Algerian project to follow hard on heels of Italian decree
07 August 2012
FACTS: Newsflow is currently supportive for Petroceltic. Both houses of the Italian Parliament have approved decree 83/2012 by a large majority. This decree modifies an earlier restriction related to drilling offshore Italy. The new law still ensures that drilling restrictions are imposed on offshore drilling (within 12 miles of the coast) but also ensures that such restrictions do not apply to licences and programmes in place when the original decree (128/2010) was put in place. We also expect that the group developing the Ain Tsila gas field in Algeria (in which Petroceltic has a 56% share) will be able to announce a declaration of commerciality by August 10th (as indicated in an earlier announcement on July 25th).
ANALYSIS: The new Italian decree makes a number of important changes to the original decree, which was brought in post the Maconda oil spill incident in the Gulf of Mexico. Ensuring that the decree does not apply to licences in force at the time of the original decree allows Petroceltic to resume its offshore Italian exploration activities. This activity had, to all intents and purposes, stalled. The new decree will have some impact on Petrocelticís operations in that it introduces a new 3% royalty on offshore activities.
It is likely that operations to pursue the drilling programme of the 55%-held Elsa project will resume, although the actual date of drilling is still to be determined. We suspect Petroceltic will approach the new programme slowly given that a new set of regulations are in place.
Importantly, we believe that the former funding arrangements are largely in place with Orca coming into the licence on a 2 for 1 promote and the Gemini fund making a material financial contribution.
DAVY VIEW: The Italian news and the expected declaration of commerciality are clearly positive for Petroceltic. The Italian news, especially the re-start of the offshore drilling programme, will serve as a reminder that there are several other potentially important value accretive programmes in the group other than the headline Algerian project. We value the entire Italian operation (offshore 2.7p) at 5.4p per share. The declaration of commerciality will separately remind that the group is delivering on a major gas investment programme in Algeria, which we value at 16p per share. Our group valuation is 26p per share and we carry an 'Outperform' rating.