Energy: Oil & Gas - Bahamas Petroleum Company Plc

November 5, 2010 Europe: Energy: Oil & Gas - E&P
Exploration risk comes in different sizes: Assessing probability of success in exploration portfolios
We recognize that high-impact exploration can come either from the drilling of high-risk wells, from drilling lower risk wells with
potentially larger volumes, or from having little value outside of exploration (and therefore having high operational leverage to the
exploration catalysts). Re-rating potential alone does not therefore give the full picture and we have analysed each exploration
portfolio to determine the weighted average likelihood of success and the proportion of the company’s value that it accounts for. We
regard those companies with a high proportion of value in exploration, but a low likelihood of success as being potentially high-risk,
high-impact plays. While our valuation work suggests that these are often inexpensive, we would recommend them being bought in
a group to diversify risk. Companies with a high chance of success and a high proportion of value in exploration remain highly
levered to exploration failure due to the high level of potential downside, but have a greater chance of succeeding in their
exploration programmes, thereby making it easier to buy them as single entities. One implication of a highly successful exploration
campaign is typically that it de-risks nearby wells and increases the capital base of the company, resulting in future exploration
wells having less impact – hence the presence of a number of more successful explorers (i.e. Encore, Tullow) in the top left quadrant.
Exhibit 34: Relationship between exploration risk and exploration materiality will determine the nature of exploration
Low risk ‐ Exploration value is lower risk and a smaller
percentage of total value. Exploration has less impact
Weighted average exploration risk
50.0%
45.0%
40.0%
35.0%
Enquest
30.0%
25.0%
20.0%
15.0%
Dana Petroleum Premier Oil
Dragon Oil
Gulfsands Green Dragon
Lundin Petroleum
Faroe Petroleum Regal Salamander
Valiant Petroleum
Melrose Resources
Soco
Coastal Energy
Det Norske
Noreco
Maurel & Prom
Panoro Amerisur
Bowleven
Cove Energy
Aminex Plc
Hardy Oil
Rockhopper
Serica
Sterling Energy
Max Petroleum
Desire Petroleum
10.0%
5.0%
0.0%
Northern Petroleum
Bankers petroleum
No exploration
Aurelian
PA Resources
Chariot Oil & Gas
Borders and Southern
Dominion
BPC
Tower Resources
Falkland Oil & Gas
0% 20% 40% 60% 80% 100% 120%
Re‐rating on core‐ Exploration value is high risk but a small
proportion of total: re‐rating potenial reasonable
Source: Goldman Sachs Research estimates.
Encore
Nautical Petroleum Tullow
Heritage Oil DNO
Exploration value as % of total value
Lowerrisk explorers ‐ High proportion of value sits in low‐risk
exploration. Downside in event of failure remains high due to
large values carried for exploration prospects
High risk explorers‐ high level of value sits in high risk exploration
assets. Re‐rating potential and risk of failure is high
Goldman Sachs Global Investment Research 30