|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||400||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
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WesternZagros (WZR CN) -- Long Idea
An investment in WesternZagros offers a compelling opportunity to participate in the exploration and production of
The market is meaningfully underestimating the probability of success. Comparable adjacent oil fields are already producing over 100,000 bbs/d and reserve adjustments on those properties continue to increase significantly. Furthermore, the KRG is trying to establish an independent viable government within the context of unified
We also believe that there is strategic interest in WesternZagros. DNO, one of the other operators in
WesternZagros is a pure play exploration and production company operating in the Kurdistan region of
The depressed stock price is the result of several factors, including temporary technical selling pressure by merger arbitrage funds, misunderstood Iraqi/Kurdish political risk, and undue concern over
The stock has been pressured by temporary technical selling as shareholders dumped the stock following the spin from Western Oil Sands. In particular, merger arbitrage funds have had a bad year and were likely using WesternZagros as a source of funds. Additionally, the spin fell outside of the purview of some Canadian fund managers’ investment mandate. The company’s small market cap means it probably falls under the radar screen of some of the much larger funds focused on the sector.
The stock price has also been under pressure because of the uncertainty with respect to ongoing negotiations with the KRG concerning a revised EPSA. These concerns are overblown and misunderstood. At the end of December, management stated unequivocally that it has orally agreed to the revised EPSA terms and expects to have a signed agreement very soon. In fact, WesternZagros is still importing equipment into the area and the KRG has been facilitating the process, according to management. Addax Petroleum, another publicly trader operator in the
As a brief history, WesternZagros was one of the first companies to enter the
Since the revised terms have been in force, several EPSAs that have already been awarded (see www.krg.org). Dr. Ashti Hawrami, the KRG Minister of Natural Resources has said “these contracts are a major step towards the Kurdistan Region’s goal of increasing oil production from the Region to one million barrels per day. This new level of exploration and production activity in the Kurdistan Region will also galvanize investment interest for the rest of
The other issue is that the EPSAs signed with the KRG prior to the approval of the Federal Petroleum Law may be deemed invalid by
WesternZagros is sitting on one of the most coveted properties in
Five seismically identified structures, three conceptual stratigraphic plays and additional undrilled structural leads evident from surface geology have been identified on the EPSA lands. These five structures have been internally assessed as potentially containing undiscovered resources of approximately 5.4 billion barrels, assuming that the structures contain oil and not gas or gas condensate. The three conceptual structures and the two northern structural leads have been internally assessed as potentially having undiscovered resources of approximately 4.7 billion and 1.7 billion barrels, respectively. Sproule and Associates, one of
The total gross risked prospective resources are 1,330 MMbbls and net risked prospective resources (after taxes and royalties) is over 230 MMbbls. This assumes a 30% recovery factor and 60% probability of success (vs. 80% historical success rate in
No petroleum exploration wells have been drilled on the EPSA Lands and, consequently, WesternZagros has not established any reserves yet. However, we expect the company to begin drilling its first well by the end of March 2008. It has completed seismic data on 750 kilometers and plans to ship a rig from
The company has a strong balance sheet, entering 2008 with C$90 million of cash and no debt. Additionally, if the company’s warrants are exercised (strike of C$2.50) on January 18th, the cash balances should increase by $C38 million. Management expects exploration and production costs to run in the C$65-C$70 million for the first two wells. If the warrants are not exercised in January, management has stated that it will have to raise additional capital by the end of the year.
The fully diluted share capital is as follows: 165 million shares issued to Western Oil Sands shareholders, 5 million shares issued in a private placement, 16.5 million warrants, and 18.7 million shares reserved for issuance pursuant to an option plan. Management has not priced its options yet.
Based on our NPV and comparable company analysis, WesternZagros is realistically worth between C$5.00 and C$15.00 per share. As a benchmark, management invested C$10 million at a price of C$2.50 per share upon the spin. Based on the revised EPSA terms, we estimate an NPV value of C$7.50 per share. This assumes an oil price of US$75 per barrel (3% inflation rate), 53% working interest, and 15% discount rate.
Additionally, there are two other operators in
DNO (DNO NO) started drilling the Tawke field (55% working interest) in November 2005 and is now delivering crude to the domestic market. On December 18th, DNO more than doubled its estimates for reserves at the Tawke field in
In August 2007, it was reported that the company rejected a $700 million bid from an unidentified international oil company for its Tawke field. This would imply a NAVPS of over C$24.00 for WesternZagros. Additionally, the UBS analyst estimates that after backing out DNO’s other assets, the implied value for its Tawke field is US$14.00 per barrel, or C$49.00 per WesternZagros share.
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