Petroceltic has announced that it has signed a sale and purchase agreement with Sonatrach, the Algerian NOC, to complete the farm out an 18.375% interest in the Ain Tsila gas and condensate development. Following the completion of the farm out, Sonatrach will have the largest working interest at 43.375%. PCI will have a 38.25% and will remain operator. The rest of the interest will be held by Enel. The transaction is still subject to final approval by the Algerian Council of Ministers and publication in the official journal or gazette. This is normally a formality but may take 5 to 6 months.
There were no changes to the farm. It includes a minimum consideration of $160m with $20m paid upfront and a maximum of $180m depending on production and completion milestones following the completion of development. The effective date of the transaction is 4 July 2013 implying that PCI will be entitled to a further refund depending on costs incurred from that date. Assuming a June completion, the company estimates the first payment to be of the order of $35m, increasing by c.$1.5m per month thereafter.
The completion of the farm out will bring some certainty to the Ain Tsila development and perhaps reduce the discount the share trade relative to the value of its assets. At current levels, Petroceltic is trading at a 15% discount to our core NAV (excluding exploration) valuation of 203p per share implying that the share price does not factor much of the upside from upcoming high impact exploration wells in Kurdistan (1.2bn boe gross, 190mmboe net, 14p/188p per share risked/unrisked). The discount to core assets limits the share price downside making it effectively a covered call option on the upcoming exploration results. We expect the results from the first well in March 2014.
<p><h5>Muna Muleya</h5>


Merrion Stockbrokers Limited (registration no. 307878)
is a limited liability company whose registered office is at
Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4, Ireland.