Merrion%20Capital%20June2011

Merrion Stockbrokers 6
The expanded drilling programme should be positive for Petroceltic:
It will move a large amount of resources into the P90 and P50 categories. As the
size of reserves is important for the valuation of exploration companies, it will add
to Petroceltic’s valuation.
It will maximise the amount receivable from the ENEL farm out. $75m of the
consideration from the farm out agreement depends on the extent of certified
recoverable reserves. We have applied a 50% risk factor on our valuation of
Petroceltic. The inclusion of 100% of this amount will add 1.1p per share (6.0%) to
our valuation.
Accelerate project to development stage
Following the appraisal programme, a final discovery report is to be submitted to
Sonatrach, the government owned Algerian partner in Q1 2012 and possibly approved by
Q2 of 2012.
The final discovery report will include the following:
Description of all studies undertaken on the licence
Description of the reservoir(s) and how much hydrocarbons it(they) contain
Description of how the reservoir(s) will perform during production defining the
number of wells, the plateau production rate and the reserves.
Description of the facilities required to gather, process and export the produced
hydrocarbons
The economics of the project.
We believe that the completion of the final discovery report will be value enhancing to
Petroceltic as it will advance the project from exploration to development stage and hence
monetisation. A clearly defined project will enable the completion of marketing
arrangements for the final gas (with discussions already underway) and make it more
attractive for a larger player. The most likely potential partner would be a current operator
in Algeria. Total SA, Repsol, BP, Statoil and BHP Billiton are some of the operators in nearby
gas fields and could all be potential suitors.
Improved news flow
The expansion and acceleration of the gas appraisal programme should improve company
news flow during the second half of the year. The main exploration newsflow in the current
year was the appraisal result for the AT 4 well. The result was mixed. While gas was
encountered but, due to fracture design issues, the achieved gas flow rate on testing was
disappointing at 1.35mmcf/day and associated with 250 bwpd. The company believed that
it is likely the induced fractures in the well extended below the current field gas-water
contact into an underlying aquifer resulting in the volumes of produced water seen.
A second appraisal well, AT5, is taking a different approach. It will involve the drilling of
both a vertical pilot hole, AT-5 followed by a horizontal section AT-5z. The horizontal
section is intended to test a major “pop up” in the north of the field. The “pop-up” feature
is one of many such structures typical of the northern part of the field anticipated to be
associated with high natural fracture density and thus potentially enhanced un-stimulated
gas productivity. The results of this approach will be crucial in determining whether it can
be applied to the other structures indentified on the field. Drilling of AT 5 has been
completed and test results are expected in early July.