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Adriatic Oil: Good things come in small packages

Published: 05:48 04 Jun 2013 EDT

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When Adriatic Oil (ISDX:ADOP) was thwarted in an initial bid for acreage off the coast of Albania, the attention turned to another emerging hydrocarbon frontier.

A short period of due diligence took Bruno Müller and his team to waters off the coast of Ireland, then a relatively quiet backwater, but now a hotspot for exploration.

After that, the search broadened to near-shore Scotland – where it nabbed a stake in sought-after acreage in an area also being targeted by two of the UK’s largest and aggressive explorers.

All this has been done on a budget that would barely cover the travel expenses of the average oil executive (the expenditure can be measured in tens of thousands rather than millions of pounds), while the incremental value added is by no means reflected in the current market capitalisation, which hovers around £4mln.

This is possibly because the group is listed on the ISDX junior, junior bourse (no it’s not a typo, ISDX is very junior in the pecking order of stock markets). It means liquidity is tight and pricing anomalies like this are commonplace.

Müller says he is “aiming to come to AIM” although nothing at this stage has been decided about the step up to the alternative market.

A closer look at the portfolio reveals several diamonds in the rough.

Its 15.5% stake in the Shanagarry blocks covering 880 square kilometres of the North Celtic Sea certainly fits this description.

This is the area offshore Ireland that sparked the current wave of interest in the Republic when Tony O’Reilly’s Providence Resources (LON:PVR) successfully re-drilled the Barryroe Field.

The operator is up-and-coming junior Fastnet Oil & Gas (LON:FAST), led by Cathal Friel and Paul Griffiths.

Fastnet, when it farmed in, agreed to carry out 200 kilometres of 3D seismic, though the prospectivity of the area was underlined by the fact Marathon drilled in the 1980s and found gas and “some oil”.

“There was no demand at that time for gas,” said Müller

“The Kinsale Field was more than enough to satisfy demand for the Irish Republic and there was no interconnector to the UK. So, there was no need to develop this asset.”

Fastnet has opened a data room as a pre-cursor to bringing in a larger, financially stronger partner to drill a well.

The likely cost of sinking an exploratory hole beneath these relatively shallow waters is put by analysts at US$12-$15mln, meaning Adriatic would have to stump up around US$2mln to maintain its stake.

“I am hopeful of seeing something occurring in the second half in terms of finding a partner willing to finance part of the well,” said Müller.

“There is a lot of excitement about the area that has been created principally by Providence Resources.

“There are a lot of companies that want to farm-in or acquire assets in the area.

“I wouldn’t call it a new North Sea, but it is not far away from that. We are very optimistic.”

Elsewhere, the 0.6% profit share in any oil produced on the Connemara Block gives investors exposure to Ireland’s highly exciting Atlantic margin. The asset was acquired in 2011 for £40,000 paid in shares.

Those who have followed the exploration and production (E&P) story in the Republic will know this is an exploration hot-spot.

Exxon is currently sinking the US$120mln Dunquin well on nearby Spanish Point, which, if successful, would open up an entire new gas and oil frontier.

In recent weeks two of the world’s largest and most successful explorers – Kosmos (NYSE:KOS) and Cairn (LON:CNE) – have farmed into nearby licences.

Adriatic’s interest is tiny. However, two independent reports – one commissioned by operator San Leon Energy (LON:SLE), which is the operator of the field, and the other by Fastnet, which owns an identical 0.6% net profit bonus  - value Adriatic’s nugget of an investment at anywhere between US$270,000 and US$4.2mln. Müller calls it the “sleeper” in the portfolio.

It must be pointed out that, while Dunquin really is a frontier exploration play, Connemara has been drilled by both BP (LON:BP.) and Statoil, which discovered oil.

Statoil’s two wells flowed at around 6,000 barrels.  So, this is more like a development play – albeit a deep-water development – with an estimated “mid-case” 75mln barrels of oil.

So, as far as sleepers go, it isn’t a bad investment.

“If they find something at Dunquin then it will undoubtedly add to the value of Connemara,” said Müller.

“San Leon is looking for a farm-in partner we believe.

“I think the Atlantic margin is very exciting with more and more operators moving there. So, we want to stick with this one as our stake becomes more valuable.”

Its 25% of blocks 12/18 and 12/19 of Scotland’s Moray Firth are assets in a great neighbourhood.

Adriatic has an option to double the stake if it decides to press ahead with exploration drilling.

The cost of a well is likely to be close to US$15mln if Adriatic and its partners opt to drill it (they must decide by early 2014).

Their next move will be informed to a small degree by the success or otherwise of a consortium consisting of Cairn, Premier Oil (LON:PMO) and others that has an identical decision to make before the end of June.

“[A successful well next door] really could give us hope our blocks have potential,” said Müller.

All of this forgets North Rodoni off the coast of Albania, which is highly prospective for gas.

However, the politics of the country and the programme to nationalise the state oil company have muddied the waters.

With elections set for the summer, the group hopes it might eventually have its licence application approved around the turn of this year.

But as the group’s immediate prospects don’t hinge on it, Müller is relaxed about the prospects of this, its earliest area of interest.

Its current cost commitments are comparatively modest - £60,000 to interpret the data acquired for the Moray Firth and £100,000 to double its stake in the licence – and can be easily met from the estimated £350,000 in has in its coffers.

However, if the group wishes to participate in the two potential wells it will undoubtedly have to raise cash – not all of it immediately and certainly not at the current price, Müller maintains.

But an AIM float then might help the group realise these ambitions as well as shining a light on the true potential and value of Adriatic.

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