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Circle Oil’s Morocco drill campaign off to encouraging start

Published: 06:05 18 Jun 2014 EDT

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Circle Oil’s (LON:COP) Moroccan drill programme got off to an encouraging start, with the first of twelve wells discovering gas.

Three gas bearing zones, which have been confirmed as permeable high pressure reservoirs, have been encountered in the SAH-W1 well, in the central area of the Sebou permit.

The well will be prepared for testing and production. The reservoirs will be produced sequentially, starting from the bottom up – which is where the pressure is higher.

"We are delighted to add another successful discovery to our Sebou gas portfolio,” said chief executive Professor Chris Green.

“This is the first well of a six well programme to be drilled with our partner ONHYM in the Sebou permit and is coupled with another six well programme in the Lalla Mimouna permit."

Across the three reservoir zones the net pay totals 15 metres – six metres in the Top Guebbas, six metres in the Intra Guebbas (which is the main target) and another three metres in the lower part of the Intra Guebbas.

City broker Investec described the find as “small but mighty”, alluding to the strong economics of these sort of prospects, which as analyst Brian Gallagher points out have between 2 to 3bn cubic feet (bcf) of gas but only cost around US$1.5mln to drill.

Gallagher also emphasises the benefits relating to Morocco’s regime for oil and gas companies, which includes a ten year tax holiday.

“While testing is still pending, we interpret today’s result as a solid start to Circle’s 2014/2015 Moroccan campaign.

“On our estimates we expected the well to test 2.5-3.0 bcf with the result so far confirmatory of this. The level of pressure seen in the sidewall cores is also encouraging and bodes well for testing and completion.”

Investec has a ‘buy’ recommendation on Circle, with a 50p target price and Gallagher ascribes between 3 and 6p per share for the Moroccan prospects. The analyst pointed to an upcoming well result from Tunisia, due in July, as a key catalyst for the AIM share.

Meanwhile, as Circle’s price actually dipped slightly to 22.25p, another City broker SP Angel questioned why the shares were not priced higher.

“[Today’s] is the latest in a long line of positive updates this year which the share price has not responded to,” the broker said in a note.

“There has long been a suspicion that there has been a management discount applied to the shares, but given that the company is well managed, reasonably financed and has a strong combination of financial market savvy, in the shape of Steve Jenkins, and technical horsepower, in the shape of Chris Green, we believe that the current share price does not really reflect what is happening within the company.”

“Of course the only fly in the ointment is still Egypt, but here again we believe that while the politics of the country remain in flux, the mechanisms of state, especially when it comes to the Egyptian General Petroleum Corporation, albeit slowly.”

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