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16 Oct 2018
Sector Note -
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Sector Note -
- Published:
16 Oct 2018 -
Author:
Jonathan Wright -
Pages:
24
Exploration performance disappoints. Despite a continued recovery in oil prices since our last quarterly and signs of a nascent recovery in the exploration market, exploration-focused E&Ps have struggled while lower-risk Large and UK-focused E&Ps have continued to outperform. Exploration performance is at fault – in the past month, there have been three high-profile exploration disappointments: Petro Matad’s 90mmbbl Snow Leopard in Mongolia; Tullow/Pancontinental’s 124mmbbl Cormorant-1 well in Namibia; and Chariot’s 459mmbbl Prospect S, also in Namibia. This has had a material impact on the performance of these companies and negatively affected investor sentiment towards explorers. Herein lies the problem with material exploration for small cap E&Ps – these are mostly binary events and with typical chances of success around 20%, the odds are stacked against you. With this in mind, a lower-risk investment strategy, and one that still suits the nascent recovery in the exploration market, is to own companies that are pursuing farm-outs to fund material drilling opportunities.