5 Reasons to Put Savannah Petroleum #SAVP on your Watchlist

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5 Reasons to Put Savannah Petroleum #SAVP on your Watchlist

The content of this blog (or content associated with it) is not intended as investment advice. I hold shares in the company below. Please do you own research.

Share Price: 30.5p
Shares in Issue: 274.6m
Market Capitalisation: £83m

Savannah Petroleum (SAVP) AIM listed is a Niger focused oil and gas company, focused around two principal assets, the R1/R2 and R3/R4 production sharing contract areas of the Agadem Rift Basin in South East Niger.

5 Reasons to Put Savannah Petroleum #SAVP on your Watchlist

On 7th July 2016 Savannah Petroleum rasied $40m. This is enough to fund them for the 3 well exploration drill campaign, due to start in H1 this year.

This $40m raise was done via placing and subscription at 38p per share.

Andrew Knott, CEO of Savannah Petroleum, said:
“This is a strong endorsement of our strategy and ensures we are funded to move the assets to the next level of value creation. From here we can now look forward to the imminent recommencement of ground operations with the 3D seismic programme at R3, which will in turn help us maximize the chances of a successful drilling campaign in 2017. This is an extremely exciting time in the Savannah story and we look forward to providing further updates in the weeks ahead.”

The current share price is below this placing price.

I always feel a little more reassured picking up shares below a major placing price as placees and subscribers are often given a discounted opportunity to invest and having a better entry point than this, in my mind, reduces risk.

On the 14th December Savannah also announced a new €11.4 million revolving loan facility available for working capital, potential asset acquisitions and general corporate purposes. An interest rate of 7.5% is payable on a semi-annual basis on amounts borrowed under the Facility.

 

Savannah Petroleum’s two principal assets are the R1/R2 and R3/R4 in the production sharing contract (PSC) areas of the Agadem Rift Basin in South East Niger.

The blocks cover a c.13,655km2 area, representing approximately 50% of the “original” Agadem permit which was mandatorily relinquished by China National Petroleum Company (CNPC) in July 2013.

Their gross best estimate risked recoverable resources are estimated to be 2,185 mmbbls by CGG Robertson, upgraded from their previous estimate of 1,191 mmbbls, principally driven by the addition of volumes from R3/R4 and from the Upper Sokor formation.

So they have:

2C resources of 2.2 billion barrles of oil.

Also worth noting is their cost structure. At a breakeven oil price of US$26/bbl, they sit at the bottom 25% of the global cost curve and they’re operating in an area that has seen a lot of 2D / 3D surveying and exploration work.

What’s Known About This Area?

China National Petroleum Company’s (CNPC) success rate on the original Agadem permit from 2008 – 2014 was as follows:

Out of 124 exploration wells drilled, they made 93 discoveries unlocking a 2P reserve base of 975 mmbbls. This is a 75% success rate.

Savannah have identified 118 exploration targets. Having now acquired 3D seismic data for R1 and R3 areas, they will be commencing a 3 well drill campaign in H1 2017.

Andrew Knott said in this interview:

“To put it into perspective the when you look at the audited structure they typically have between 30 – 90 million barrels (each), in terms of size. If you assume we start a multi well campaign early next year its not unreasonable to expect us to be targetting 200m – 300m million barrels of unrisked resource .

The value in the ground, if we assume $4-$6 a barrel would imply we’ll be testing at least $1 billion of upside potential of the course the coming year, which is for a business for Savannah is very transformative but more importantly, it’s only a fraction of the structures we’ve mapped and identified as potentially interesting for drilling”.

 

Some Really Simple, Back of the Envelope, Maths

Let’s just focus on their 3 well drill campaign, in H1 of this year:

It’s targetting the c.93 mmbbls Damissa structure (located on the R1 permit area), the c.37 mmbbls Bushiya structure and c.35 mmbbls Kunama structure (both located on the R3 permit area).

Remember CNPC’s exploration success rate, in this area, was 75%.

Even if I decide to be super conservative and assume they only achieve success in one of these 3 drills (33% CoS) and it’s the lowest in terms of oil i.e. the c.35 mmbbls Kunama structure, this is how it looks:

$10 profit per barrel, is worth $350m of profit to them (their break even price is $26/bbl) over the life of this asset.

I have no idea at the flow rate of this asset but 35m barrels of oil would last for 10 years at a flow rate of approximately 10,000 bopd.

If they were producing 10,000 bopd and making $10 of profit on each barrel, then it would generate £36.5m of profit every year. If we apply a P/E of 10, this would make Savannah’s market cap £365m. It’s currently £83m.

This a conservative estimate on just ONE of their assets and as Andrew Knott pointed out, “This only a fraction of the structures we’ve mapped and identified as potentially interesting for drilling”.

As reminder, CGG Robertson estimate Savannah Petroleum’s gross best estimate risked recoverable resources to be around 2,185 mmbbls. So the above profit is only attributable to less than a 60th of their overall resources.

 

There’s some decent, big, institutional investors on the share register including:

Standard Life have 4.5 million customers and clients worldwide, with a further 25 million customers through joint ventures in China and India. Their cuurent market cap is £7.2bn.

 


As of March 2015 Fidelity had $285 billion of assets under management.

 


An American financial services company, ranks among the world’s oldest and largest investment management organizations, with $1.39 trillion in assets under management.

 


L&G have a market cap £14.5bn and as of 2015 had £746.1 billion of assets under management.

 


Their market cap is $2.5bn.

The share are quite tightly held, as you can see from above, 64.31% are either in the hands of major institutions or directors.

CEO, Andrew Knott holds a decent chunk at 8.81% which is always a good sign. I always ask the question, “if the CEO has not invested his money, why should I invest mine?”

 


Steve Jenkins, Chairman

A geologist by profession, Steve is widely recognised as one of the most capable oil and gas executives in the UK.

Previously Founder and CEO of Nautical Petroleum which was sold for £414m to Cairn Energy in Q3 2012.

Steve is currently the Chairman of the Oil and Gas Independents Association, Circle Oil, Terrain Energy and Franklin Petroleum.

 

Andrew Knott, CEO and Founder of Savannah Petroleum

Previously Head of Global Energy Investments for Man Group/GLG Partners, prior to GLG Andrew held various roles at Merrill Lynch and DrKW.

 

Antoine Richard, VP of Operations

On 6th Januray, Savannah appointed Antoine Richard as VP Operations. Mr Richard has over 20 years’ experience working for both major (Total) and independent (Perenco) oil & gas companies worldwide, including 10 years’ experience in West Africa.

Perenco has exploration and production activities in 16 countries around the globe (the North Sea, Cameroon, Gabon, Republic of Congo, Democratic Republic of Congo, Guatemala, Ecuador, Colombia, Peru, Venezuela, Brazil, Belize, Tunisia, Egypt, Turkey, Iraq, Vietnam).

Perenco is involved in operations both onshore and offshore with production equal to approximately 450,000-barrel (72,000 m3) of oil equivalent per day.

 

On the 24th January Savannah announced it had completed the 3D seismic acquisition over a c.800km2 portion of the R3 license area, approximately two weeks ahead of schedule and on budget.

This data was of 12 existing mapped exploration targets and the identification of new targets not currently mapped on existing 2D seismic dataset.

Savannah intends to commence drilling activity on its Niger permit areas in mid H1 2017.

On 16th November 2016, Savannah Petroleum released this RNS:

“Well proposals have been issued, and technical and commercial discussions are in progress with contract signature expected in January 2017. The drilling contract structure is expected to confirm an initial three well drilling campaign, with a series of additional options to lock in equipment availability and associated cost structure for additional drilling thereafter.

The campaign is expected to initially target the c.93 mmbbls Damissa structure (located on the R1 permit area), the c.37 mmbbls Bushiya structure and c.35 mmbbls Kunama structure (both located on the R3 permit area).”

As stated above, well contracts were supposed to have been signed in January. One can only speculate as to the delay. It could be due to the processing and interpreting of the 3D siesmic or it could be the talks around a possible farm out deal. As stated in their interims, released on 27th September:

“Discussions with potential farm-in partners ongoing, any transaction expected to be announced prior to commencement of drilling activity”.

Savannah Petroleum are entering a news rich period, which includes, drill contracts being signed, a fully funded 3 well drill campaign and the potential annoucement of farm out partners.

The share price at 30.5p has hardly reacted, to what could be regarded as a potentially transformational time for the company. They are drilling in an area that has undergone a wealth of 2D and 3D surveying plus it’s experienced a good deal of exploration success under previous operators.

Even success using the most conservative of guidelines, within the next 6 months, could see a material re-rating of the share price.

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