Nautical Petroleum - the Kraken wakes?

Nautical is a very unsexy oil stock. It specialises in heavy crudes, which nobody likes. They're more viscous than other crudes, so they're seen as expensive to produce, with a  poor refining yield. And Nautical is involved in mature producing areas, with a big position in the UK Central North Sea, so compared to oil stocks with West or North African acreage, it looks terribly boring.

But things could be looking up. For a start, UKCS heavy oil is more interesting than it looks. It's become a scarce feedstock for the chemical industry, and the discount to Brent has been narrowing for a while. Hardman & Co points out that Alba oil trades at a tight discount to Brent, and both Mariner and Kraken should have higher yields than Alba ^[1] . It's also worth noting that the existing UK fields which are producing heavy oil are beginning to run down - the latest figures indicate a 20% drop in production from Captain, Harding and Alba ^[2] .

It's also worth noting that the new Field Allowance announced in the April 2009 Budget will help Nautical, since heavy oil field developments have been given a total Field Allowance of £800m ^[3] . That should improve the profitability of Kraken and Mariner, and more generally enhances the value of the company's heavy oil portfolio.

Nautical's two core assets are Mariner and Kraken, both fields on the East Shetland platform. The company is now stepping up development on both fields, and is pruning the rest of its portfolio - potentially involving relinquishment of some licences. It has also had to write off the expenses of unsuccessful exploration at two prospects. (More of that later.) 

Kraken is located on the East Shetland Platform, west of the North Viking Graben. It was drilled in 1985 and then again in 2007. (In 2008, though, a new well failed to provide evidence for a resources upgrade.) An appraisal well will be drilled in 2010; reservoir definition is proceeding with re-processing of seismic data. First oil is  aimed for in 2012. Nautical part-funded development via a 10% farm-out to Canamens. The resource appears to be 37.1mmbbls net, which according to Edison ^[4] is worth 21p a share.

Mariner is close to Kraken, in Block 9/11a, in shallow waters (107m deep) close to the eastern edge of the East Shetland Platform. It was first drilled in 1981, finding a structural and stratigraphic trap in the Palaeocene Maureen sandstone, and is the largest undeveloped and unappraised field in UK waters. Nautical acquired its interest in 2005. In 2007, StatOil took over development from the previous operator, Chevron. Using its experience on the analogous Heimdal sandstone Grane field in Norway as a guide, StatOil has been able to upgrade estimates. Current estimates are based on 21% recoveries, but management thinks recoveries could be as high as 30%, which gives some useful further upside. Most recently, gross volumes were most recently revised up to 369 mmbo, a 34% increase, and first oil is expected in 2015. The reservoir production models are being updated, and should be ready early in 2010.