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

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.

Yes - many thanks PP!

Something more :

http://www.oilbarrel.com/news/article.html?body=1&key=oilbarrel_en:1195610260&feed=oilbarrel_en

21.11.2007

Heavy Oil Specialist Nautical Petroleum Has A Notable Success With The Drilling Of The Kraken Prospect in The UK North Sea

London Aim-listed Nautical Petroleum specialises in heavy oil, mostly in the UK North Sea but also in France. Heavy oil has not been popular in the past. It can be difficult and expensive to extract, have low recovery rates and sell at a discount to more conventional light crudes.

Now, with fears that light oil may be going into short supply and with oil prices at record levels, companies have been looking anew at heavy oil. Moreover, Nautical, through its association with fellow Aim member Quadrise Fuels International, says it has access to proprietary technology, which not only makes it easier to extract heavy oil but also can add value by processing so that heavy oil when broken down into various components can sell as fuel oil for power plants at a premium to Brent Crude rather than a discount.

Nautical has accordingly for the past two years been assembling a portfolio of known discoveries and development prospects. It now numbers seven discoveries and development prospects in the UKCS and France amongst its assets as well as some low cost exploration opportunities.

One key asset is the stake in the Mariner field. This is said to hold the record of being the most heavily appraised undeveloped field in the North Sea. There have been a total of seven appraisal wells, and, in flow tests over 650,000 barrels have been produced. Gross 2P reserves have been put at 82 million barrels and these are bookable as proven and probable reserves. Nautical has just under 27 per cent of this field.

For various reasons it is taking time to develop Mariner. It has also become clear that the market has wanted Nautical to prove up some of its other prospects. When it announced last September a four field programme of drilling we said now the fun begins. In the event drilling has turned out to be more fun than expected.

The Kraken appraisal well 9/2b- 2 has been drilled by Nautical and its partners at a location 2.7 km north of the original 9/2-1 discovery well drilled in 1985 which tested the Heimdal sandstone. The 9/2b-2 was drilled to a depth of 4378 ft subsea and encountered oil-bearing Palaeocene Heimdal sands at a higher elevation than in the discovery well. There was a gross oil column of at least 252 feet, which confirmed a substantial accumulation. There was 79 feet of net pay within the high quality Palaoecene with good porosity and permeability.

Commenting on the well, broker KCB Peel Hunt said: The successful appraisal well on Kraken announced by Nautical suggests that potential reserves in the field may be significantly higher than the gross 53 million barrels of contingent resources estimate disclosed by the company. Equally importantly the oil found in this well is lighter than anticipated at 18 degree API. Based on the results to date, we are increasing our estimate of recoverable reserves on Kraken to 100 million barrels (from 53) and reducing the risk factor from 50 to 70 per cent (probability of success).

The broker says there is further appraisal work and most likely a production test still to be carried out. This could demonstrate further upside on the field. Steve Jenkins the CEO of Nautical said: I am extremely pleased with our first operated well. This is a very positive result for such an aggressive appraisal well.

And of course, there is more drilling to come. Nautical will shortly be mobilising the rig to start drilling the Mermaid exploration well on Block 9/11c. It has a 50 per cent interest in this prospect and will have the initial well costs fully carried by its partners. Mermaid is a potential 112 million barrel prospect in the Maureen reservoir, lying immediately to the south of the Mariner field and in an analogous geological setting.
In France, Nautical is preparing for an appraisal well in the Grenade prospect. This should lead to testing during the spring of 2008 to confirm production. Nautical has a net interest in 2.8 million barrels of best estimate contingent reserves on the Grenade prospect in the Aquitaine Basin.

Nautical will also commence a site survey of the Selkie prospect in the UKCS which contains net best estimate prospective resources of 13.2 million barrels of oil, ahead of a planned well in 2008.

While it might still be a touch premature to say as Steve Jenkins is wont to do that the day of heavy oil has truly arrived, it can be claimed that proving up the prospectivity of a further 100 million barrels of oil reserves through the current drilling programme is looking on the conservative side.

Looking like a break of 13p is coming, for good.

I certainly hope it does.........

Edison note on "Junior Oils" - mentions AEX, NPE amongst others.

PDF file can be downloaded on the link below :

http://www.esnips.com/doc/128fc9a0-7004-48dd-bf19-57e9a14e1055/JuniorOil


.

Rec'd this from Peter Shearlock's small cap stock picks this morning...
Looks ecncouraging...and I've topped up a bit this morning as well!

Nautical success at Kraken

Nautical Petroleums first operated well on the North Sea Kraken field has come up trumps, encountering a long oil column that justifies a material upgrade to earlier reserve estimates. The oil is also lighter than expected, which should aid recovery. Hardman & Co now reckon Kraken alone is worth 13p a share and the whole portfolio, including exploration acreage, worth 31.6p a share. So, with the shares currently trading at 13p (up from Septembers 10p recommendation price), everything else is in for free. With Nautical now moving on to drill the Mermaid field, the shares are a strong hold.

RNS today:
Nautical Petroleum PLC
27 November 2007

Nautical Petroleum (AIM:NPE), the independent E&P company focused on the
development of heavy oil assets in the UK and Europe is pleased to announce that
the Mermaid exploration well 9/11c-13 spudded on 22 November 2007.

9/11c-13 is an exploration well on the Mermaid Prospect which is analogous to
and lies directly south of the Mariner discovery (Block 9/11a). This is
Nautical's second operated well and initial results are expected towards the end
of December.

The interests held in Block 9/11c are Nautical Petroleum plc 50%, Celtic Oil
Limited (wholly owned by SK Energy) 40% and Silverstone CNS Limited 10%.

Commenting on the spudding, Steve Jenkins Chief Executive of Nautical said:
'Mermaid is the second prospect Nautical is testing in our drilling programme,
where the technical work completed to date suggests that best estimate
prospective resources total 129 mmbo. If successful, this will represent a
further material addition to Nautical's resources and reserves.'

This lot look interesting

Glad you think so Big Al.

This is starting to be a frustrating share, it was sat at approx the 12.5p mark before the last RNS which was truly positive, including higher grade oil and lots more of it... and where is the sp now...???!!!

WHy are we not currently higher on this? Does anyeon think we are looking at New Year before we see anything worth writing home about?

Looking at the graph I think the price is nicely consolidating this level and when we do break 13p it will be more sustained. More patience required for the time being. Also I note in the Hardman November update they expect a flurry of news in the coming months.

Anyone looked at other comnpanies lately to see how the volatile markey is affecting them?

Very few are immune.

Evening all.

Warm night.

michaelwalters.com - Heavy Oil - Nautical Petroleum (NPE) [6/11/2007]

Link to ADVFN site I think

pb - the link works and a good idea. Why not put it in the header and I will do likewise

steelwatch (aka oilwatch)

Ha!

I knew it was you you monkey!!!

I really do think your blog over the road is the market leader.............

It's time to update this header in any event here, but I wonder if it's time you opened one here, or the alternative could be for you to post me your work and I claim the credit for it!!

LOL