In two short years Australian oil explorer Pura Vida Energy has secured two exceptional assets off the African coast and a farm-out agreement that could make it billions.
Oil exploration can be an expensive and risky business, so gaining some security is a major advantage for any junior company. Australia-based, Africa-focused Pura Vida Energy (ASX: PVD) is currently enjoying just that after finalising a high-value farm-out agreement with US company Freeport McMoRan Oil & Gas for its Mazagan permit, off Morocco. Pura Vida is now lining up a similar agreement for its Nkembe permit off Gabon – another promising asset surrounded by oil majors in an oil-producing region. Not bad for a company formed just two years ago.
Pura Vida was co-founded by Managing Director Damon Neaves and Technical Director David Ormerod, following 10 years working together in the industry. Neaves says breaking away to start their own company was “a great decision” from which he’s never looked back.
“I think David and I were both at the stage at which we wanted to form our own company, do our own deals and cut our own path,” he remarks.
“It’s come together really well; we’ve achieved a lot over the last two years. Certainly, the assets we have are exceptional for a junior company and I think that’s apparent from the great farm-out deal we did on the Moroccan acreage.”
The Mazagan permit, covering 10,900km2 and located around 100km off Morocco, could hold as much as 7 billion barrels of oil. The Toubkal prospect alone, which is to be the first well, has a mean resource potential of 1.5 billion barrels.
Pura Vida bought the Mazagan block in late 2011 and undertook 3D seismic studies and a drop core programme in the area that found micro-seeps of Jurassic oil. Neaves says the company was first attracted to Morocco by its political stability, high 4.5% GDP growth and comparatively plentiful communication and transport infrastructure. Coming here has proven to be another good decision for Neaves.
“We’ve had a really positive experience in Morocco,” he says. “We’ve managed to get on and do a lot of work here in a very short period of time. Fortunately, results have been really positive and we’re excited now to be entering the drilling phase.”
Under the farm-out agreement the drilling, along with tasks such as the well planning and contracting, will be undertaken by US company Freeport McMoRan Oil & Gas. “They’ve got exceptional qualifications,” Neaves adds. “They recently drilled a 30,000ft well in the Gulf of Mexico – it was one of the deepest ever drilled.” Freeport paid Pura Vida US$230 million for 52% of the Mazagan project, shrinking Pura Vida’s ownership to 23%. That doesn’t worry Neaves.
“Toubkal has 1.5 billion barrels, so that’s 350 million barrels [mmbo] net to our interest,” he explains. “It’s an enormously leveraged event for us and will be transformational for our company if we have a discovery there. You’d be hard-pressed to find another junior with this kind of high-impact drilling programme.”
The Nkembe block in Gabon presents a different type of opportunity. While Mazagan is more of a frontier project, Nkembe sits “at the heart” of a prolific oil basin, surrounded by major companies at advanced stages of development. For example, just to the south of Nkembe is the Diama-1 exploration well where Total (NYSE: TOT) is targeting a 2,250mmbo pre-salt prospect. If this is successful, it will be the first major pre-salt discovery offshore Gabon and a “watershed moment” for the country, says Neaves.
“With some eight other wells being drilled there over the next 12 months, the industry activity in Gabon will be enormous,” he remarks. “What we like about Gabon is that there’s an established industry here; it’s been here since the 50s, with Total and Shell, meaning there’s a lot of infrastructure including pipelines leading to the port oil refinery.
“It also has shallow water, making it a much cheaper operating environment; we can drill wells there for a fraction of the cost we can do in Morocco. The real exciting bit is the upside from the pre-salt play, which extends into our block.”
Pura Vida is currently interpreting the existing 3D seismic data over the Nkembe block and expects to release resource estimates in late July this year. In August, it will commence a farm-out process to secure a funding partner for the new 3D seismic acquisition and drilling in the block.
Together, the Mazagan and Nkembe assets form Pura Vida’s core business and constitute the first two parts of a diverse portfolio. “One is frontier, big-scale exploration and the other a producing basin with discoveries on the block, giving us a good balance,” says Neaves.
“We have both exploration and appraisal activity, and in that way we diversify the risk. We’d like to continue to do that – picking up the right acreages for generating value and fulfilling our strategy of building a diversified portfolio.”
Pura Vida is in an enviable position and has many hallmarks of a good investment proposition. The farm-out deal on Mazagan with Freeport provided an investment benchmark, valuing its interest in the Moroccan project alone at US$100 million, while the company’s market cap is half of that. “These are serious exploration targets we pursuing,” he adds. “We’ve got a good equity position, quality acreage and just look at or neighbours – Chevron, Total, Petrobras – these are much bigger players, and for a junior we’ve got a great portfolio of assets and a very strong management team. We’ve been very successful in attracting funding from the industry to fund our Morrocan project, leaving us with no financial risk there. There is activity all around us – in the next 12 months we’ll see nine wells drilled offshore Gabon.”
Pura Vida’s chances of striking oil at Toubkal have been estimated at one in three, and success here would truly be a game-changer for the company. If it doesn’t happen, Pura Vida has a second chance in the funding it’ll have left over for another well. The pre-salt trend in Gabon means there is much upside in the block and it won’t be long until a farm-out deal is finalised there. “I think we’ll become a very different company in a relatively short period of time,” Neaves remarks.
“We’ve had great success at moving things along quickly, and matured the company a long way. I see us becoming a substantial mid-cap oil company, evolving over time to become a producer. Certainly, we’re off to a flying start.”