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Weekly Update: Afren makes brave move into Kurdistan

Eoin Coyne
Evaluate Energy

Afren entered into two deals this week, one involved an increase in its interest in block 1101 in Madagascar, whilst the other marked a major entrance for the company into the Kurdistan region of Iraq. Afren paid $588 million for a 60% interest in the Barda Rash PSC and a 20% interest in the Ain Sifni PSC from Komet Group and the Kurdistan regional government. With 890 million barrels of contingent reserves being acquired at $0.66 per barrel, it signaled that there is no cheaper place to buy a barrel of oil at present.

Interest in the region has been building in the past couple of years with major discoveries being reported by Addax Petroleum, DNO International, Gulf Keystone Petroleum and Heritage Oil. The strong operating results and relatively good value also attracted Hess Corp. this week, and continued the speculation that the newly formed acquisition vehicle Vallares PLC may look to enter the region. The terms of Hess Corp.’s acquisition were not reported but the company will be gaining a 64% interest in 2 exploration blocks known as Dinarta and Shakrok in areas close to existing large discoveries.

Despite the impressive operating results, it’s hard to ignore the risks that the fragile region presents. The Kurdistan region has been traditionally far more peaceful than neighbouring Iraq, from whom it is still only semi autonomous. However with US troops due to exit the country, leaving control in the hands of the Iraqi coalition government, it’s hard to predict whether stability will be maintained and Afren gets to fully reap the estimated 21-year reserve life that the acquired assets offer. Since the acquisition cost represents over one third of Afren’s current market cap, this produces significant risk to the company. Evidence of this could be seen with the share price falling by 5.5% on the day of the deal announcement. Although it would have likely been down anyway on US debt fears, the drop was higher than the company’s peers.

Included in Talisman’s Q2 2011 report this week was the announcement that the company spent $510 million on increasing its position in the Duvernay shale play in Alberta by 255,000 acres. Talisman had so far this year been a major seller after monetizing positions in the Montney shale to South African company Sasol Limited. That the company chose to invest part of the funds into the Duvernay shale indicates that this area may be the next major shale play to emerge in Canada following the success of the Montney and Horn River plays in British Columbia. The potential of the Duvernay shale had already led to a record land sale for Alberta in March with $842 million in revenues. The acquisition was at a cost per acre of $2,000, which can be seen as high for an unproven play. However, with the Duvernay play rich in liquids and recent assets in the Eagle Ford shale play in Texas changing hands for over $20,000 per acre, it could prove yet to be a very desirable entry price for Talisman.

Breitburn Energy Partners made an opportunistic acquisition, picking up 230 bcfe of proven reserves for just $285 million. The low cost per mcfe of $1.24 cannot be attributed to operating risk with the asset already producing and 59% of the reserves already developed. The assets suffered from being gas weighted in a time of suppressed prices, which are due traditionally to be held down over the coming months until the winter demand picks up again.

BG Group became the latest company to enter into the Australian shale sector this week when they farmed into ATP 940P in the Cooper basin in a deal with Drillsearch Energy Limited. The deal reaffirms that the Australian shale industry is moving forward after ConocoPhillips farmed into a similar prospect two weeks ago and Beach Energy recently announced a successful shale gas flow test.

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