AFTER a busy reporting month, announcements from two stock-market darlings are worth reflecting on.
Firstly, Tullow Oil issued results on March 10 that were in line with expectations, but overshadowed by developments in key exploration areas Uganda and Ghana.
Tullow is waiting for the Ugandan government to make an announcement on the development and ownership of the three blocks now 100% owned by Tullow following the purchase of the Heritage Oil stake.
Following that purchase, Tullow had initially intended to keep a 50% interest and bring in a different partner to develop the upstream and downstream infrastructure required.
Initially, the choice was whittled down to two – CNOOC (China National Offshore Oil Corporation) and Total.
That plan has now changed (probably through Ugandan government pressure) and Tullow has now proposed having both companies on board.
The new partnership will equally own the three licences with a one-third share each.
Tullow’s CEO, Aidan Heavey, was clearly uncomfortable at the new proposals being leaked ahead of a formal announcement at the end of the month, but he emphasised the probability that the Ugandan multi-oilfields development would be fast-tracked and completed at a lower cost.
Management is now talking about more than 200,000 boe/d (barrels of oil equivalent per day) in five years.
We should shortly find out the prices paid by Total and CNOOC, and these could have an impact on Tullow’s share price.
Other highlights for the 2010 drilling campaign include two very important wells in Guyana and French Guiana which potentially have 1.8billion boe gross reserves.
In toto, during the current year, Tullow’s exploration and appraisal programme is targeting 8.8billion boe of gross reserves. This compares with 2.8billion boe of resources in 2009, so there is still plenty of exploration upside in the stock.
While production will be a more important factor going forward, Tullow remains primarily an exploration company.
The key to higher production is moving reserves from the contingent category to the commercial category, and this year will see a major step up from Ghana and Uganda. This movement of reserves could be the catalyst for further increasing NAV (net asset value) estimates on the stock and see the shares re-rated further.
Elsewhere, and of at least as much interest, is the news that Cairn Energy is to press on with its plan to drill four wells offshore Greenland, commencing this summer.
The potential is vast and could transform both Cairn and the Greenland economy.
This could happen if one of the four wells to be drilled this summer/autumn is successful. If all four wells are unsuccessful (and remember, we are talking about a frontier development which has perhaps a one-tenth chance of success) Cairn will carry on. If necessary, it will plough 10% of its market capitalisation to develop a potential resource of 4billion boe.
But will Cairn succeed?
To put the size of the task into perspective, the two blocks being drilled in the West Disko prospect are the equivalent of 3.5 North Sea quadrants (and have never been drilled before).
The southern acreage, in depths of up to 3,000m (9,850ft), is equivalent to six North Sea quadrants.
These four blocks are at the southern tip of Greenland and on the same latitude of the Labrador coast of Canada, which is currently being explored by four US companies.
While we still think that the risk factor in Greenland is very high, this is counterbalanced by the strong financial position and the cushion of the fast-rising cash flows from Rajasthan.
So exciting times for holders of both stocks.
Mark McCue is a divisional director of broker and wealth manager Brewin Dolphin in Aberdeen. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd, nor will any liability be accepted for any direct or consequential loss arising from use of the contents of this column