Canaccord Analysis

Rafi Khouri, MBA
44.20.7050.6645
[email protected]
Energy -- Oil and Gas, Exploration and Production
Tanganyika Oil Company Ltd
BUY
Undervalued heavy oil resources
TYK : TSX-V : C$11.90
Initiating research coverage
TARGET PRICE: C$29.00
We are initiating research coverage of Tanganyika Oil Company with a BUY
recommendation and a target price of C$29.00. Our target price is based on a multiple
of 1.0 times our risked sum-of-the-parts NAV estimate of C$28.52 per share (fd).
Inside
Investment highlights.............................. 3
Reserves and production growth ........... 5
Valuation .................................................. 6
Financial condition .................................. 9
Corporate profile....................................10
Operations..............................................11
Appendix.................................................16
Investment risks ....................................18
Overview
Tanganyika is an international oil and gas company with strategic focus on the Middle
East. It currently has over 12,000 bopd (gross) of oil production, 429 million barrels of
2P reserves (net), and over 6,441 million barrels of Stock Tank Oil Initially In Place
(gross) on its Syrian heavy oil plays.
Reserve growth potential
Tanganyika’s current business model is centred on increasing its heavy oil recoverable
reserves and production by using proven Enhanced Oil Recovery technologies.
Specifically, in the long term, the company expects to increase its current 2P reserve
estimate significantly by expanding its current EOR operations. The company also aims
to grow its current 12,000+ bopd production.
Attractive valuation
Tanganyika is currently trading significantly below our estimate of the company’s
risked NAV, which includes a commercial risk premium for the Syrian assets.
At C$11.90 per share, the company is valued slightly above its proved reserves NAV,
and significantly below our calculated proved + probable (2P) NAV, creating an
attractive buying opportunity for investors. While we acknowledge risks associated with
EOR operations, we note that Tanganyika currently reports reserves under Canadian NI
51-101 standards, which is regarded as one of the more stringent reserve booking
methodologies in use.
Canaccord Adams is the global capital markets group of Canaccord Capital Inc. (CCI : TSX|AIM)
The recommendations and opinions expressed in this Investment Research accurately reflect the Investment Analyst’s personal,
independent and objective views about any and all the Designated Investments and Relevant Issuers discussed herein. For important
information, please see the Important Disclosures section in the appendix of this document or visit
http://www.canaccordadams.com/research/Disclosure.htm.
15 January 2008
2008-006
2
Figure 1: Corporate summary
Tanganyika Oil Company Ltd. (TYK: V, TYKS:OMX)
Company summary
Shares & listing information
Overview:
Tanganyika trades on the TSX Venture in Canada (symbol TYK), and via Depository Receipts on the Nordic
Exchange (symbol TYKS). Trading volume is relatively light in Canada, and liquid on the Nordic Exchange.
The company has five major shareholders that own approximately 32.5% of the basic shares outstanding. .
Company name
Tanganyika Oil Company
Ticker
TYK, TYKS
Exchange
TSXV, OMX
Recommendation
BUY
Shares & capitalization:
Current share price*
C$11.90
Shares outstanding - basic (M)
56.9
12-month target price
C$29.00
Shares outstanding - float (M)
56.4
Total projected return (incl. dividends payable)
144%
Tanganyika is an international E&P company operating in the Middle East, with heavy oil assets in Syria. The
company currently has 429 million barrels of 2P oil reserves. D&M, the company's third party engineering
consultant, estimates a potential of 6,441 mmboe of unrisked Stock Tank Oil Initialy in Place from these
assets. Tanganyika is currently producing 12,000 bopd (gross). Tanganyika operates all its licenses.
Shares outstanding - fully diluted (M)
59.2
Market capitalization (C$M)
$677.6
Enterprise value 2007E ($M)
$631.0
Key shareholders*:
Ellegrove Capital Ltd.
14.4%
Management & Directors
* as at Jan 15, 2008
1.0%
* as at Jan 15, 2008
Resources (Dec 31, 2006) (MM Bbl)
Reserves
Properties
Proved
Probable
2P
3P
Area
Oudeh
50
148
198
280
Syria
Tishrine
38
178
216
296
Oudeh
--> Current production & development
1
14
15
27
Tishrine
--> Current production & development
Sheikh Mansour/Sheikh Suliman
--> Development & Exploration play
Sheikh Mansour/Sheikh Suliman
Total
89
340
429
604
Proved
Probable
2P
3P
Oudeh
2,102
931
3,033
3,921
Tishrine
2,688
446
3,134
3,451
128
145
273
424
4,919
1,522
6,441
7,795
Oil Initially In Place
Sheikh Mansour/Sheikh Suliman
Total
Rli (Yrs)
67
2P NAVPS (Unrisked)
95
$39.62
Key operating and financial data
Year end: Dec. 31
Other/Details
Valuation
Year end: Dec. 31
P/CF
2007E
2008E
2009E
PRODUCTION (Net):
1,922
Natural gas (mmcf/d)
Total prod. (boe/d)
% Natural gas
1,609
9,693
25,286
0.0
0.0
0.0
1,922
1,609
9,693
25,286
0.0
0%
0%
0%
0%
2008E
2009E
N.A.
7.5x
2.4x
N.A.
N.A.
7.0x
2.3x
P/E
N.A.
N.A.
11.5x
3.3x
Target P/CF
N.A.
N.A.
18.2x
5.9x
Other Parameters
$65,102
EV/BOE (2P)
$1.47
EV/BOE (Reserves + Resources)
Crude oil (b/d)
2007E
N.A.
EV/CF
EV/BOED
2006A*
2006A
CCI Nav (C$/Sh)
$0.09
$28.52
Commodity Price Assumptions
2007
2008E
2009E
LT
$72.59
$75.05
$74.00
$70
UK gas (US$/mmbtu)
$5.29
$7.45
$6.66
$6.21
Forex (US$/C$)
$0.93
$1.00
$1.00
$1.00
Brent oil (US$/b)
FINANCIAL STATEMENTS:
Net Revenues ($M)
Net Operating Expenses ($M)
$33
$32
$177
$483
$14
$18
$73
$190
Income Tax ($M)
$0
$0
$0
$0
Net Income ($M)
-$8
-$20
$59
$207
Sale price
Operating Cash Flow ($M)
$7
$4
$91
$279
CFPS - basic
$0.15
$0.05
$1.60
Operating 'Net Back estimates*
Oudeh
Tishrine / SM
$54.00
$52.50
Base Crude Production (BCP)
$0.74
$4.03
Capex
$6.37
$6.39
Opex
$9.87
$9.27
$4.91
CFPS - fd
$0.15
$0.05
$1.59
$4.89
Royalty
$0.12
$0.12
EPS -basic
EPS - fd
-$0.01
-$8.00
-$0.24
-$0.24
$1.03
$1.03
$3.64
$3.63
State Profit Oil
$24.70
$21.15
Net Back
$12.20
$11.54
Capex ($M)
$74
$127
$200
$400
Net Debt (surplus) ($M)
($95.7)
($46.6)
$62.7
$183.5
Net debt/cash flow
(12.8x)
(12.0x)
0.7x
0.7x
* Includes discontinued operations
*Source: Canaccord Adams estimates
Management & directors
Production profile (2P Blowdown) (Gross)*
Name
Position
200000
Executive Management
Gary Cuidry
CEO
Ex Calpine, AEC, Nexen, Oxy
Ian Gibs
CFO
Ex Valkyries, First Int'l Oil
Donald Miller
180000
160000
Tishrine/SM
Oudeh
140000
GM (Syria)
Ex Apache, Arco
Lukas Lundin
Chairman
Lundin Mining, Ex Lundin Oil
Gary Cuidry
CEO
Ex Calpine, AEC, Nexen, Oxy
Keith Hill
Non-exec
Pearl Exploration, Ex Valkyries
60000
William Rand
Non-exec
Rand Edgar Capital
40000
Hakan Ehrenblad
Non-exec
Tethys Oil
20000
John Craig
Non-exec
Cassels Brock and Blackwell
Bryan Benitz
Non-exec
BOPD
Board representatives:
120000
100000
80000
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
0
All values are in US$ unless otherwise statetd.
*Source: Canaccord Adams estimates
Source: Company reports, Capital IQ, Bloomberg, Canaccord Adams estimates
Tanganyika Oil Company Ltd
15 January 2008
3
INVESTMENT HIGHLIGHTS
Tanganyika Oil Company (Tanganyika) is a successful international oil and gas company,
currently focused on the Middle East. Combining technical expertise with a solid network
of local contacts, the company has been able to generate value through increasing
recoverable reserves. For 2006 year end, the company increased its Syrian heavy oil
reserves to 428.7 million barrels of oil, a 10-fold year-over-year (yoy) increase.
Tanganyika currently has two Contracts for Development and Production of Petroleum in
Syria. The company has a 100% interest in the Oudeh and the Tishrine-Sheikh Mansour
blocks, located in North Eastern Syria. The main oil bearing horizons on both blocks are
Pliocene (Chilou formation), Cretaceous (Shiranish formation), and Triassic (K. Dolomite
formation) carbonates. Using our 2008 production estimate of 17,500 bopd (gross), we
calculate a Reserve Life Index (RLI) of 67 years on a 2P basis, and 97 years on a 3P
basis.
In addition, having grown its Egyptian reserves from 0.8 million barrels (net) of oil in
2005 to 5.6 million barrels (net) at the end of 2006, Tanganyika recently sold these
assets to TransGlobe Energy (TGL : TSX : C$5.26 | BUY) for US$70 million (inclusive of
working capital adjustment). On a per barrel basis, this equates to US$12.5 per barrel of
2P reserve, significantly higher than the current valuation on Tanganyika’s Syrian assets.
Going forward, we believe significant growth potential remains achievable from the
company’s 6.4 billion barrels of Stock Tank Oil Initially In Place (STOIIP) (gross, 2P
basis). The company recently initiated Enhanced Oil Recovery (EOR) pilot projects aimed
at using steam injection to increase recovery factors. As of Q3/07, the company had
seven thermal wells on the Oudeh block, eight thermal wells on the Tishrine block, and
had achieved notable production rate increases from EOR versus cold production.
According to Tanganyika, results on the EOR programme indicate the potential to
increase recovery factors from 7% of Oil Initially In Place (OIIP) to a minimum of at least
14%. For the 2007 year-end reserves update, we believe several conflicting factors could
impact the company’s bookable reserves. We expect the company to book additional
reserves from recently discovered extensions to the Tishrine field. Countering this, we
would not be surprised by a reduction of some of the Oudeh booked reserves, as part of
that field has proven to be of higher viscosity than previously anticipated, preventing
cold production of this oil.
However, we see the higher viscosity issue as a short-term hiccup rather than a longterm fundamental problem. Tanganyika currently anticipates the higher viscosity oil on
Oudeh to be highly receptive to thermal production. As such, any potential reserve
reduction from these areas for 2007 year-end could be reversed for the 2008 year-end
report.
We are initiating coverage of Tanganyika Oil Company with a BUY rating and a target
price of C$29 per share, which represents our risked sum-of-the-parts NAV estimate of
C$28.52 per share (fd) for the company.
We believe a BUY rating is justified given the upside potential our target price offers from
current levels, and our expectation that the company will continue to generate reserves
and production growth in line with historical results. We consider that our target price
reflects a fair risk/reward scenario, as we capture commercial risk associated with the
15 January 2008
Tanganyika Oil Company Ltd
4
pilot stage of operations, as well as the sole country asset concentration in our 30%
discount to NAV factor.
The main risks to our target price and recommendation that we see are:
Tanganyika Oil Company Ltd
•
economic risk, as our calculations are based on forecast oil prices;
•
reserve and resource risks, as our production profile is based on blowing down
reserves;
•
development risk; and
•
country-specific risks.
15 January 2008
5
RESERVES AND PRODUCTION GROWTH
Tanganyika has shown an impressive ability to add significant reserves on a yoy basis to
its asset base. The company’s 2006 year-end 2P reserves from Syria increased 10 fold to
429 million barrels of oil, while 3P reserves similarly grew to 604 million. In addition,
DeGolyer and MacNaughton (D&M), an independent reservoir engineering firm, currently
calculates STOIIP from Tanganyika’s Syrian assets at 6,441 million barrels on a proven
plus probable basis. Based on the continued development of the company’s EOR project,
we believe there remains significant reserve growth potential to be achieved. To date, the
company’s pilot thermal EOR wells have been able to achieve production increases
ranging from 1.4-6 times rates from cold production only.
Figure 2: Tanganyika reserve base
Oudeh
2005
2006
P (MM barrels)
16
50
2P (MM barrels)
41
198
3P (MM barrels)
71
280
Tishrine
2005
2006
P (MM barrels)
0
38
2P (MM barrels)
0
216
3P (MM barrels)
53
296
Sheikh Mansour / Sheikh Suliman
2005
2006
P (MM barrels)
2P (MM barrels)
3P (MM barrels)
1
15
27
Source: Company reports, Canaccord Adams
Similar carbonate heavy oil fields in the Middle East have been attributed significantly
higher recovery rates following EOR pilot work. A typical example is the Issaran heavy
oil field in Egypt, with an average API of 10˚, where D&M attributed a 13% recovery rate
increase on OIIP following a successful field demonstration of Thermal Enhanced Oil
Recovery technologies on carbonate reservoirs.
In addition to potential reserve increases from continued EOR work, Tanganyika
reported the discovery of significant, productive extensions of the West Tishrine field
during 2007. Specifically, two West Tishrine field extensions were discovered, down-dip
to the north and up-dip to the southwest.
In Egypt, having grown 2P reserves to 5.6 million at year end 2006 – from 0.8 million in
2005, Tanganyika recently sold its interest in the West Garib concession area to
TransGlobe. These assets were sold for US$70 million, including working capital of
US$11 million – translating into US$12.5 per 2P barrel of oil.
Having grown its Syrian production to over 12,220 bopd (gross) at the end of 2007, we
believe Tanganyika is on track for a significant production increase in 2008 and 2009. In
addition to the three drilling rigs currently in operation in Syria, Tanganyika expects
three new rigs to arrive in the county in the near-term. This would give the company six
running rigs in Syria by the end of Q1/08. Assuming an average drilling and completion
time of 12 days per well, this would allow Tanganyika to drill close to 120 wells in 2008.
Assuming average production of 150 bopd per new well, and a 15% decline rate on
existing production, we believe the company could exit 2008 at close to 25,000 bopd
(gross).
15 January 2008
Tanganyika Oil Company Ltd
6
VALUATION
We calculate a risked sum-of-the-parts NAV for Tanganyika of C$1,690 million (C$2,394
million unrisked), or C$28.52 (C$40.41 unrisked) per share (fd). Figure 3 shows the
breakdown of our calculated NAV, as well as our risk factors for the company’s various
assets. Our NPV calculations are based on a DCF model, discounted at 10%, and longterm oil price of US$70 per barrel of WTI, inflated at 2% per annum. We currently apply
a 30% commercial and geopolitical discount to our NPV calculations. We believe a 30%
discount reflects the risks associated with the pilot stage of the EOR projects, operating in
Syria, and the ‘single country operations’ status of the company.
Following the continued success in increased production from the Thermal Pilot wells in
Syria, and given market valuations of similar heavy oil stories in the past, we calculate
the NPV for a potential EOR recovery rate increase of an additional 12.5% from the 6.6
billion barrels of OOIP. While, given EOR results from similar carbonate reservoirs, we
believe a total recovery factor of 20% of OOIP (7.5% currently + 12.5% EOR) could be
achievable from the Syrian fields, we have opted to exclude the EOR NPV in our base
valuation pending delivery of official reserve increases. Note that we currently expect to
see an increase in the company’s 2P reserves attributed to EOR on release of the next
reserve update, expected for Q1/08.
Figure 3: NAV summary
Unrisked NPV
US$ million
334.50
Unrisked NPV
Per share US$
5.65
Risking
39
89
191.37
525.87
3.23
8.88
Oudeh (Probable reserves)
Tishrine - Mansour/Suliman
(Probable reserves)
Probable Reserves NPV
148
787.95
192
340
Oudeh upside
Tishrine upside
Mansour/Suliman upside
379
392
34
Oudeh (Proved reserves)
Tishrine - Mansour/Suliman
(Proved reserves)
Proved Reserves NPV
Reserves/Resources
Million bbls (Gross)
50
2007E Cash / (net debt)
Net asset value (f.d.)
Net asset value (C$) (f.d.)
Risked NPV
US$ million
234.15
Risked NPV
Per share US$
3.95
70%
133.96
368.11
2.26
6.21
13.30
70%
551.57
9.31
1,033.40
1,821.35
17.44
30.74
70%
723.38
1,274.95
12.21
21.52
324.00
981.86
139.91
5.47
16.57
2.36
0%
0%
0%
0.00
0.00
0.00
0.00
0.00
0.00
46.56
0.79
100%
46.56
0.79
US$2,394
C$2,345
40.41
C$40.12
US$1,690
C$1,690
28.52
C$28.52
70%
Source: Canaccord Adams estimates
Figure 4 shows our NAV sensitivity to discount rates and long-term oil price scenarios.
Tanganyika Oil Company Ltd
15 January 2008
7
Figure 4: NAV per share (fd) sensitivity
Discount
Rate
US$50
Brent oil price (long-term) US$ per barrel
US$60
US$70
US$80
US$90
5%
C$24.58
C$36.66
C$47.84
C$58.76
C$69.55
10%
C$12.17
C$20.85
C$28.52
C$35.84
C$42.97
12%
C$9.09
C$16.79
C$23.50
C$29.86
C$36.02
15%
C$5.71
C$12.20
C$17.79
C$23.02
C$28.04
Source: Canaccord Adams estimates
Figure 5 tracks the value progression on another EOR heavy oil play, Rally Energy, for
the three-year period prior to Rally’s acquisition, showing the impact of each reserve
update on the market valuation.
Similarly, we would not be surprised to see markets attribute the same value curve to
Tanganyika on successful delivery of incremental reserve increases from the company’s
heavy oil field over the next two to three years. Note that the last published reserve
report for Rally’s heavy oil assets reflected recovery rates close to 20% of OOIP.
Figure 5: Rally Energy: share price and value addition (RAL : TSX)
8
3
Rally
7
6
5
C$
2
4
3
1
2
1
0
Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
- 05 - 05 - 05 - 05 - 06 - 06 - 06 - 06 - 06 - 06 - 06 - 06 - 06 - 06 - 06 - 06 - 07 - 07 - 07 - 07 - 07 - 07 - 07 - 07 - 07 - 07
Notes: 1) Rally increases 2P reserves from 8 mm boe to 46 mm boe
2) Rally increased 2P reserves from 46 mm boe to 102 mm boe
3) Rally announces acquisition by Citadel Capital and National Petroleum
Source: Bloomberg, Canaccord Adams
15 January 2008
Tanganyika Oil Company Ltd
8
RECOMMENDATION
We are initiating coverage of Tanganyika Oil Company with a BUY rating and a target
price of C$29 per share, which represents our risked sum-of-the-parts NAV estimate of
C$28.52 per share (fd) for the company.
We believe a BUY rating is justified given the upside potential our target price offers from
current levels, and our expectation that the company will continue to generate reserves
and production growth in line with historical results. We consider that our target price
reflect a fair risk/reward scenario, as we capture commercial risk associated with the
pilot stage of operations, and the sole country asset concentration in our 30% discount
factor.
Tanganyika Oil Company Ltd
15 January 2008
9
FINANCIAL CONDITION
Balance sheet
Based on our production assumptions given above, we calculate 2008 and 2009 cash
flow from operations of approximately US$91 million and US$279 million, respectively.
Pending company guidance, we currently model capital expenditures of US$200 million
in 2008 and US$400 million in 2009.
From a balance sheet perspective, we have calculated Tanganyika’s net cash equivalent
as US$83 million (including working capital) as at 30 September 2007. For 2007, we
currently model the company exiting the year with a net cash equivalent position of
US$47 million. In the longer term, based on our current assumptions, the company could
be required to raise an additional US$63 million to fund our forecast 2008 capital
spending. Note that Tanganyika has not yet provided capital guidance for 2008 or 2009.
Quarterly update
Tanganyika recently reported a Q3/07 net loss of US$6.9 million (US$0.12 per share),
and cash flow from operations of (US$0.5) million (US$0.01) per share. During the
quarter, the company also announced the sale of its Egyptian assets for US$70 million
(including US$11 million in working capital) to TransGlobe.
Subsequent to the quarter, the company received approval from the Syrian Petroleum
Company (SPC) for a sales pricing increase on the Oudeh and Tishrine crude oil sales.
Specifically, the company now expects to receive 85-90% of Syrian Heavy Export Blend
pricing on Oudeh and Tishrine production. Note that prior to this agreement, the
company was selling its Oudeh and Tishrine production - based on provisional pricing at 20% and 30% respective discounts to Syrian heavy pricing.
For Q4/07, Tanganyika reported net production of 2,190 bopd (10,070 gross) from its
Syrian assets. The company also reported net production for the last two weeks of
December at 3,491 bopd (12,220 bopd gross), in-line with its guidance.
15 January 2008
Tanganyika Oil Company Ltd
10
CORPORATE PROFILE
COMPANY HISTORY
The predecessor to Tanganyika was incorporated in 1986 as Flash Pack Ltd. The
company was renamed Canadian Lynx Petroleum in 1994 and Tanganyika Oil Company
in 1995. The company is currently listed on the Toronto Stock Exchange Venture,
(symbol: TYK), as well as via Depositary Receipts trading on the Nordic exchange
(symbol: TYKS). The registered office of the company is located in Vancouver, British
Columbia. The company has four major shareholders, three of which – Zebra Holdings,
Abalone Capital, and Ellegrove Capital - are owned by a trust whose settler is the estate
of Adolf Lundin.
MANAGEMENT AND DIRECTORS
Management continues to be a key, if not the most important, asset in determining the
success of a development stage oil and gas company. In our view, sustainable growth is
achieved by technically capable individuals who can manage risk not merely avoid it. We
believe that Tanganyika’s personnel, and their ability to successfully implement EOR
programmes on the Syrian heavy oil assets, will be the driver for long-term value
growth.
Lukas H. Lundin - Chairman and Director
Mr. Lundin currently serves as Chairman of Tanganyika. Prior to that, he was a Senior
Director at Lundin Oil AB, President of International Musto Exploration Ltd, and
responsible for Argentina Gold’s Veladero discovery. In addition to his role at
Tanganyika, Mr. Lundin is currently Chairman of Lundin Mining, Denison Mines, Red
Back Mining, Tenke Mining, and Canadian Gold Hunter. He is also director and/or senior
officer of: Africa Oil Corp, Lundin Petroleum, Vostok Nafta Investments, Pearl
Exploration and Production, and Atacama Minerals.
Gary Guidry - President and Chief Executive Officer
Mr. Guidry is the President and CEO of Tanganyika. Prior to joining Tanganyika, he was
President and CEO of Calpine Natural Gas Trust. Mr. Guidry has also served as President
of AEC International and in senior management roles with CanOxy/Nexen, Benton Oil
and Gas and Occidental Petroleum. He has extensive international oil and gas
experience, has worked on development projects in Oman, Nigeria, Argentina, Yemen
and Ecuador prior to joining Tanganyika in 2005. Mr. Guidry also currently serves as
Chairman of Pearl Exploration and Production.
Ian Gibbs - Chief Financial Officer
Mr. Gibbs is a graduate of the University of Calgary (B.Com), and a registered Chartered
Accountant. Prior to joining Tanganyika, he was the CFO of Valkyries Petroleum, Country
Controller and Business Systems Manager for First International Oil Corporation in
Kazakhstan, and Chief of International Finance for a subsidiary of Canadian Fracmaster
in Russia. Mr. Gibbs also serves as CFO of African Oil Corp.
Tanganyika Oil Company Ltd
15 January 2008
11
OPERATIONS
The company is leveraging off the contacts that management and directors have made
over the years to focus on core areas. Tanganyika initially focused on Africa but has
since shifted its focus to the Middle East. Specifically, the Middle East focus is aimed at
increasing reserves and production from a significant heavy oil resource base in Syria.
In Q4/07, Tanganyika averaged gross production of 10,070 bopd (2,190 bopd net) from
its 100%-owned Oudeh and Tishrine blocks in Syria.
SYRIA
Country profile
Syria, situated in the Middle East, is bordered by Israel and Jordan to the south,
Lebanon and the Mediterranean to the west, Iraq to the east, and Turkey to the North.
Following independence in 1946 and a short lived unification with Egypt from 19581961, Syria has been ruled by the Baath party since 1963. Bashar Al-Assad, in power
since 2000, follows his father Hafez al-Assad who ruled from 1970-2000. Economically,
petroleum and agricultural sectors make up approximately half the country’s US$24
billion GDP. For 2006, Syria’s oil production averaged 405,000 bopd1.
Operations
In 2003, Tanganyika was awarded a Contract for Development and Production on the
Oudeh block in north eastern Syria, approximately 700km from Damascus. In 2004, the
company signed a second Contract for Development and Production in Syria, covering
the Tishrine and Sheikh Mansour blocks, also located in the north east of the country.
Tanganyika assumed operatorship in 2005 when the contract was ratified.
Figure 6: Syrian assets
Source: Company reports
1
15 January 2008
CIA World Fact Book
Tanganyika Oil Company Ltd
12
Geology
Tanganyika’s Syrian exploration and development activities are currently focused on
onshore blocks located in the country’s north east, at the edge of the very prolific Zagros
fold belt. The Zagros fold belt stretches from southern Iran into Turkey and contains
extensive structural anticlines, including the massive Kirkuk oil field in Iraq. Geologically,
the oil fields in north eastern Syria display similar stratigraphy to the Zagros fold belt
region, with reservoirs typically containing heavy oil in the shallower zones, and some
medium and lighter oils in deeper horizons.
The Oudeh field has three main oil bearing zones, mainly the Shiranish (Cretaceous
carbonate), the Butmah (Triassic carbonate) and the Kurachine (Triassic carbonate). At
Tishrine and Sheikh Mansour, oil accumulations are in the Chilou (Tertiary carbonate),
Jedala (Tertiary carbonate) and Shiranish reservoirs. Note that Tanganyika’s
management believes that all of these carbonate reservoirs have the characteristics for
successful thermal recovery projects.
Oudeh
Awarded to Tanganyika in 2003, the 192km2 Oudeh block is located in north eastern
Syria, in proximity to the border with Turkey. The company currently has operatorship
and a 100% working interest in the block. Core to the 20 + 5 years production contract at
Oudeh is the use of enhanced oil recovery techniques to increase field production.
Following acquisition, the company has developed the field, increasing production to
3,138 bopd (gross) during December 2007. As part of the production contract,
Tanganyika has an interest in all incremental oil above the Base Crude Production (BCP)
from legacy wells. Details of the fiscal terms are presented in the Appendix.
Geologically, the Oudeh field has three main oil bearing zones. The Shiranish, a
Cretaceous Carbonate, lies at depths of approximately 1200 metres, and contains heavy
oil averaging 14 API, with viscosities ranging between 200 centipoise and 100,000+
centipoise. The reservoir has moderate porosity (25%) and good matrix permeability
(ranging between 10 to 500 millidarcies).
Secondary reservoir zones on the Oudeh block are the Jurassic and Triassic Butmah and
Kurrachine formations. On Oudeh, the Butmah Carbonate is a rich gas reservoir with a
10 metre oil leg. It is known to produce light oil in neighbouring fields. The Kurrachine,
also a Carbonate reservoir, produces 26° API oil from other Syrian fields. In addition,
both the Butmah and Kurrachine reservoirs are important to the company’s thermal
operations in that they provide ample supplies of natural gas used in steam generation.
Tanganyika Oil Company Ltd
15 January 2008
13
Figure 7: Oudeh field cross section
Source: Company reports
Following award of the block, Tanganyika has mainly focused on developing the
Shiranish formation, both through conventional cold production and thermal EOR
methods. During 2007, Tanganyika drilled several appraisal wells on the Oudeh block,
aimed at potentially increasing reserves from the Shiranish, Butmah and Kurrachine
formations. OD-155H, drilled and tested during Q2/07, in the southwest area of the block
flow tested (cold production) 150 bopd from the Shiranish, potentially leading to new
reserves additions from that area. Log results from OD-158H, also drilled during Q2/07,
indicate 112 metres of net Shiranish oil pay in the northwest area of the field.
In addition, the company drilled and tested an exploration well (OD-153) into the Butmah
and Kurrachine formations. While petrophysical analysis of the well indicates
hydrocarbon pay in the Shiranish, Butmah and Kurrachine, this well tested water in the
Kurrachine. Production testing from the Butmah is ongoing. A successful test could
potentially increase reserves attributable to the Oudeh field.
New wells drilled in 2007 on the western part of the Oudeh field show higher viscosity oil
than the eastern part of the field. In the short term, we would not be surprised to see a
slight reduction in bookable reserves in the 2007 year end update associated with this
high viscosity area. Specifically, with the higher oil viscosity limiting cold production
rates, the company’s third-party engineers might have to lower recovery rates compared
to the previous model. We do not, however, expect this to be a long-term issue, as
Tanganyika currently anticipates that the viscous oil will be highly responsive to thermal
stimulation. Therefore, this would enable these reserves to be booked as recoverable
using thermal production methods.
As part of the EOR tests, a cyclic steam injection pilot was initialised on Oudeh in 2006.
As of Q3/07, the company had seven thermal wells on Oudeh, and has achieved up to
four fold production rate increases from EOR versus cold production. According to the
company, results on the EOR programme indicate the potential to increase recovery
factors from 7% of OIIP to a minimum of 14%. Figure 8 shows an example of production
gains on an Oudeh (OD-146H) well following steam injection.
15 January 2008
Tanganyika Oil Company Ltd
14
Figure 8: Oudeh EOR production gains
Average Injection Rate
Average Fluid Rate
Average Oil Rate
Average Water Rate
Water Cut
10,000
1,000
100
10
Average Oil Rate after
Steam 300+ BOPD
1
0
Jun-06
Average Oil Rate before
Steam 73 BOPD
Aug-06
Oct-06
Dec-06
Feb-07
Apr-07
Jun-07
Aug-07
Oct-07
Dec-07
Source: Company reports
Oudeh oil is shipped to the Scotraco trunk line via a 57km pipeline. The Scotraco
pipeline connects to the Homs refinery and onwards to the Tartous export terminal on
the Mediterranean coast approximately 725km from the Oudeh oil station. The Scotraco
pipeline, which ships all the Syrian heavy oil, currently has spare capacity of
approximately 100,000 bopd, allowing for future expansions on the Oudeh block.
Up to Q3/07, Oudeh crude was sold – under provisional pricing - at a 20% discount to
Syrian Heavy Export Blend (Tartous), itself normally trading at 80% of Brent. The
company has since mutually agreed a new pricing agreement, based on 3 party refining
assay modelling, where Oudeh crude is expected to sell at 85-93% of Syrian Heavy.
rd
Tishrine - Sheikh Mansour
Initially discovered in 1974, the Tishrine field was awarded to Tanganyika in 2004 and
ratified in 2005 for a 20+5 year term. The 409km2 block is located in eastern Syria, and
contains two producing oil fields – West Tishrine and East Tishrine - producing from
three main reservoirs. Specifically, the Jaddala (Tertiary carbonate), and the Chilou
(Tertiary carbonate) reservoirs are oil bearing on the West Tishrine field, while only the
Shiransish (Cretaceous carbonate) is present on the East Tishrine. The company was
also awarded the Sheikh Mansour block, located 8km north of Tishrine, as part of the
same PSA. This block contains two discoveries, the Sheikh Mansour discovered in 1978
and the Sheikh Suliman fields discovered in 1977.
Tanganyika Oil Company Ltd
15 January 2008
15
Figure 9: Tishrine formations
Source: Company reports
Similar to Oudeh, Tanganyika plans to use enhanced oil recovery techniques to increase
field production from Tishrine. At the end of Q3/07, the company had eight thermal wells
on Tishrine.
As part of the production contract, Tanganyika has an interest in all incremental oil
above the Base Crude Production (BCP) from legacy wells. Details of the fiscal terms are
presented in the Appendix.
Following acquisition, the company has developed the field, increasing production to
9,082 bopd (gross) during December 2007. While this remains slightly lower than the
company’s previous expectations, this is mainly due to legacy water injection on the field
negatively impacting current oil production rates. Specifically, water disposal into the
Jaddala reservoir at West Tishrine, prior to Tanganyika’s acquisition of the field, has
resulted in water displacing oil in many of the reservoirs’ fractures. Note that
Tanganyika is in the process of remedying this, and is witnessing water cut reductions in
some wells.
During 2007, Tanganyika reported the discovery of significant productive extensions of
the West Tishrine field. Two West Tishrine field extensions were discovered, down-dip to
the north and up-dip to the southwest. The southwest extension could add an additional
area approximately 30-40% the size of that currently recognised for reserves purposes.
Similar to Oudeh, oil from Tishrine is shipped to the Scotraco trunk line. Up to Q3/07,
Tishrine crude was sold, under provisional pricing, at a 30% discount to Syrian Heavy
Export Blend (Tartous), itself normally trading at 80% of Brent. The company has since
negotiated a new pricing agreement, where Oudeh crude is expected to sell at 85-93% of
Syrian Heavy.
15 January 2008
Tanganyika Oil Company Ltd
16
APPENDIX
FISCAL REGIMES
Tanganyika’s Syrian assets are currently governed by Production Sharing Agreements,
under which produced oil is allocated to one of the categories shown in figures 10 and
11. The Syrian government is entitled to a Base Crude Production from each block,
relating to production from wells prior to the agreements with Tanganyika. As per the
PSA, base crude production is declined at 5% per year, calculated monthly. Production
oil is then split into Royalty Oil, Cost Oil, and Profit Oil. The company pays a royalty of
12.5% to the government on all incremental production. Tanganyika is also required to
bear all upfront capital costs, which would then be recouped via the ‘Cost Recovery’
category. For Oudeh, up to 70% of post royalty oil can be used to recover capital and
operational expenses in any given year. Any un-recovered amounts are then carried over
for recovery in the following year. On Tishrine, up to 48% of post royalty oil is
attributable as cost oil. Remaining oil is then split 30:70 between Tanganyika and the
Syrian Petroleum Corporation (SPC), the state owned oil company. Note that the SPC is
responsible for paying all Syrian taxes from its share of the oil under both PSAs.
Figure 10: Oudeh PSA
Source: Company reports
Tanganyika Oil Company Ltd
15 January 2008
17
Figure 11: Tishrine – Sheikh Mansour PSA
Source: Company reports
Figure 12: Base Crude Production
BOPD
Oudeh
Tishrine
Q1/07
915
6,074
Q2/07
884
5,933
Q3/07
873
5,795
Q4/07
862
5,723
Q1/08
870
5,778
Q2/08
841
5,643
Q3/08
830
5,513
Q4/08
820
5,444
Source: Company reports
15 January 2008
Tanganyika Oil Company Ltd
18
INVESTMENT RISKS
Investors need to be aware of the risks inherent in the oil and gas industry, which
comprise risks to our target price and rating. Without limitation, these risks include:
Reserve and resource risks
Tanganyika currently provides third-party reserves evaluation on its producing assets
according to Canadian NI-51-101 standards. While third-party evaluations lower risks
associated with the company's petroleum reserves, note that any such calculations
remain dependent on long-term oil pricing, geological assumptions made, and the
company's ability to produce said reserves. All other resource estimates used are based
on Tanganyika's internally generated data, and thus carry a higher risk level than thirdparty estimates. There are also risks associated with replacement of reserves required to
sustain the long-term growth of the company.
Development risk
The company's value lies predominantly in the development and production of oil and
gas projects that carry a completion risk. Delays in the development schedule or
increases in capital requirements, for example, may negatively impact our suggested
valuation. Access on favourable terms to oilfield services, equipment and labour could
also materially impact our valuation of Tanganyika.
Country risk
The company's exploration, producing and potential properties are located in Syria. The
company's operations, financial results, and valuation could be adversely affected by
events beyond its control taken by the current or future governments in this country with
respect to policy changes regarding taxation, regulation, and other business environment
changes.
Economic risk
Our suggested valuation is impacted by our long-term price assumptions for oil. We have
indicated the impact of price on our valuation using five price scenarios. Volatility in
crude oil and natural gas prices could materially affect financial performance and the
accuracy of our estimates for Tanganyika.
Our net present value calculation assumes a discount rate of 10% per annum; however
should the un-risked weighted average cost of capital differ our estimated value would
also change. We have indicated the impact of price on our valuation using four discount
factor scenarios.
Tanganyika Oil Company Ltd
15 January 2008
19
NOTES
15 January 2008
Tanganyika Oil Company Ltd
20
NOTES
Tanganyika Oil Company Ltd
15 January 2008
21
APPENDIX: IMPORTANT DISCLOSURES
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Distribution of Ratings:
Global Stock Ratings
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Rating
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Speculative Buy
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Canaccord Ratings
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57
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112
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13
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476
100.0%
IB Clients
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70.2%
33.0%
0.0%
BUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.
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Tanganyika Oil Company Ltd.
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Tanganyika Oil Company Ltd
15 January 2008
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Robert J. Hastings, CFA, Vancouver
Sara Elford, CFA, Halifax
Eric Glover, CFA, San Francisco
Mark Thompson, MSc, CFA, London
Eric Prouty, Boston
John Quealy, CPA, Boston
Tom Varesh, MBA, Toronto
Jeffrey Leung, Associate, Vancouver
Juan Plessis, MBA, CFA, Associate, Vancouver
Mark Sigal, Associate, Boston
Christy Taylor, Associate, Vancouver
Max Vichniakov, MBA, Associate, Toronto
1.604.643.0177
1.902.442.3161
1.415.229.0669
44.20.7050.6649
1.617.371.3729
1.617.371.3837
1.416.869.3189
1.604.661.7861
1.604.643.0181
1.617.788.1591
1.604.643.7034
1.416.869.7284
Portfolio Strategy
Nick Majendie, CA, MA, Vancouver
Michael Rudd, CFA, Associate, Vancouver
1.604.643.7005
1.604.643.7421
Vancouver Head Office
P.O. Box 10337 Pacific Centre
2200 – 609 Granville Street
Vancouver, British Columbia
V7Y 1H2
1.604.643.7000
Toronto
BCE Place, 161 Bay Street
Suite 3000, P.O. Box 516
Toronto, Ontario
M5J 2S1
1.416.869.7368
Calgary
TransCanada Tower
450 1st Street SW Suite 2200
Calgary, Alberta
T2P 5P8
1.403.508.3800
Montréal
1010, rue Sherbrooke ouest
Bureau 1100
Montréal, Québec
H3A 2R7
1.514.844.5443
London
7th Floor, Cardinal Place
80 Victoria Street,
London, SW1E 5JL
44.20.7050.6500
Boston
99 High Street
Suite 1200
Boston, MA
02110
1.617.371.3900
New York
535 Madison Avenue
2nd Floor
New York, NY
10022
1.212.849.3900
San Francisco
101 Montgomery Street
Suite 2000
San Francisco, CA
94104
1.415.229.7171