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Canadian Overseas Petroleum to test the water offshore Nigeria

There is more to dual-listed resources company Canadian Overseas Petroleum than its admittedly highly-prospective Liberian asset. The company has an option on an asset in Nigeria as it looks to develop into a company that has "more of an appraisal/development view to it".

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The management team at Canadian Overseas Petroleum (LON:COPL, CVE:XOP) is not one to sit on its laurels.

The company has a 17% stake offshore Liberia in Block LB-13 with oil super-major ExxonMobil owning the other 83%. The US oil giant is committed to carry Canadian Overseas Petroleum (COPL) through the first US$120mln (gross) of drilling costs, and the company could just sit back and let ExxonMobil do all the heavy lifting, but, as chief finance officer Chris McLean asks, where is the fun in that?

Although Liberia remains the company’s top priority, the management sees plenty of other opportunities off the coast of West Africa where it could apply its expertise, and has been looking for some time at Nigeria, where recent changes in licensing requirements have opened things up for an experienced and nimble player.

“One of the things we wanted to do, [because] most people know us for Liberia, was get more assets into the company based around West Africa and, in particular, get a company that has more of an appraisal/development view to it,” McLean told Proactive Investors on a recent visit to follow up the Canadian company’s listing on the main market of London on 4 April.

McLean, previously head of Capital Markets and Investment Banking at resource-focused boutique investment bank Wolverton Securities, says he first got involved in Nigeria in 2003 and has seen which companies have worked and which ones have not.

Chief executive officer (CEO), Arthur Milholland, meanwhile, provides the geological know-how, having worked in a variety of regions including the UK North Sea, Canada, the Gulf of Mexico, the United States, South America and West and North Africa. Investors might remember him as the founder and CEO of North Sea exploration and production company Oilexco whose market capitalization grew from $4 million to $4 billion in 7 years.

Having identified Nigeria as an enticing prospect, the company has hit upon an interesting, low-risk way of (literally) testing the water.

It has an option agreement to participate in OPL 2010, a block off the coast of Nigeria that is wholly-owned by indigenous Nigerian company GEC Petroleum Development Company (GDPC).

The important thing to note is the “option” part of that last sentence; rather like a wary bather easing into a very hot bath, COPL can proceed in stages, or pull back. “We remain in control of COPL’s interests,” McLean notes.

The state-owned oil company NNPC is not involved, so this is a fairly straightforward relationship between two companies that will initially see COPL spend around US$15mln shooting seismic data over 500 square kilometres when the option is exercised.

McLean seems confident of getting backing for the venture. The block is surrounded by producing oil fields, not to mention discovered but non-producing fields, and as the old adage has it, the best place to hunt for elephants is near where you found the last lot.

He thinks that the Square Mile is getting more comfortable about Nigeria as a place to do business but does worry that it is overly fixated on “monster 1bn barrel plays”.

Some residual unease remains about oil companies operating in Nigeria but McLean’s view is that the City’s apparent preference for participants to get a well-connected partner is only going to perpetuate a problem where, at least among the technical personnel in the oil industry, the main concern is developing the resources they have.

That’s where a company like COPL can help.

“To play the game, you’ve got to know the people,” McLean says. “The aim is to get a foot in the door of a place [Nigeria] that is looking to steadily grow output, and become the preferred partner. We plan to be the financial and technical partner, and work with the operator to create an efficient and effective process.”

As for concerns about the locals stealing oil, McLean cannot foresee a scenario where looters paddle out to offshore rigs with their hoses and watering cans. That may be one of the reasons why the company is so keen to restrict its operations offshore, albeit in reasonably shallow water.

Long story short, the immediate share price catalyst is likely to be the success, or otherwise, of the fund raising for the Nigerian venture, but it won’t be long before attention turns to Liberia, if only because oil major Chevron, situated right next door on Block 12 to the COPL/ExxonMobile block, has begun drilling.

“The drill ship is there,” McLean reveals. “Drilling should take 30-40 days.”

Once Chevron is done with the drillship, ExxonMobil and COPL are next in to bat, which means drilling could start as early as July.

However, McLean is keen to stress that COPL is not a binary “bet on red or black” play, and that investors should look beyond the short term.

If the option on Nigeria pays off, cash could be flowing in two years, McLean suggests.

“We can grow into cash flow that will give us sustainability and create substantial value,” he concludes.

Quick facts: Canadian Overseas Petroleum Limited

Price: 0.2164 GBX

LSE:COPL
Market: LSE
Market Cap: £7.54 m
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