Wednesday, September 22, 2010

Niko Resources (NKO.T) post on Seeking Alpha

This is a copy of the update article I posted on Seeking Alpha about oil and gas company Niko Resources (NKO.T) which is one of my favorite long term oil and gas investments.

Niko Resources: The Cashflow Wave Continues to Grow

I first wrote about Niko Resources (NKRSF.PK) back on 3/19/2009 in an article titled Niko Resources: Tsunami of Cash from Indian Oil and Gas. The stock was trading around $50 per share at the time of that articles publication and was completely off the radar screen of most oil and gas investors. At the time it was my view that the market was severely undervaluing Niko and that the story was almost unknown to most investors. All the company has done is to continue to execute on its strategy of bringing on the D6 gas field off shore India, with partner Reliance Industries.  Production in the latest quarter has grown to 283,574 (Mcf/d) from 155,030 (Mcf/d) during the same quarter last year.  Operating cashflow for the year ended March 31, 2010 has grown 298% to 258 million dollars. Over the last year the stock has quietly doubled.
In my original article it was my contention that Niko’s management had a strategy of utilizing the huge cashflow being generated from its India operations to acquire acreage in other prospective areas and to finance exploration of the company’s growing land position. That is exactly what the company has done as illustrated below:
Land Holdings:
Exploration Acreage
# Blocks
Gross
Net
Bangladesh
1
1,795,000
1,117,000
India
5
8,577,000
1,281,000
Indonesia
16
19,696,000
15,195,000
Kurdistan
1
209,000
77,000
Madagascar
1
4,161,000
3,121,000
Pakistan
4
2,450,000
2,450,000
Trinidad
5
902,000
461,000
Total
33
37,790,000
23,702,000
Development Acreage



Bangladesh
2
7,000
6,000
India
3
114,000
20,000
Total
5
121,000
26,000
Total Acreage

37,911,000
23,728,000


Niko is not resting on its past success in India; the company has an extensive continuing development program on its India properties along with an extensive seismic program on its various development acreage positions. A very detailed spreadsheet of planned drilling and seismic activity can be viewed at this link. You will note that development drilling continues on all three major India blocks (D6, D4, NEC-25). The company has had continued success in finding additional gas deposits in India and I expect that a new and upgraded resource calculation will be forthcoming from the company. I have listened to several presentations by the company management over the last year where they have stated that their blocks offshore India may contain multi trillion cubic feet gas deposits.  In addition to this upside in India Niko has an interesting drilling project that is ongoing in Kurdistan where the company is drilling the Qara Dagh exploration well with its partner Vast Exploration. This well is currently drilling ahead with full results expected in the next month. This well has several hundred million or billion barrel potential and would be material to Niko if successful.
However the big potential for the company over the next several years resides in the offshore of Indonesia. The company has spent a couple of years accumulating a land package of almost twenty million acres. The company has been very methodical in acquiring acreage that is near existing large producing blocks. They spent a significant amount of time acquiring and analyzing seismic data that the company feels puts them in a good position to be successful when they commence drilling offshore Indonesia. Many of the blocks in Indonesia are on trend to existing large oil and gas deposits.
Although the shares have doubled over the last year I think the following catalysts bode well for further potential upside in the stock price; continued growth in production from D6, ongoing successful development drilling offshore India and a new upward reserve and resource estimate, potential for a large oil discovery in Kurdistan, large and growing land package in diverse areas with a major drilling program to commence offshore Indonesia late in 2011. There is plenty to be excited about with Niko Resources and it is my view the company has huge upside based on the fact that it is still virtually unknown even after its continued success. I would also note that management has reaffirmed its positive view on the company prospects by recently doubling the quarterly dividend to $.06 per share.

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