Nautical Petroleum plc is an independent hydrocarbon exploration and development company listed on the London AIM. The company's mission is to acquire, develop and add value to discovered heavy oil, initially on the United Kingdom Continental Shelf.

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Download Nautical 2007 Annual Report

Hardman & Co. Research note

Thanks for your Summary S...r! Great news

Nice serious buying going on :)

Typically not at my desk today, what has been the highest percentage gain on the day? Looks like we're off and running now.

Hi Greyhound: I think the highest price was 15.25-15.50 but I could be wrong (have had some breakfast in the meantime). Looks like we're up against the 16p resistance that's been there since mid-2005 (does that make sense? - I'm not as experienced as you guys).

Sounds good, thanks Toya. Will have a thorough read of update later.

KBC comment this morning on the news :

Nautical Petroleum (NPE) Successful Kraken appraisal well EST: Up , REC: CORPORATE

The appraisal well on Kraken announced by Nautical Petroleum this morning suggests that the potential reserves in the field are towards the higher end of the range. The well found a gross oil column of over 250 feet with oil in high quality Paleocene reservoir. Equally importantly the oil found in this well is lighter than anticipated at 18 degree API. This is a very satisfactory result for Nautical. Based on the results to date, we are increasing our estimate of recoverable reserves in Karken to 100 mmbbl (from 53) and reducing the risk factor from 50% to 70% (probability of commercial success). The net impact is a 6.3p/share increase in Core NAV from 15p/share to 21.6p/share, but there remains further upside in this field.

Nautical will shortly be mobilising the rig to start drilling the Mermaid exploration well. Mermaid is a potential 112 mmbbl prospect in which NPE has a 50% interest and will have the initial well costs fully carried by its partners. We are scarrying a risked exploration value of 3.4p/share on this prospect over and above the Core NAV. Given its proximity to Mariner, a discovery at Mermaid could enhance the economics of that field via joint development of a larger resource.

Thanks PP. That's almost double the original estimate then, for Karken.

Cool! it's all coming on nicely.....onwards and upwards! might top up on any sp weakness in the coming weeks while waiting for more news.

Yep, CORE NAV now of 21.6p a share :)

Roll on Mermaid.

well, few days ago i was thinking to buy few of this, but i didn't have any spare cash, i hope Indago Petroleum will show the same moves soon..

New Hardman & Co Note

I am very happy with that!

Thanks seawall, good to see that update today as well. Reads very well and hopefully we'll be seeing a few articles over the weekend and further northward moves next week.

Meant to say the note came via steelwatch on ADVFN, always try to remember who did the initial detective work.

http://business.timesonline.co.uk/tol/business/markets/article2886678.ece

Nautical Petroleum, the heavy oil explorer, rose 1p to 13p after it struck oil at its Kraken field. KBC Peel Hunt doubled its estimate of recoverable reserves at the North Sea field to 100 million barrels and raised its target price to 21.6p. On its first trading day on AIM, Excite Energy rose 2p to 83p. It has rights to the Bentley field next to Kraken.

Morning all, some press comment over the weekend, all bodes well.

Crikey.... SP not doing so well today what with the Market turbulent etc., think I'll buy some more at these levels !

Nice to be holding this today with a lot of red elsewhere.

Bit of a squeeze coming at the close by the looks...

http://www.michaelwalters.com/stories/news.phtml?num=3072


Heavy Oil - Nautical Petroleum (NPE)

6/11/2007 (119264)

Heavy Oil

Demand, demand, demand. That, maintained one of the TV talking heads, was what is driving the oil price higher. It touched $97 a barrel in the US today (Tuesday), well on schedule for the $100 everyone has been talking about for the last month or two.

. What else is pushing the price up? The weaker dollar (at a new low against the euro), and OPECs reluctance to expand production. Oh, and those greedy speculators, gamblers who have inflated the price by maybe as much as $40 a barrel.

Is that all making sense? Sure, up to a point. Choose your own answer, or pick and mix as you wish. For my money, the first answer is the one which really counts demand.

It is easy to imagine that, once pushed through $100, the price will pause and come off in a bout of profit-taking. Of course there is speculative cash pushing it up, and there will be a point at which it is best to bank the profits.

OPEC? Well, who can doubt that OPEC is happy to see more cash pouring in, and higher dollar rates are a welcome offset against the weakness of the dollar? So far, there are few signs that higher prices are damaging demand greatly, certainly not enough to make substitution by other forms of energy too much of a threat. And if they start to look awkward, then OPEC might be able to pump more and trim prices just enough to make the alternatives (whose costs have also risen fast) less attractive.

The oil price is volatile, and will continue to be so. Short of a world economic collapse, demand will carry on rising, probably at a faster rate than new discoveries and extraction techniques can match. A fall of $20 a barrel? Possible, for sure. A $40 cut? Just maybe, but doubtful. Even at that level, we are talking $55 a barrel and that makes a lot of money for some fields, and makes relatively big money for a lot of smaller exploration companies tip-toeing towards production.

Big oil is facing heavier costs for the raw material in production-sharing agreements and taxes, and is faced by rising general costs. Oil prices might be high, but margins are under pressure. Big companies are no longer the sure thing that rising oil prices might suggest.

The winners, though, still look to be the smaller companies which are finding new oil and are approaching production. Their shares must be viewed as speculative, given the volatility of the oil price. But the upside is still considerable, especially when relative tiddlers can be transformed by good fortune with the drill bit.

Northern Petroleum (NOP) has done brilliantly for us, despite extreme volatility in the share price over the past couple of years. But there is a six or seven-fold gain from the early recommendations, and good gains for any who bought along the way, or in recent bouts of depression. Plus markets tiddler ATI Oil (ATIP) has also done well.

Both continue to look way undervalued, with assets still packed full of potential, situated in areas with low political risks, close to ready markets. If you have them, hold tight. If you are prepared to risk the impact of volatile oil prices (both companies look good even at $60 a barrel) and share prices, there is still time to buy. In these uneasy markets, though, do be aware that any share must carry a fair degree of risk, so do not commit too much.

It remains a puzzle why the market does not value these two more generously. Part of it, perhaps, might be due to the limited drilling programme on the horizon. Longer term that does not matter, given a firm to rising oil price. But it might discourage some players.

With that in mind - and sharing all of the risks and cautions above I have been looking for another punt to play. Nautical Petroleum (NPE) fits the bill. The price is 11.75p to 12p, with a market capitalisation of 152m at 12p. The 12 month low was 6.5p, and the high 13.25p. It recently reported pre-tax losses of 860,000 for the year to end June, down from losses of 7.1m for the previous 18 months. These are largely irrelevant for such a company, which specialises in seeking heavy oil, mainly in the North Sea.

What matters most is the cash, and Nautical has played that well. At the year-end, there was 8.9m in the bank, and commentators were suggesting that was enough to meet commitments. But the company took advantage of the favourable climate for oil stocks and weighed in during October with a placing of 190m shares at 10.5p to raise 19m net of expenses.

That was followed by a smart deal which effectively raised the stake in one exploration block and brought in private company Canamens to cover a chunk of the drilling cost on the Kraken discovery, saving a net 700,000 in costs according to paid-for research group Hardman.

This appears typical of the way Nautical has been keeping costs to a minimum, bringing in partners to share the load. It comes after a statement explaining a drilling programme which should mean a net capital spend of about 9m for the six months to December 31, and about 11m for the 12 months to December 31, 2008. Current estimates suggest a 3m contingency against drilling cost overruns in 2007, with between 7.5m and 10m to fund drilling in 2008, and the balance going to fund the Mariner field development programme, assess further licence acquisition farm-in opportunities, and for working capital.

This cost schedule is re-assuring for such a company, and clearly went down well. The placing by KBC Peel Hunt was over-subscribed, and the company says it strengthened the institutional shareholder base.
Neither of the two biggest shareholders subscribed for the issue, and was diluted. So International Energy Group SA now has 475.7m shares, or 37.5%, and clients of Goldman Sachs have 105.5m shares, or 7.93%.

These make intriguing connections, and suggest that Nautical has influential friends. International is Swiss-based and linked to heavy hitters in the international oil trading business. Formerly Masefield Energy, this has an interesting background which leads to Marc Rich, a controversial commodities trader pardoned by President Clinton in 2001. There is a fun report on www.businessweek.com/magazine/content/05_29/b3943080.htm - 81k -

Nauticals directors have fairly conventional oil industry backgrounds. It looks as if the company knows its way around in a fashion which could help such a small, speculative business. International Energy appears to bring useful skills to the table, particularly in processing heavy oils, and looks to have helped the company in the Kraken deal mentioned above.

The shares are at an interesting juncture. Nautical has put together a decent portfolio of prospects, with around six discoveries and a similar number of exploration prospects. Now the drilling action is getting under way.

A Kraken appraisal well spudded (started) on October 24, with results expected towards the end of this month. Kraken is shallow, was discovered in 1985 and tested oil with the best contingent reserves totalling 53m barrels. Nautical has a 45% interest and has farmed out a stake to Korean SK Corporation which is paying 60% of the costs.

The hope is to confirm the companys model, establishing a thicker reservoir development with a side track to locate an oil/water contact. With luck, that could at least double the potential reserves. So it is probable that the drill will find oil it is just a matter of how much and how far this can take the company towards actual development planning, perhaps in the New Year.

Nautical has three exploration blocks nearby, and the SK deal includes a commitment to a well in 2008 in one of them with unrisked potential of 25m barrels.

Kraken will be followed by an exploration well on the relatively shallow Mermaid prospect, which is not far to the north (most of these North Sea blocks are fairly close together). There are guesses of up to 129m barrels. There are also two blocks to the west of Kraken.

Mariner is also close by Kraken, and is the most heavily appraised undeveloped field in the North Sea, with seven appraisal wells and over 650,000 barrels produced in flow tests. Nautical owns just under 27%, with gross 2p reserves put at 82m barrels. Chevron was the operator, but that position has been taken over by StatoilHydro (Norsk-Hydro). Statoil has a better understanding of heavy oil, and is likely to push ahead more quickly than the original 2010 estimate.

Nautical is also planning to drill the Catcher prospect (15% interest) early in 2008, way to the south, followed by an exploration well on Selkie (60% Nautical), one of three structures close together which include Skipper (Nautical 98.5%) where there was a promising discovery in 1990.

In addition to the North Sea, Nautical also has 22% of the Grenade prospect in the Aquitaine basin in France. This is a large heavy oil discovery originally made in 1975 with perhaps several hundred millions of barrels, but a modest estimate of recoverable reserve so far. There is likely to be an appraisal well before the end of 2007, perhaps later this month, with the chance of testing to confirm production in the spring of 2008. With luck, that could lead to relatively early revenue, maybe in 2008.

Nautical also has other North Sea interests where there will be seismic shot, and there is a significant interest in the East Irish Sea following the 24th licensing round in February 2007. One of these blocks contains the Merrow prospect where seismic is being reprocessed. That could have sizeable prospective resources of oil or gas.

There is a bewildering list of opportunities opening up for Nautical, and the company is starting to advance them. Chief executive Steve Jenkins has suggested the company is in an excellent position to confirm potential oil reserves of over 100m barrels, in addition to confirming prospectivity of a further 100m barrels of oil.

It is important to realise, however, that we are talking heavy oil. This is the thicker stuff, harder to transport and refine, with a net yield below that of lighter oil. It has not hitherto been popular, but there is perhaps twice as much of it around the world as there is of lighter oil.

It has a low recovery rate, and is more difficult and costly to extract and transport, though it is often in shallower depths than light oil. It sells at 10% to 20% below the price of light oil. As a result, it has not been exploited much in the North Sea, where there is thought to be substantial quantities.

The soaring oil price is changing attitudes.Nautical has specialised equipment which allows it to test heavy oils, and through associate company Quadrise has access to a new technology which converts heavy oils into a fuel for power generation, adding a premium to the price. The link to International Energy Group also gives access to marketing skills.

Obviously there are risks. A disappointing result from Kraken could hit the price. But if there should be a setback no reason to suppose it, but), attention will turn quickly to progress on Mermaid and Grenade. And so on.

The shares could be volatile, so do recognise the speculative nature of this one. That said, the company is well financed, has respected management, and appears to know what it is doing. It has a good City following for such a modest operation.

Given that major production is two or three years away, it is necessary to apply all manner of discounts for uncertainties. Most estimates suggest the current asset value is comfortably in excess of the share price. Good drilling results could mean it is twice the current price and more. Continuing success, eliminating risk discounts as events unfold, could mean an asset value several times greater.

This is one I have been watching on and off for some time, and should perhaps have recommended earlier. That would have looked smarter. I am coming to it now because it is hard to find convincing speculations in this market, the oil sector looks much the most appealing, despite the risks to the oil price, and we are getting to the action point which could transform the rating. .

Though oil could be volatile, over a two or three year period it ought to move higher, and is unlikely to stay long at depressed levels, simply because demand is outpacing supply. That creates a great opportunity for smaller explorers who are moving towards production. Nautical fits that bill, with risks to any one of the current projects, but action close at hand on a sufficient number of projects to reduce the risk. We know there is oil on several of those projects, the heavy oil which is now coming to be properly valued.

Fingers crossed.

Ends

Hi PP, thanks for that.