Petroceltic (PCI) is an E&P with assets in Egypt, Bulgaria and Algeria,where it is developing its flagship gas project Ain Tsila. As producing fields in Egypt and Bulgaria decline and exploration is de-emphasised, the valuation proposition in PCI shifts steadily towards Algeria. The drilling contract for Ain Tsila was awarded in April and the project is on track to be sanctioned by end-2015 and start up in Q418. Ain Tsila is fully funded until Q216 thanks to Sonatrach’s carry. The June launch of a $175m secured bond is an important step towards securing financing for H216-2018 – further progress on this front would remove uncertainty. A RENAV of 154p/share (which should grow c 16% pa over time) indicates the stock is pricing in nothing for a possible second phase at Ain Tsila or exploration.
Execution at Ain Tsila underpins value creation
PCI plans to monetise 2.1tcf of dry gas and 175mmbbls of condensate/LPG at the Ain Tsila gas field, targeting a Q418 start-up date. Ain Tsila is a transformative project for PCI, the only independent to develop a gas project in Algeria. Risks are mitigated by the use of proven technology and Algerian PSC terms, which protect returns from cost overruns and effectively guarantee a base return on investment. Key catalysts are the EPC contract awards and start of development drilling by end-2015. Given the vast gas resources in place (>10tcf GIIP), there could be further value upside from a second development phase in the long term (2022+). Ain Tsila will provide a significant production boost as Egypt and Bulgaria decline.
Exploration shifts to lower-risk plays
PCI is moving away from high-risk exploration and focusing activity on onshore licences in Egypt close to existing blocks, where discoveries could be brought onstream fairly quickly. In the medium term, exploration prospects in onshore/shallow-water Italy and offshore Egypt could offer significant upside.
Valuation: Ain Tsila value grows over time
Our core NAV is 125p/share, including Egypt, Bulgaria and Ain Tsila Phase 1. Hence at the current share price, the market is giving PCI no credit for Ain Tsila execution and upside and for exploration in Egypt/Italy. Our RENAV is 154p/share. As the project progresses and first gas nears, its value should grow, supporting a RENAV CAGR of c 16% out to 2020. We estimate PCI requires c $580m of debt funding to get through the heavy spend phase in H216-18 until first gas. Beyond the recently announced $175m secured bond issue, we expect it to look to a mix of corporate bonds, project finance and RBLs. Progress on refinancing over the next 12 months and on strategic issues with Worldview would be a positive catalyst.