMbbl of proved OIP), but has strong indications of oil in place in zones encountered by four wells drilled in the past. The 8-X-2 well, in particular, even with its impressive flow rates was tested in the Upper Zorritos only (not past zone 7), although the well showed high resistivities (indicates higher probability of hydrocarbons) through zone 15. Based on the tested and encountered zones from these four wells, BPZ estimates that total oil in place from North Albacora is 349 MMbbl. In summary, with Albacora South, BPZ estimates that the field could have some 700 MMbbls of OIP. Assuming a conservative 25% recovery factor (the company believes this will be higher), this implies net reserve potential of 175 MMbbl to BPZ at Albacora. This does not include estimates for gas potential.
The first step in Albacora will be to drill a twin to the 8-X-2 and test through zone 15. By this time next year, BPZ should have about one or maybe two wells down in the field. By mid-2010, the company expects to have about seven wells producing at Albacora. Wells at Albacora are drilled in shallow water; the first well should cost about $20 million and subsequent wells should be in the $12-15 million range. BPZ expects to drill about 40-80 wells to fully develop the field.
Another catalyst in Early 2009: Pampa la Gallina prospect. As seen in Graphic E, a number of wells drilled on Block XXIII in the past showed indications of gas potential in the Mancora formation at Piedra Redonda and oil has been produced from the Heath formation, which overlies the Mancora. The resistivities given by each well show a very high probability of an expansive, gas-rich basin. Recently, BPZ contracted out a second rig which will start drilling a step-out to the 5215 well onshore in Block XIX towards the end of the year. The 5215 well had strong gas shows and flowed at 8 MMcf/d when completed by PetroPeru in 1973, but the well was poorly tested and abandoned. Results on this step-out should emerge around April 2009. Wells onshore cost about $8 million and will be drilled down to depths of approximately 12,000-14,000 feet. The second rig just contracted at around $33,500/day (the first rig is running at ~$31,000/day) has the ability to drill down to 14,000 feet. The intermediate plan for Piedra Redonda is to drill twins or step-outs to previously drilled wells.
Update on balance sheet, capital outlook, and long-term plans. Currently, BPZ has about $20 million of cash on hand and no debt, with no equity needs foreseen. The company is negotiating a term sheet with the International Finance Corporation (IFC)—a 10% holder of BZP—for a credit facility of $200 million to develop Corvina and Albacora, as well as an additional $120 million debt facility for the power project. The negotiations should be finalized and funding should be secured by September.
Of the $105 million budgeted for the drilling program this year, the company had spent $30 million through May. Looking ahead, the preliminary budget for 2009 is ~$225 million, which includes $150 million for drilling and about $75 million for construction of the power plant. This compares to our operating cash flow estimate of approximately $270 million. We estimate that the company will exit 2009 at 11,000 boe/d of production from Corvina and Albacora. Production in 2010 should approach 20,000 boe/d from the two Corvina platforms and from Albacora (not including potential adds from Delfin or Block XIX).
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