Caribbean now known for oil as well as beaches

David Pett
Financial Post
Wednesday, November 12, 2008

The Next Big Thing?

Canadian Superior Energy's well off the shore of Trinidad in the Caribbean Sea. Handout photo

The Caribbean Basin could well be the next big thing in the world of oil and gas, but investors should be warned; the opportunity to cash in on the area's new and exciting potential discoveries comes with a host of uncertainties and will require a great deal of patience.

The area of the Caribbean garnering the lion's share of interest by oil and gas explorers is off the northeast coast of South America. Not only is this part of the tropical island region well known for its oil and gas assets, with discoveries dating back more than 100 years, it is also within close proximity to Venezuala and Colombia, two of the most successful oil and gas nations.

According to a recent Canaccord Adams report authored by analyst Frederick Kozak, "up and coming players" are concentrating much of their efforts near Trindad and Tobago and further south, near Guyana and Suriname.

Included in the list of those vying for a piece of the pie on and offshore from these countries are several Canadian-listed companies including Canadian Superior Energy Inc. (SNG/TSX), Challenger Energy Inc. (CHA/TSX-V) and CGX Energy Inc. (OYL/TSX-V).

Canadian Superior Energy has production operations in Western Canada, offshore Nova Scotia and Libya, but the company's future value is linked predominantly to its gross undeveloped holdings of 135,041 acres in Trinidad and Tobago. Its offshore operations, at a site 86 kilometres off the east coast of Trinidad, have determined three large separate potential hydrocarbon structures named the Victory, Bounty and Endeavour prospects. According to Mr. Kozak, these could contain as much as 3.7 trillion cubic feet of natural gas.

The company is a joint venture partner with the Petroleum Company of Trinidad and Tobago in the Mayaro/Guayaguayare Block, which claims reserve estimates of 10 billion to 30 billion barrels of oil. Mr. Kozak's estimated value for the Trinidad assets equals $3.65 per share, based on the recoverable resources from the offshore operations in question.

When combined with the value of Canadian Superior's Canadian assets, he derives a 12-month price target of $4.50. The analyst has a "speculative buy" rating on the stock, however, telling clients that capital requirements and liquidity risks associated with development and production of the property remain high, including the problem of bringing the gas onstream.

The first option being contemplated by Canadian Superior and its partners is to build a pipeline from the site to the mainland and construct a new fifth liquid natural gas (LNG) train to accommodate the new gas. The second option is to liquefy the gas offshore and then transport the LNG to a sales point.

"Management has stated that both options have roughly the same economics and the decision depends on agreement from other stakeholders [including government] and joint venture partners, as well as the success of the Endeavour well," the analsyt wrote.

Mr. Kozak also slapped Challenger Energy with a "speculative buy" rating, pricing the company's 12-month share value at $5.25. CGX is one of Canadian Superior's partners in the area off the Trinidad coast, but, unlike Canadian Superior, Challenger is a pure play on Trinidad exploration and does not have other operations to fall back on.

CGX Energy Inc., meanwhile, was initiated with a "speculative buy" and $1.80 price target. CGX is focusd on oil exploration in the "unproved, high-risk" Guyana-Suriname Basin, with offshore holdings that amount to 7.2 million acres. Mr. Kozak's target price is based on CGX being able to develop successfully a 50-million-barrel offshore discovery.

According to the U. S. Geological Survey, Guyana-Suriname has one of the largest unexplored oil basins in the world, with estimated recoverable oil reserves of 15.2 billion barrels and gas reserves of 42 trillion cubic feet. However, a dry hole drilled recently off Suriname raises questions about the commercial viability of the basin.

"While a success would have been favourable for companies such as CGX, that dry hole does not mean the basin is uneconomic, as the targeted play type was different than what CGX is focusing on," the Canaccord Adams analyst said.

dpett@nationalpost.com