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WesternZagros: Profitable and Undervalued

WesternZagros: Great Oil Resources Profitable At $26 And Dramatically Undervalued


  • Enterprise Value per barrel of resources (and reserves after a development plan issue) is close to zero.
  • It is a prospective acquisition target.
  • The recent Canaccord Genuity's initiation of coverage provides target price almost 1.5x higher (С$0.4), including only domestic sales perspective.
  • Well-defined drivers based on sustainability of independent oil export from Kurdistan.
  • Risks are mostly from political instability in the region and low share liquidity. 
WesternZagros (WZGRF) is a small Canada listed oil company with key assets in the Southeastern part of Kurdistan Region of Iraq (KRI). It discovered considerable oil&gas resources on two blocks (Kurdamir and Garmian). There is already small production (a bit more than 5 kbpd) at Garmian block with domestic oil sales. Given high political risks and lack of export infrastructure, WesternZagros is valued close to zero per barrel of contingent resources. More than half of net 2C contingent oil resources could be upgraded to reserves, if development plans are on hand. In that case the Company's barrel of reserves would be valued just close to $0.2/bbl. 

While both WesternZagros' fields Sarqala (Garmian block) and Kurdamir have a great resource potential, they are relatively far from the export pipeline to Turkey. The pipeline extension project depends on KRG's financial abilities. Lack of financing creates a considerable problem, as the KRG could not approve the development plans for the fields. For Kurdamir the approval is crucial for contingent resources conversion into reserves. More than half of 2C contingent oil resources could be upgraded to reserves, if the approval is granted.

WesternZagros' market capitalization is less than net cash on its balance (cash $153M and debt $71M). The company's liquidity situation seems sufficient for their development program for the Sarqala field. Targeted volumes are estimated at 35 kbpd by 2018.

The Company has $200 mn credit facilities, three-quarters of which becomes available in October 2015. The credit facilities are from the largest shareholder, Crest Energy, which has the right to nominate up to three members to the Board of Directors.

WesternZagros has about $70 mn of remaining capex. The company will have to pay in cash $71 mn of convertible bonds in the end of this year.

WesternZagros has attractive PSC terms, as one of early entrants in Kurdistan. Crude oil at the Sarqala field has high API and the high diesel cut. According to the management, it is their considerable advantage on the domestic market in time when the other producers in KRI, like DNO and Genel, have receivables issues due to unpaid crude oil export deliveries.

Given very low operational costs ($1-3/bbl) and relatively strong prices for its crude oil ($8/bbl discount to $50/bbl Brent price), WesternZagros might be cash flow positive in the nearest foreseeable future. 

Sarqala's development:   

  • Following a nine-month extended well test on the Sarqala-1 well in 2011/2012, the company commenced commercial oil sales in February 2015 at ~5,200 b/d gross.
  • The company expects production up to 6,700 b/d on a sustained basis.
  • At present, WesternZagros is waiting on field development plans to drill additional wells.
  • The long-term target for the Sarqala field is 35,000 b/d .
  • Given final 30% share in the produced crude oil (40% WI), according to PSC terms, and $50/bbl Brent price, the company can achieve $100-150 mn of operating cash flows from domestic sales. 
Resource potential:

  • Kurdamir block contains 924 mn bbls of contingent resources (40% WI).
  • Canada-based Talisman Energy is a partner in the field with 40% interest. Talisman has been acquired recently by Repsol.
  • The company is waiting for the approval of a new development plan for the Kurdamir field.
  • The approving will trigger 2C resource conversion into 2P reserves.

The Risks
  1. The risks for WesternZagros are mostly common for other Kurdistan E&Ps: 
  2. The Kurdistan Regional Government has been shipping oil for export independently only for two months now. Iraq might to block it. 
  3. Operational risks are high as the resources are mostly in contingent and probable categories. Resources are anticipated to be proved with the approval of the development plan from the KRG. 
  4. Low share liquidity. 
  5. A threat from ISIS. 
  6. Export pipeline sabotages (Turkey vs Kurdistan Workers' Party). 
  7. Crude oil price downside risk exists, even if the breakeven price for WesternZagros fields is only $26 per barrel, according to the management. 

In Conclusion

In my opinion, WesternZagros is a prospective acquisition target, given their attractive resource potential. In the foreseeable future the company could be cash flow positive due to domestic crude oil sales from the Sarqala field. The key catalysts in the near-term are based chiefly on the expected KRI financial sustainability.

My general concern is the low share liquidity. Canaccor Genuity's initiation of coverage is worth a look from potential investors. Hope, it might help to draw attention to the stock. I have taken a lot from it.

Disclosure: I am/we are long WZGRF.

Additional disclosure: I picked WesternZagros, exploring Kurdistan universe, because of its superb return potential. But investors should be aware of specific risks. WesternZagros' market capitalization is below $100 mn and share liquidity is very low. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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