Dominion Petroleum (DPL) was my pick this year for the competition on Paulypilot’s board.

My rationale was two-fold:

a) the company’s share’s had taken a helluva beating – down to 3.5p, apparently on funding concerns and general lack of patience and
b) the fact that there was a material well (Mihambia-1) being drilled in Tanzania in the near future which may have the potential to transform the company’s fortunes

Keen followers of Paul’s board will have noticed that I provided no details at all at the time of my selection – I think the last time I commented on Dominion on the boards was to point out that the shares at 60p then (having moved rapidly up from 30p) were far too high, given the state of play at that point.

And keen followers of the oil sector will have noted that, since the turn of the year, DPL shares have risen to 12.25p at the time of writing. I had hoped to buy some before writing this piece, but never got around to it…… though I do own a significant number of shares in Aminex, whose shares have ALSO taken a helluva beating and who, coincidentally, are ALSO planning a major well in Tanzania in the next month or two – on the Ruvuma licence…. only 100km or so further down the coast from the Mihambia-1 well. The Mihambia-1 well will be drilled on the Mandawa licence, only some 75km south of Aminex’s recent offshore success at Nyuni with the Kiliwani North well, which found gas last year (see http://fool.uk-wire.com/cgi-bin/articles/200807170700052562Z... ). And, as a final point of comparison in this digression, both Aminex and Dominion have well-capitalised 50/50 partners in their licences – Maurel and Prom have 50% of Dominion’s Mandawa licence and Tullow have 50% of Aminex’s Ruvuma licence (having acquired this via their Hardman deal a few years back).

All these companies (except Aminex) ALSO have interests in Uganda which, you will know, has seen some huge finds by Tullow and Heritage…….but AFAIAA nobody has yet found flowing oil in Tanzania…..though both wells on Mandawa and Ruvuma are targeting oil. This is not a “punt in the dark”, because Aminex found evidence of oil in the Jurassic when drilling their Nyuni-1 well 5 years ago (see http://www.offshore-mag.com/display_article/226026/9/ARCHI/n... The partners extracted relatively light liquid oil had from cuttings recovered at depths below 3,600 m subsea. Subsequent geochemical analysis in a laboratory suggested that the oil type matched the surface seeps and tar balls collected from the center of Nyuni Island. Aminex concluded that the various samples shared a common source with the Songo Songo field. The evidence, therefore, is of a widespread oil-prone and oil-mature source rock within the Jurassic formation. “We now believe we have identified an oil-prone play fairway in the region, and along the coastal margin of Tanzania,” Rego says)…….

…….however, not being a “punt in the dark” isn’t the same thing as being a certainty……far from it, in fact, because this is Dominion’s first ever well.

So…….getting back to the job in hand, what does Dominion look like?

Assets:

1) Tanzania: Four PSAs in Tanzania, three being onshore and one offshore, totalling 48,000 square kilometres. Partnered on two of these with Maurel & Prom (on Mandawa) and Heritage (on Kisangire), retaining 45% on the latter and 50% on the former (though only 45% in respect of the Mihambia prospect). Attempting to negotiate cross-assignments in respect of offshore block 7 (which contains billion barrel-sized prospects), to give them a carried exposure to several blocks.
Two commitment wells are firmly planned for the Mandawa block in 2009:
a) the Mihambia-1 well (which spudded on 23rd January and is expected to take 45 days). Pre-drill estimates were for gross mean recoverables of 176mn bbls with risking of 11%, mainly due to reservoir and source uncertainties (bearing in mind this is the first well on the licence!). Dominion have in the past claimed that they have flat spots on the seismic (though, as we know from elsewhere, this isn’t always as reliable as it sounds as if it should be!). the well should TD at 2,800m if they think it worth drilling the last 500m. Maurel and Prom are paying 100% of the costs of this well – and Dominion are committed to paying 100% of the costs of the second well….which will be….
b) the Kianiki-1 well, to be drilled in the northern part of the licence later this year. There is no size or CoS info yet available on this well – but I suspect that Dominion will be able to say something by the time they make their delayed appearance at Oilbarrel on April 1st!
Relevant RNSs etc on Mihambia-1 and the Mandawa licence are here:
http://www.dominionpetroleum.com/news_139.asp
http://www.dominionpetroleum.com/news_127.asp
The Kisangire licence is second priority. Heritage farmed-in last year and have yet to decide the timing of the commitment well. See http://fool.uk-wire.com/cgi-bin/articles/200809150700094024D...
The two active onshore licences (all except Selous, which was signed a year later) were signed in July 2005 with an initial 4 year term. The seismic commitments have been fulfilled (though Heritage have just shot 250km more on Kisangire and are assessing the results) but, since the commitments are for two wells on each block, they would appear reliant on the Tanzanians being pragmatic and granting an extension. I understand from third parties that there is some precedent for this (and presumably Heritage and M&P wouldn’t have farmed-in if they were in doubt!). The Selous PSA will almost certainly get a three-year extension – they are trying to figure out how to shoot 500km of seismic across the game reserves!!!

The offshore licence has a $8.75mn commitment on 500sqkm of 3D seismic by 2011. It is deep water – so progress will almost certainly be reliant on doing deals with the neighbouring majors (not impossible IMO if there is success in the region, given that they have 5 play types and 11 prospects/leads on the block, some being 1bn+ bbls!)

2) Uganda and DRC: I lump these together because between them they cover virtually all of Lake Edward – which is the next biggish lake south of Lake Albert in the Albertine rift valley (which is where Tullow and Heritage have been making all their finds on the Ugandan side!). Together these blocks cover c 9,300 sqkm. Oil seeps have been observed in both blocks, especially at the northern ends.
On the DRC side, Dominion are partnered with SOCO in Block 5, which is still awaiting the DRC presidential decree of final approval. There are still some significant security issues on this block, given the guerrilla activity in the east of Congo, but around 20% of the block consists of Lake Edward, which might make things somewhat “easier” in that regard. On the Ugandan side, Block 4b is still 100% Dominion and the first commitment well is due in the July 2009-2011 extension period. Since a number of prospects have been identified on the seismic, I imagine that Dominion are actively seeking farm-in partners for early drilling!
FWIW Dominion think they have a billion barrels net of P50 oil resources in these two blocks…..but of course they won’t be able to start to confirm that until they start drilling!!
So….in summary the near-term interest in Dominion rests squarely on the Mandawa licence and, in particular, the Mihambia-1 well now drilling! This is particularly the case because further funding is inevitable, given the commitment to pay for 100% of the second well on Mandawa (the first well is costing around $10mn) and the potential to move ahead on Kisangire (and Block 4b in Uganda) in the relatively near term.

What else can we say about Dominion?

- Dominion had $20.6mn of cash as at 30/6/08. Year-end figures should be out in April…..but, if Mihambia comes in with a decent result, raising more funds could happen sooner than that*! At 12.25p, the market cap is about £53mn. The last interim accounts are here: http://www.dominionpetroleum.com/uploads/11524DOMINTERIMPF5....

- Dominion is domiciled in Bermuda, presumably for tax reasons though there may also be some nuances re being outwith the UK takeover code and other restrictions. It is also AIM-listed and not eligible for ISA investment (otherwise I’d probably have managed to buy some by now!).

- There have been various option exercises and share purchases by Directors around the recent lows: See http://fool.uk-wire.com/cgi-bin/articles/200812021757504264J... , http://fool.uk-wire.com/cgi-bin/articles/200812221418176070K... and http://fool.uk-wire.com/cgi-bin/articles/200901061325251911L... . None of these were for major amounts, though there is already a limited free float of the shares, with over 40% controlled by non-public holders (similar to SOCO, in fact!). See http://www.dominionpetroleum.com/shares-and-shareholders.asp...

- Dominion has Roger Cagle of SOCO as its non-executive Chairman. The complete slate is here: http://www.dominionpetroleum.com/directors.asp . The history of some former Directors has been “interesting”, with one recently resigning due to unrelated allegations http://fool.uk-wire.com/cgi-bin/articles/200811281749402366J... and a previous FD launching a (now-settled) lawsuit http://fool.uk-wire.com/cgi-bin/articles/200807281129189979Z... . The former FD, however, owns nearly 15% of the shares and is subject to a lock-in lasting only until 12th May this year – so what he does with his stake may have a material influence on the share price, IMO, especially as the Mihambia well results and a fund-raising are both very probable in the intervening few weeks! It is also worth noting that the settlement of this action cost over USD 5mn!

- There are 54.5mn options and warrants outstanding – all at exercise prices more than 50% above the current share price. There are also $57mn of convertible notes due for repayment in October 2010.

* The interim accounts were qualified: http://www.dominionpetroleum.com/uploads/11524DOMINTERIMPF5....
Going concern
The Group currently has insufficient working capital to fund its planned work programme for the next 12 months and hence further funds will need to be raised. The Directors have a reasonable expectation that they will be able to raise these funds through the issue of equity and debt or farm-out arrangements. Failing that, the Group would need to amend its planned work programme to be achievable with the funds available and therefore continue in operational existence for the forseeable future.

In sum, this share is IMO an interesting punt. If the Mihambia-1 well comes on expectations (which of course it won’t - it might be rather worse or, indeed, somewhat better! One of the links above states that Following the interpretation of additional 2D seismic acquired over this prospect in 2007, Dominion s current un-audited reserve range of combined P50 cases for multiple reservoir targets is between 38 and 224 million barrels.) then Dominion will have an interest in around 80mn bbls net of 2P oil at Mihambia-1, which should suggest a share price (pre-dilution from any fund-raising*!!!) on its own of 60p+, together with a significant rise in the prospectivity and marketability of their other assets in the region.

Given that the pre-drill CoS on Mihambia-1 was 11%, it feels to me as if the market may have got ahead of itself at this point (as often happens....or used to! ;-)......with high-impact wells). I'd be thinking that the upside in the next few months (post-funding) may be limited to the 40-50p range, whereas the downside could get close to a wipe-out, in the event of a really bad result. At a price of 3-5p I'd be very happy to take that risk - but at 12p+ the market seems to be discounting a much higher chance of success than was the case before the drillbit turned. As we are now some 33 days into a 45 day well, it doesn't seem impossible that there are solid reasons for that (especially given the pattern recent share price movement - the share price effectively doubled over last weekend!), but only time will tell!

*I’d guess they’d be trying to raise at least £50-100mn…..I know I would, as they also have some potential to get other acreage in the region and develop an even more substantial regional portfolio.

OTOH, if Mihambia-1 comes in dry, then all bets are very likely to be off!!

Given the links to SOCO (Block 5 DRC and the board connections), it may also be that SOCO (or, for that matter, Heritage, Maurel & Prom – or Tullow perhaps) might have a role to play in how matters develop. What happens with the Aminex/Tullow well at Ruvuma may also have a bearing, as might any drilling further south in Mozambique.

Whatever happens, it will not be a dull year for shareholders!

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