BPZ Resources, (BZP)

BPZ Resources (BZP) - ($18.72) - Interesting Little Peru-Centric E&P

Note: the ticker and the name of the company are not the same. If you are looking at a $200ish quote you have the wrong issue. This is a $18.72 stock as of 3/7/08. 

Background: This is a Houston based E&P with exploration licenses in Peru and some non-operated acreage in Ecuador. They're focusing on proving up undeveloped proven reserves via low risk development wells and re-entries of existing wells. Their four exploration licenses are in good hydro-carbon rich territory. In aggregate, they have worked up 50 prospects on their acreage.

Peruvian Economics: Favorable royalty environment, low operating costs.

To get close to their margins take WTI and subtract:

• $4.50 per Barrel for Royalties
• $8 per barrel for location discount
• $7.50 per barrel for cash operating costs (LOE, G&A, production taxes)

Net operating margin  = (WTI - $20)

So at $105 crude they would gin cash at a rate of $85 per barrel. Insert whistle here. 

Their Operations: Peru - 4 Blocks

 

• Block Z-1 (Pacific Ocean) (100% working interest). 740,000 acres from coast line to depths of 1,100 feet. They are focused on the Corvina & Albacore Fields:
• Corvina - Oil (natural gas structures as well but first they are concentrating on developing the oil)
• 10,000 square km of 2D seismic over the structure.
• this is an old field with 18 existing wellbores and 4 old platforms,
• they began work here in late 2006 and have drilled 3 new wells and recompleted an old one and have production from two of these (the 21XD and 14D) of approximately 4,200 BOEpd as of 2/08.
• First Well (completed Nov '06):  Drilled from the CX11 Platform: CX11-21XD
• Tested oil and gas from the Upper and Lower Zorritos formations in 6 drill stem tests (DSTs)

• Second Well: recompleted the CX11-16XD well in June 2007----
• Third Well: the CX11-18XD is set to be completed by April 1 (thinking it adds another 2,000 BOEpd)
• Fourth Well: followed by the 20 XD (also 2,000 bopd) by July 1 in essence doubling production.
• Fifth Well planned: the 15D will be drilled later this year to delineate reserves further afield from the platforms.

• These four wells form the backbone of their guidance: Using very back of the envelope math and assuming 2008 oil averages $70 in a low case and $90 in a high case I get CFPS for 2008 of:

• Albacore Structure, large 6,000 acre structure, a little further offshore than Corvina
• This structure had 8 wells drilled on it during the 70s and has one old platform with 3 shut in wells on it at present.
• they plan to twin a well (the 8-X-2) during 4Q08 and
• then to recomplete the 3 shut in wells mentioned above,
• a fifth new well is planned for later in 2009.
• they expect production of 8,000 bopd by 3Q09 and that's fine as projections go (2,000 bopd per well) but I don't have any data to sink my teeth into on the original wells to get a handle on productivity ~ will do a little snooping here.
• Clearly they see this as the growth engine for 2009 and if it comes in as expected you could see CFPS up ~ 50% in 2009 into the mid $3's per share.

Onshore Peru Blocks: 

• Block XXIII -  Mancora Gas Play

• Basically they envision that a large structure gas play seen off the coast in the Z-1 block extends 50+ miles running from southwest to northeast, across Block XIX and into this block.
• The market for potential gas volumes from this play is still under development and would serve increasing Latin American demand for natural gas coming from power generation (they plan to build a gas-fired turbine), LNG, and piped gas to Ecuador.
• Planning a 3D shoot for 2008/09

• Block XIX: they have 200 km of 2D seismic and are planning a test in the fourth quarter. 

• Block XXII

• Contains several large structure and there is oil production nearby.
• have some 2D seismic and are planning to conduct a 3D shoot 2008/09.

Ecuador - Block 2: Plan to participate in some directionally drilled onshore to offshore targets with Brazilian operator Pacifpetrol.

Reserves: They are using Netherland Sewell (NSAI) for reserve estimates. This is a high quality firm and speaks volumes to management's conservatism (NSAI and Ryder Scott are the best in the reserves business often underestimating reserves).

• For Corvina alone, and excluding the success at the 18XD well which occurred in 2008, NSAI has put 1P Reserves (the proved reserves the SEC allows you to book at year end) at 17.8 mm barrels.
• NSAI's estimate of 3P reserves (proved, probably, and possibles - see definitions page) balloons to 59.8 million barrels from the $974 million of PV10 they credit the 1P reserves with.  On this basis, the PV10 of the reserves at Corvina begins to justify the valuation of the company. Year end 3P PV10 = $1.877 billion vs a Total Enterprise Value for (BZP) of $1.188 billion, but the market won't give you credit for 3P reserves until they start moving up the chain towards 2P and 1P status.
• I'd also point out that the reserve estimates don't include anything beyond Corvina for now which leaves room for upside revisions in the near term (2008/2009) as the company begins to test some of the other blocks.

Valuation: Very much depends on their ability to execute at Corvina in 2008 and at Albacore in 2009. While PV10 is a useful benchmark for company valuation when a company is in the development stage (ie, they have little to no production) it becomes less valuable as they make the transition to a viable, cash flowing entity (unless they're being acquired). I find it unlikely that they will be acquired for the value of their 3P reserves but they might get $10 per barrel for them in the ground which would not justify the current stock price. However, if they generate the mid $3 CFPS that success at both Z-1 fields would indicate for 2009 then the company is a bargain based on its growth rate and low operating costs.  

In A Nutshell: Interesting. Favorable economics and an apparently low risk development program. The Peruvian government is not as apt to interfere as much as in some neighboring states. Management is aligned with the company's fate holding a quarter of the outstanding shares. Institutions hold another 42%. I like that it's not costly on a forward basis and I like that it has multiple stock catalyzing events in the near term. Their are no options here but I plan on working up a little less back of the envelope model and perhaps taking a piece of the common and settling back for a couple of years to let it run. I'm not going to rush either as the name is oily (at least until they get some of the gas structures (Corvina has a lot of gas + plus the Mancora gas play mentioned above flowing) and at $105 oil and the run the stock has had, I feel it could be due a pullback. I plan to publish this one as a separate piece in coming days with a little more detail.