Update on Longboat

Velocette Discovery: A Miss, Not a Loss

Today Longboat Energy (LON:LBE) has announced that the Velocette (20% Longboat JAPEX Norge AS) discovery well has encountered gas:

The exploration well 6607/3-1 S encountered hydrocarbons in the primary target in Cretaceous turbidite sands in the Nise formation. The top of the reservoir was reached close to prognosis at a vertical depth of 3348 metres below sea level with 61 meters of high net-to-gross, moderate to very good quality sandstone. Data acquisition indicates a gas column of approximately nine metres in the well.

However, the volumes are actually lower than the prognosis estimated:

As the Velocette volumes are at the lower end of pre-drill expectations the discovery is not considered to be commercial in isolation. However, the licence contains numerous other prospects which have been derisked by the presence of gas in good quality reservoir in the Velocette well.

Partners of the licence include OMV Norge AS (40% operator) and INPEX Idemitsu Norge AS (40%). It is important to remember that LBE is not the only company behind the decision to drill this well, a major like OMV decided it was worth a try.

The main problem is the contingent payment from JAPEX on Velocette exploration success of US$30 million (c. £23.5 million). LBE hasn’t announced how this result will impact to the final amount that JAPEX would pay to the Norwegian JV, or if it means that the payment is nil. As the potential volumes were not estimated and application for development will not be submitted to the Norwegian regulator, we think it is the latter.

It is not lost

This news is dissapointing, it cannot be considered other way, but there is a chance to make a combined development with other prospects in the area. As we commented in the write-up, here it is where the fiscal conditions of o&g exploration in Norwat play in favour of the company:

The new NPTS enables the repayment of 71.8% of all losses in the following year

Hence, LBE will be reimburshed of almost 72% of the cost of this drill in November 2024, which is not the outcome that was expected, but it lowers the downside from a pure cash reserve point of view.

This is the last drill of a series of dissapointing wells that have been dry (e.g. Copernicus or Cambozola) or below expectations (e.g. Oswig or Egyptian Vulture). Only the Kveikje discovery has been above the initial expectations.

It is important to remember that there is an inherent risk in the exploration activity, but at the same time, the prize is huge in the case of making a series of discoveries.

A new adventure

We would like to comment on another recent news:

Longboat Energy, an emerging full-cycle E&P company active in Norway and Malaysia, is pleased to announce the expansion of its business in SE Asia through the acquisition of privately held Topaz Number One Limited ("Topaz"), increasing its working interest in the Production Sharing Contract over Block 2A offshore Sarawak, Malaysia ("Block 2A") to 52.5%.

Hence, LBE (not the Norwegian JV ) has increased its stake in the licence becoming the largest sherholder. The licence contains the giant Kertang prospect with significant volume potential representing multiple trillions of cubic feet (TCF) of gas. This increased ownership can be followed by LBE’s traditional strategy: study the geology and geophysics and plan a discovery well to put the licence to “drill-ready” stage. That way, LBE could offer a farm-in to a partner with enough resources to cover most of the expenses related to an exploration well.

Part of this deal, James Menzies and Pierre Eliet have joined LBE:

• James was CEO of Coro Energy before joining Topaz. He was responsible for the acquisition of Coro’s main asset: Duyung PSC in West Natuna basin (Indonesia). He serves as NED at Trinity and was CEO of Salamander Energy, another South East Asia focused o&g company, until it was acquired by Ophir Energy for $370 million. He knows quite well the area, so it is a very interesting addition. He has become Chairman of Longboat Energy SE Asia. He also has a curious self-definition in LinkedIn (I’m not here to judge):

• Pierre worked at Lundin Petroleum and Coro Energy in the South East Asia region, before joining Topaz. His brackground is more technical than James’. He has become Director of Longboat Energy SE Asia

LBE has built a team focused on the South East Region with decades of expertise. This is a long shot as the prospect is still at an early stage. But LBE’s new team can complement the technical expertise obtained in the North Sea. It is yet too soon to confirm whether this will lead to a discovery or not, but there is another potential area of growth.

Looking ahead

The company hasn’t announced the closure of the acquisition of a 4.80% in the Statfjord Øst Unit and a 4.32% in the Sygna Unit. Last 29th of August, Equinor announced the production start at the Statfjord Øst, which will generate income for the Norwegian JV.

It is important to remember that Velocette is not LBE’s last shot, it will, together with the licence partner, drill the Lotus exploration well in Q3 2024 (it still is one year away). The company is also preparing the exploration campaign of Jasmine and Sjøkreps, and is working in advancing the Kveikje development or a potential monetization.

LBE has added a new path of growth in Malaysia, where it can apply its strategy:

Win licences, Drill and Discover, Monetise assets, and Generate revenue and create value for stakeholders

The risks still persist and the news isn’t positive, but the damage to the stock seems excesive considering the reimbursement of costs next year. It is still an interesting company for more risk-taker investors.

Disclaimer: at the moment of writing this article, we don’t hold shares of Longboat Energy. However, we may buy or sell shares at any time. This document only represents the opinion of its authors; its content cannot be considered investment advice and it has been prepared only for informative purposes.