Petroceltic: A review of Worldview's concerns

Brian O'Cathain, CEO of Petroceltic

Over the last year, Worldview has been very public about its dissatisfaction with Petroceltic's performance and has openly criticised the board of the company. Earlier this year, it tried to remove Brian O'Cathain as CEO and replace the board with two of its own directors.

Worldview believe the assets are not being managed properly and that the Ain Tsila development in Algeria could be brought onstream at a third of the cost and much more quickly. In this post, we review the key arguments that Worldview have come out with and provide our view on each of these.

Production decline in Egypt
Worldview notes that 2015 production guidance for Egypt of 16.5 - 18.5mboepd represents a 18-27% drop vs. 2014 levels and views such significant drop to be caused by poor management of the wells. Worldview believe they could boost production by a third within months.

We say: The Egyptian assets are mature and production has been steadily declining for the past four years at a rate of c.16% p.a. from 38mboepd in 2010 to 19mboepd in 2014. Unfortunately since the production guidance given in January 2015, reservoir issues have led to a further decline in production and guidance was revised down at the July AGM to 12-13mboepd. The infill programme is now on hold to allow detailed reservoir studies to be carried out. We also agree with Petroceltic's position that attempts to significant boost production as per Worldview risks damaging the reservoir and wells.

Capex being spent in the wrong places
Worldview say that development capex of USD59mm in 2015 on the Egyptian and Bulgarian assets "do not make sense" given the assets are mature and in decline.

In Egypt, Petroceletic notes that the capex is to be used for production optimisation, whilst in Bulgaria, this is required for a tie-back well given the compartmentalisation of the reservoir leading to lack of communication between pools.

We say: Given the halt of the infill drilling programme, capex in Egypt may come in below guidance at the end of the year. Nevertheless, given declining production, the spend is necessary to maintain production levels and to halt decline through infill drilling and optimisation. Similarly for Bulgaria, this capex appears to be rather essential as opposed to nice to spend.

Unnecessary exploration spend
USD35mm has been budgeted for exploration in 2015 with the bulk going towards Egypt. The company aims to rejuvenate its Egyptian portfolio through the drill-bit and had acquired four new licences between 2013-15. Worldview notes that a better strategy might be to acquire low-risk acreage with proven and undeveloped reserves.

The exploration licences cover onshore (South Idku), deepwater (North Thekah and North Port Fouad) and Gulf of Suez (El Qa'a Plain) acreage.

• South Idku is viewed as low risk with geological similarities to Petroceltic's existing acreage with 400-1,900bcf of prospective resources
• The offshore licences are believed to be an extension of the proven Levantine play where >40tcf has been discovered although water depths reach up to 4km 
• The Gulf of Suez block is in an oil-prone area

We say: We agree with Petroceltic's view that this is an opportune timing for operations in Egypt given the country's short gas position. There are three commitment wells over the next three years with two on South Idku and one on El Qa'a Plain. The company is in active discussions with farm-in partners for carry. We note that these licences were signed historically prior to the collapse in oil prices and that spending commitments are now unavoidable. While the onshore licences are generally viewed as lower geological risk, the deepwater licences are a large gamble although there are no well commitments on them.

High opex

Worldview notes the high opex structure and makes comparisons around employees/well.

• Petroceltic: 16 employees/well
• Apache: 9.5 employees/well
• TransGlobe: 6.7 employees/well

We say: Employee/well is not a standard metric. In addition, Worldview are assuming Petroceltic headcount of 365 vs. disclosed headcount of 171 as at the end of December 2014. We note that Petroceltic has a substantial number of staff dedicated to the Ain Tsila development and should not be directly compared with TransGlobe. Apache is a top-tier player in Egypt with its substantial success since entering the country in the 1990s. In June 2015, the company noted that a staff reduction programme had been implemented with 27 reduction in headcount to 144.

Timing and high cost of Ain Tsila

Worldview believe that the development cost of USD1.5bn (gross) is unjustified.

"In our view, the current approach to Algeria is outdated with its unreasonably large budgets and long schedules, aimed to deliver a "gold-plated" custom-designed plant where one is unlikely to be required."

Worldview believe that the project could be completed at USD500mm using off-the-shelf modular gas plants which can be constructed with much shorter lead times.

We say: Significant FEED work has been completed on Ain Tsila with a wide range of options and concepts studied. "Off-the-shelf" gas plants as used in the US are unlikely to be fully compliant with Sonatrach's stringent specifications for gas and target of >95% uptime. Furthermore, the field is 1,700km from the coast with limited infrastructure and the plant has to be designed with minimal risk of breakdown/need for repairs, especially when operating in an environment of c.50 degrees Celsius in the summer. There is additional cost in transporting and constructing a plant in such a remote location and extra costs need to be factored in for security arrangements. We view Worldview's proposal as unrealistic with a lack of understanding of the timescales required when working with National Oil Companies.

Concerns on the bond issuance

Worldview has said that it will take all steps available to stop the bond issue arguing that Petroceltic’s proposed pledging of “the company’s crown jewel”, its interest in the Ain Tsila asset, “will result in squandering shareholder value”. 

Petroceltic notes that the bond has been contemplated for a long time and shareholders have been made aware of the plan for months.

We say: Petroceltic clearly needs the financing unless, as Worldview believe, that production in Egypt can be restored, costs can be cut further and Ain Tsila brought onstream more quickly and cheaply than currently planned. Concerns around pledging Ain Tsila are unjustified since it would need to be security against any future debt that is raised, regardless of whether it is bank or bond debt. In fact, Ain Tsila is already part of the security package for the USD500mm facility that the company put in place in April 2013.

Borrowing powers

Worldview wishes to limit the borrowing powers delegated to the board under its Articles and has proposed that no new debt be raised which contain any of the following provisions:

• Interest rate above Libor + 8%
• Granting of security over the company's assets or subsidiaries
• giving rights over equity securities
• including any structured elements such as contingent coupon

Petroceltic has reviewed guidance from the Investment Association which recommends that companies should limit borrowings that can be incurred without shareholder approval. In this regard, Petroceltic has proposed a resolution to amend the articles that limit the company's borrowings to USD650mm with shareholder approval required for debt in excess of this amount.

We say: The inability to pledge assets is unrealistic and would essentially mean no further debt could be raised. Petroceltic's resolution to limit borrowings to USD650mm is unlikely to appease Worldview and is seen as a token gesture.

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