HDR hardman resources limited

hdr - 2005 what to expect ...

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    Very much appreciated.

    "2004 - That year that was

    Oh what a year it has been. This was the year that Hardman grew out of its baby suit and entered adulthood. Given its cult following of speculators and traders, the institutions were reluctant to join the party until they realize they were missing one heck of a ride to stardom. While the rise is not in the class of Cairn, the potential is there. Now would be a good time to reflect on this past year, and look forward to what's coming up in the next year or two…

    Following the discovery of the now famous Tiof-1 and Tiof-West late in 2003, we were greeted with the news that Hardman (30%), together with Pancontinental (30%) and Afrex (40%), had signed a MOU with Govt of Eritrea over a 11,550 sq km block in the Red Sea offshore Eritrea. This was followed closely by the declaration of commerciality for Chinguetti, and Woodside announced that they were considering acquiring 10% of Block-7 in Mauritania following the huge gas deposit at Pelican.

    The next major highlight came as Hardman on-sold its newly-acquired 13.084% in PSC A and 11.63% in PSC B to BG Plc for a net profit of US$99 million. IMHO, there were three reasons for this transaction. Firstly, Hardman needed lots of money to fund the Chinguetti Development Plan as well as the 2004/2005 drilling costs. Secondly, they would have had some difficulties in funding the additional costs associated with the increased stake. Lastly, it would have meant that they would commit most of their available funds into Mauritania – which goes against their strategy of maintaining a “manageable” stake across a wide diversified range of acreage. This profit from this transaction also enabled them to strengthen their balance sheet, thus allowing them more flexibility in any form of capital restructure such as obtaining additional bank loans, doing a placement, etc.

    In a separate transaction, Hardman decided that the Jingemia oil field no longer fits the overall corporate growth strategy and sold all their WA assets, but 12% of the EP413, to Arc Energy for AUD7.64 million, plus up to AUD1.5 million if production exceeds certain level. Those remaining 12% was subject to a call and put option, which Hardman eventually exercised later in the year for AUD5.4 million.

    Then came the Placement and Entitlement Issue at AUD1.10 (45.4p) to raise a total of approx AUD168 million (GBP70 million). Placement was over-subscribed while the entitlement issue saw a take-up rate of 91%. Woodside elected to exercise all of its entitlement to maintain their 10+% in Hardman – which is a strategic stake to block any takeover attempt.

    By mid year, the JV approved the Chinguetti Development to go ahead and , almost at the same time, announced their aggressive 20 well programme for 2004/2005 drilling compaign. As it turned out, the drilling of all western flank prospects (Dorade, Capitaine and Merou) all turned out dry. The success at Tevet-1 (44m oil column) was good in that it confirmed the Banda-Tevet-Chinguetti oil channel, with further appraisal to be done at east of Banda scheduled for 2005. While the Tiof appraisal programme has been very successful to date with Tiof-3 (134m), Tiof-4 (113m) and Tiof-5 (23m), the “mechanical problem” encountered while preparing for the flow test at Tiof-3 ST2 caused a major hemorrhage in its share price. Consequently, the JV are performing the flow test at Tiof-6 instead.

    On other frontiers, 2D seismic has been completed In Lake Albert, Uganda. In Gabon, Premier Oil has farmed in and will fund Fusion Gas and Oil in drilling 1 to 2 exploration wells in Q1/2 2005. In Guyane, it was confirmed that farm-in discussions have taken place with up to 8 large parties, and an announcement could be coming in the near future. In Falklands, 2D seismic has commenced in Dec 2004.

    Of course, the year closed with Ted Ellyard, the long-sitting CEO, resigning first from his position as CEO, then as a non-exec director – for reasons that no one know for sure. As far as we know, it is for health reasons.

    2004 – Final Analysis of 2004

    In my final analysis of 2004 for Hardman, I must say that while I am a touch disappointed with the drilling results to date at Mauritania, it is by no means the end of Mauritania. I believe they were testing the outer western boundary of the existing oil discoveries, and ”to prove up as many commercial discoveries as possible outside existing EEA's to retain acreage rights for a further 25 years [xmagx]. This is not a bad thing as long as the JV has taken this in their stride and learnt from the data gathered – which I think they have by the fact that they have re-thought their entire drilling strategy.

    The discovery at Tevet has not only increased the commercial viability of Chinguetti, it has also provided further evidence that the entire Banda-Chinguetti channel is in indeed hydrocarbon charged. I believe the next appraisal will see a prospect east of Banda being drilled. Another significant gas deposit similar in size to Banda would almost certainly make Banda commercial – bearing in mind that Banda is approx 1-4 BCF, with about 6BCF required to make it commercial. I believe it is only a matter of time before it is declared commercial. In addition, while the dry hole at Capitaine was disappointing, it does not, in any way whatsoever, rules out an extension west of Chinguetti. I believe they have already identified a few targets between Chinguetti and Capitaine, which I believe will most likely be drilled in 2006.

    The problem is Tiof-3 ST2 can be liken to the one encountered at Chinguetti 4-2. On that occasion, the JV went away, analysed the data, came up with a possible solution and obtained the desired flow rate at Chinguetti 4-5. While there may be subtle differences in the geographical structure between the two, I do not expect anything to be different this time round. I believe we will get the flow rate from Tiof-6. In addition, the fact that they have suspended Tiof-3 ST2 as a future production well suggested to me that the problem wasn't terminal. As a whole, note that Tiof-1 is near crest of structure, Tiof-2 (or Tiof-West, 8km stepout west of Tiof-1) is on the outer west of the current boundary, with Tiof-3, Tiof-4 and Tiof-5 somewhere in between. Looking at the sequence from East to West – Tiof-5 (23m, downdip from crest), Tiof-1 (39m oil, 49m gas – crest drilled), Tiof-4 (113m), Tiof-3 (134m) and Tiof-2 (122m). Aerial closure of the current defined structure is approx 54 sq km. While Merou (which was also crest drilled) turned out dry, the fact that it was hydrocarbon charged suggests that there is still a reasonable probability that the Tiof structure extends westwards beyond Tiof-2.

    Lastly, while Ted's departure is sad/unfortunate, it is important not to overlook the fact that Hardman will be a producer in 2006, with significant production growth rate as Chinguetti, Tiof and Tevet comes into production. Therefore, a new man with previous experience in managing a production company should be viewed as a positive factor.

    In summary, while 2004 may have ended on a rather sour note, it was still a good year with the stock climbing from 93c to 1.57 (+68%), and there were positives to be taken away from most of the negative. So what's to come in 2005?

    2005 – What to expect?

    While the common belief in the market/press seems to be that there will not be much action until exploration drilling occurs in March, I find that almost amusing and actually believes that it has created a rare opportunity for topping up. Until the fundamentals of the company changes, I believe that there will be sufficient market support around my NPV of 1.62. So what are the key events of 2005? While I cannot gauge the exact date of each of the following events, I have tried to list them in chronological order to the best of my knowledge:

    * Tiof-6 flow test – This should be out by end of January. We're looking for about a minimum rate of around 5000bpd. This piece of news is, without a doubt, very price sensitive. Bearing in mind that when Merou was announced as dry, Hardman only retraced a little. The real price shaker was when it was announced that the flow test couldn't be performed at Tiof-3 ST2 due to mechanical problems. So I believe a good flow rate and we could see significant appreciation in the SP. Conversely, a bad flow rate here and we could see that gap around 1.30 being filled.

    * Appointment of new CEO – Although it was indicated to me that an announcement will be made most likely towards the end of January, I suspect the person in question has, in fact, already been conditionally selected subject to successful negotiation of salary packaging, incentive targets and bonuses, etc. As many Fools have pointed out in the past, the management is the backbone of a company. I'd like to think of the CEO as the brain that controls the spinal cord. Here's the top 5 qualities that I will be looking for as my assessment of a good candidate:

    -> Past illustration of strong leadership

    -> Proven track record in an executive management role within a production company

    -> Demonstrated capabilities at managing hedgebooks

    -> Deal-making abilities (signing new acreage, farm-in agreements, etc)

    -> Visionary (to continuously maximize Hardman's growth potential)

    Personally, I value good management more than anything else. I liken it to some of the most amazing athletes in the world – at the physically-impaired Olympics. They lack some aspects of what is given, and taken for granted, to the general population. Yet, their will to succeed carries them to feats most of us didn't think they were capable of. It's all in the head.

    * Announcement of newly identified targets – While the final target selection has not been finalized yet, here's a quick analysis of some of the new potential prospects:

    -> Baudroie – located to the west of the dry hole at Poune 5-1 in Block 5, this prospect sits directly north of Tiof-1 and Chinguetti and appears to be testing the middle section of Block 5.

    -> Fantar – western flank of Block 3 in PSC A. Identified after the following Kiffa #D Seismic was done over PSC A. On the page marked 14 (page 34 of the actual document) of the Woodside Investor Briefing 2004, it has been described as "Existing 2D seismic suggests flat spot... Kiffa 3D seismic to confirm Fantar for late 2004/early 2005 drilling."


    -> N'Dor – Located in Block 4 PSC B between Chinguetti and Capitaine, this prospect had been identified earlier on as I recall seeing it in Hardman's 2004 May edition of their Info Brochure. After the dry hole at Capitaine, I believe this is to explore the western boundary of the existing Banda-Tevet-Chinguetti Miocene channel.

    -> Espadon – This prospect is also in PSC B, located right on top (North) of Merou-1. Obviously they must have taken the wirelogs from Merou-1 and discovered something that is worth exploring. Merou-1 was hydrocarbon-charged, though non-commercial (mostly gas I believe). Since it was crest-drilled, maybe they suspect that there maybe some oil deposits on either side of Merou-1.

    -> Sotto/Bogue/Petrel – These three holes are already very well-publicised and discussed prospects.

    When the finalized drilling targets are announced, it will give all the traders something to think about and as such, we should see some SP movements. Likely timeframe is around mid to end of February.

    * Drilling of exploration wells – This should be starting around March. In contrary to my previous postings, I think they may in fact utilize the same “tandem drilling” approach that they have been using in their current drilling programme. This is to maximize the utilization of each drill rig. Once WN completes Tiof-6, I suspect it will be moved back to drill the top sections of more Chinguetti wells, which is followed by ST drilling the bottom sections. During which, WN will head off to drill the top sections of the exploration wells, to be drilled to completion by ST while WN heads back to drill more top sections at Chinguetti, and so on and so forth. At this stage, it is too difficult to gauge the exact sequence and timing of the drilling sequence as it will largely depend on the finalized targets. At this stage, the JV is only planning to drill two exploration wells. While their top priority is clearly to get Chinguetti ready prior to the arrival of the FPSO, if spare rig time is available, we may see a third, or even fourth, well drilled in the current campaign.

    * Farm-in partners for Guyane – Nothing new to add to what I posted a few weeks back…

    “They are at an advanced stage of the negotiation process. However, that is not to say that they will get the terms that they want in the current round of negotiation. Furthermore, given the prospective nature of the Matamata prospect, their primary objective is to secure the best farming terms and conditions for the shareholders, not to do it as quickly as possible. While they have to drill a commitment well by mid-2006, there's sufficient time between now and then for them to carry out this farming process in a diligent fashion, and have sufficient time to drill a couple of wildcats. Another factor in their consideration for finding the “right” farm-in partner/s is to find ones with

    (1) Previous drilling experience in the region who would understand the structure better and be able to develop the best drilling strategy.

    (2) Established production facilities

    (3) Established customer base in the region.

    So as for the actual timing, like ee said, it could take a month, or 12 months.”

    While it is perfectly understandable that we are REALLY excited about Matamata, especially judging from what Scott said at the presentation – Numerous past drillings to the south of Hardman's acreage had encountered non-commercial hydrocarbons. They believe that the source kitchen is, in fact, near the Tambaredjo Oil Field, and that the migration path is to the north east – which of course, runs right through Hardman's acreage – it must be said that it is still a relatively under-explored frontier and as such, it is only prudent that it should not be included as part of one's NPV calculation for Hardman.

    * Announcement of Lake Albert exploration well – Despite the recent disappointing results from Turaco-3 (for Heritage Oil Corp), I still think we can be positive about Lake Albert. Again, going back to what I posted a while back - Lake Albert is a rift basin that is 40m wide and 120 long– a type of structure that has been responsible for a disproportionately large amount of the global oil output in the past. At a recent conference in Cape Town, Scott met up with a representative of Energy Africa, who mentioned that the quality of source rock found in the drilling of Block-1 implies there are unrisked reserves in the billions of barrels. In addition, during one of their visits, it was observed that oil seep was found to rise to the surface of the lake, and could be found along the lakeside - I believe we will see an exploration well drilled in Q2/Q3 this year, and they will probably be looking to drill a shallow water offshore well using an onshore rig. Again, a word of caution. Since Lake Albert is basically in the middle of nowhere, any discovery other than a significant oil deposits will most likely end up being non-commercial. So while we can be quietly optimistic about it, we should not include this as part of our NPV calculation especially in light of Turaco-3 result.

    * Drilling of 1-2 Exploration Wells in Gabon – Several prospects have already been identified and the current plan is to drill a couple of wildcat exploration wells in Gabon around Q1/2 this year. I will update this section once more details are disclosed with regards to the prospects.

    * Declaration of commerciality for Tiof and approval for Early Production Wells – This is one event that I am quite confident will occur around Q2/3 this year. Barring any major disaster with Tiof-6, I think the Tiof appraisal programme thus far has pretty much lived up to the JV's expectations and we should see them giving the green light to an Early Production Plan.

    * Completion of Chinguetti wells and arrival of FPSO – This should occur around late June/early July this year.

    * Drilling of more exploration wells in Mauritania – Once all completion operations have been done at Chinguetti, the JV will most likely keep one rig on site to drill further exploration wells right up to Q1 2006, while the other rig may get released.

    * Chinguetti goes into production – Current expectation is March Q1 2006. So far so good, but still a long way to go. Initial daily production rate of 75000bpd (net of about 14250 bpd to Hardman).

    So as you can see, 2005 will be quite a full year once again for Hardman, and as always, expect some wide rides along the way. Good luck and happy investing to all :)


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