It was early morning 18th June 2007 about 60 kilometres off the coast of Ghana – The waters were eerily calm and the only sound to pierce the crisp morning air was the sound of the rotary table turning on the Belford Dolphin drillship.
The roughnecks looked at each other in nervous anticipation. The drill bit had just entered the target depth sandstone reservoir, running in hole with elevated gas readings.
All of a sudden the drill pipe began to tremor and the drill manager shouted “more mud!” – The 2 billion barrel Cretaceous aged Jubilee Oil field had been penetrated, which sent shockwaves around the exploration community and opened up a deep-water Upper-Cretaceous Santonian play type which would have implications for exploration companies all along the West African Atlantic Margin plays, including Offshore Morocco, where Shell had just relinquished the year before.
For the exploration team at Kosmos Energy (NYSE:KOS), the discovery was a culmination of four years exploration beginning with the acquisition of the Deep Water Cap Three points block in 2004. The “Pathfinding” Kosmos geologists convinced Tullow Oil (TLW.L) and Anadarko (NYSE:APC) to farm into the acreage in 2006 after spending some big bucks on a 1,000km 3D seismic survey , a justification for their contrarian view of world exploration which led them to pinpoint hugely overlooked areas of exploration. A quick look at the exploration “hit-list” on the Kosmos website leads us to Morocco and their exploration target they call the first of their “Second Inning” – a play-type with an uncanny resemblance to the Jubilee Oil discovery.
A little about Kosmos
At a stock price of $10.80, Kosmos has a market capitalisation of about $4 billion. Kosmos raised $594 million in their 2011 IPO at $18 per share. Their 2013 revenues hit $851 million (110 thousand barrels per day gross), an increase of 27% on the back of better production from Jubilee. The strong financial performance now evident from their 24% working interest in Jubilee Phase 1 and Phase 1A producing oil fields affords that they can self- fund their exploration programmes. Additional success offshore Ghana has followed the initial discovery at Jubilee. The Plan of Development for a second FPSO oil project at the Tweneboa, Enyenra, and Ntomme fields has been approved by the Government of Ghana and will target up to 80,000 barrels of oil per day, with first production anticipated in 2016. Additional appraisal of several other discoveries offshore Ghana is underway focused on near-term production and reserve growth for the company. Their new CEO, Andrew Inglis, previously from Petrofac and BP, will lead the front line beginning with their “Second Inning” in FA-1 well (Eagle-1) and continuing on in an aggressive but potentially big impact multi-well programme in Morocco (also in Essaouira to the North, Tarhazoute to the West and Cap Boujdour to the South of Foum Assaka), Mauritania, Suriname and Ireland.
The FA-1 (Eagle) well – The start of the “Second Inning”
They say “birds of a feather flock together” and there is a curious coincidence happening in Offshore Morocco Block Foum Assaka where, Komos who pride themselves on their “Pathfinding” route to oil discoveries originally farmed into the block owned by Pathfinder Hydrocarbon Ventures Limited, a subsidiary of Fastnet Oil and Gas (FAST.L) and headed up by oil finder Paul Griffiths. Like Kosmos, Griffiths similarly harbours a contrarian view of world exploration which has served him well with some oil discoveries in the Celtic Sea and his unwavering belief in Morocco resulted in first-mover acreage acquisitions beginning in 2007/2008 around the time Kosmos were developing their Ghanaian Jubilee discovery. Shell relinquished the licence in 2006 and unfortunately for them, the Jubilee discovery happened afterwards, which opened the Cretaceous as a play-type in Offshore Morocco and Griffiths was quick to capitalise by snapping up the block. The “like-minded” Kosmos farmed into the Foum Assaka licence a mere six days before their New York $6 billion listing on 11 May 2011.
The question has to be asked what Kosmos saw in the Foum Assaka geology that excited them so much to complicate their huge IPO by farming into the acreage just 6 days in advance? The answer unfolds itself in the following sequence of events that indicates immediacy and urgency from Kosmos from that May 2011 farm in, to last week’s shock announcement that the rig, not previously expected to be on-site until July 2014, is now on its way from its current location at the Nile Delta to start drilling the giant “Eagle” prospect in the North Eastern section of the Foum Assaka licence within the next 2 weeks. As soon as Kosmos were in, they immediately wanted to do a huge 3D seismic survey over the acreage. After securing the results of the 3D seismic and the interpretation showed the “Eagle Prospect”, Kosmos today announced the rig was on the way, which analysts did not expect until around July this year. Indeed in African exploration, a few quarters can often be added onto timelines to get a better idea of when things will actually happen but being like-minded “birds of a feather” about the geology, Kosmos and Fastnet have accelerated the chronological sequence to match the geological anticipation for “Eagle”.
Risks to the investment thesis
The main risk to investing in an oil and gas exploration company like Kosmos is the risk of the exploration disappointment but we see the portfolio of high impact plays in the next 2-3 years coupled with a strong Net Asset backing from solid production in Jubilee and future phases of Jubliee and TEN fields in Ghana, mitigating the risk on the upcoming wildcat programme beginning with Eagle 1. Exploration is risky and not for the faint hearted, but the rewards are big especially with Kosmos’ stock price currently down close to its all time low with little justification and with a rejuvenated board with Inglis at the helm, the prospects for a big rally following a big oil hit are good as statistically, Kosmos have enough big impact drills coming in the next 18 months.
Conclusion – Belief in Bundles
In previous articles on exploration companies, we talked about the value of third party validation on a play, where the more big partners on a wildcat drill, the better, and Foum Assaka’s Eagle prospect has belief in bundles. BP (BP have also farmed into Tarhazoute and Essouira) and SK innovation of Korea have since joined the play and while the stakes are raised and the anticipation intensifies, the FA-1 (Eagle) well will get drilled at no cost to Kosmos as BP pays for the drilling within the expected cost of the well. Chevron have also recently farmed into the Offshore Morocco idea, farming into three Offshore licences just South of the Kosmos Foum Assaka Block, thus providing as much validation as can be provided for wildcat exploration in an area. If the company farm out validations are not enough, just look at the quality people working for Kosmos their successful pasts and their adding value to acreage through acquisition , work up, farm out and development. To “up the stakes” further, earlier this month Tullow Oil released news of its Offshore Mauritania Fregate-1 30 metres net pay oil discovery, just South of Morocco which increased the hope further for late Cretaceous turbidites in the region. To further increase anticipation for Foum Assaka, yesterday Genel Energy plc (GENL) announced in their 2013 preliminary results that the JM-1 well on the Cap Juby prospect offshore Morocco confirms the presence of oil in the Upper Jurassic, as originally tested by the 1968 MO-2 well, some 2km from the JM-1 location. (The well continues to drill ahead to the primary Middle Jurassic target). The statistics seem right, with more than five high impact new basin drills upcoming in the next 12-18 months, that Kosmos will get it right in at least one of these, and with their record on Jubilee and TEN to date in Ghana, the Pathfinding approach to oil discovery, might yet yield something fascinating at Foum Assaka!