12 July 2018
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Cluff Natural Resources PLC Cluff is a UK-focused oil and gas investing company with a core asset base in the
Southern North Sea (SNS). With a strategic focus on gas in particular, the company
has established an exciting programme to drill up to three exploration wells in 2019
targeting combined estimated P50 prospective gas resources of over 1.3 TCF. Cluff
augmented its North Sea acreage position significantly in May 2018 with the
provisional award of licences covering ten full and part oil and gas blocks as part of
the UK’s 30th Offshore Licensing Round.
Cluff’s core existing asset base is represented by 100% interests in licences P2248 and
P2252 in the UK SNS. These large blocks, covering 1,525 km2, were awarded to the
company in the 28th Offshore Licensing Round and are estimated to contain prospective gas
resources of between 1.2 TCF to 11 TCF with a P50 estimate of 3.9 TCF across all prospects
in the enlarged SNS portfolio.
Licence P2248 contains several large prospects on trend with existing discoveries and
producing fields in the immediate area. In particular, the Cadence prospect is believed to be
represented by multiple stacked reservoirs which could be targeted by a single exploration
well. Cadence has been ascribed a P50 prospective resource of 929 BCF of gas and a 26%
geological chance of success (GCoS). At present, it is the company’s intention to drill an
exploration well in Q3 2019.
This licence also contains three Bunter sandstone prospects; Bassett, Bathurst and Beckett
with a combined estimated P50 prospective resource of 806 BCF of gas. Exploration wells
in this area are expected to be comparatively inexpensive at less than £9m given the
shallow target depths and a single well with an attractive GCoS of 37% is planned to target
a P50 prospective resource of 128 BCF of gas on the Basset structure in Q2 2019.
Success with a well on Bassett is likely to de-risk the larger Bathurst and Beckett prospects
to a significant degree accelerating the potential for further drilling activity after 2019. The
block also benefits from close proximity to infrastructure and pipelines which have the
potential to reduce future development costs to an appreciable degree.
Licence P2252 also contains several large prospects and Cluff has outlined plans to drill the
Pensacola prospect with estimated prospective gas resources of at least 270 BCF and a
GCoS of 20% with an exploration well in Q4 2019.
In May 2018, Cluff was provisionally awarded licences by the UK OGA covering ten full and
part blocks as part of the 30th Offshore Licensing Round. Three of these blocks are located
in the Central North Sea (CNS) region north of the SNS and include oil prospects further
diversifying the portfolio. However, the licences located in Cluff’s core SNS region are of
particular interest to the company.
The seven new blocks in the SNS contain a portfolio of leads and prospects with estimated
prospective gas resources of nearly 1.9 TCF. Further work is required to reprocess 2D and
3D seismic data and undertake sub-surface studies on these potential targets. However,
Cluff has already highlighted several potentially exciting structures, including Burbank (est.
200 BCF), Cortez South (est. 331 BCF) and the large Cupertino lead (est. 820 BCF), which
merit further exploration activity over the longer term.
Cluff recently secured a six-month extension of the licence terms relating to P2248
and P2252 until 30 November 2018 to enable the company to continue its efforts to
secure farm-out partners or strategic investors to fund exploration drilling in 2019.
With 100% equity interests in both assets, Cluff possesses maximum flexibility to
introduce new partners and with our conservatively risked indicative valuation of at
least £127m for the company’s three high-graded targets alone, we remain confident
that the company can attract farm-in partners or alternative financing ahead of a ‘drill
or drop’ decision for each licence by 30 September 2018.
Stock Data
Share Price: 2.1p
Market Cap.: £11.3m
Shares in issue: 538.2m
Company Profile
Sector: Oil & Gas
Ticker: CLNR
Exchange: AIM
Activities
Cluff is an oil and gas investing company
with a primary focus on gas exploration
opportunities the UK Southern North Sea
(SNS). The company recently expanded its
asset portfolio with the provisional award
of ten full and part oil and gas blocks
located in the SNS and the Central North
Sea region.
Share price performance
Source: LSE
Turner Pope contact details
Turner Pope Investments (TPI) Ltd
6th Floor
Becket House
36 Old Jewry
London
EC2R 8DD
Tel: 0203 621 4120
Email: [email protected]
Web: www.turnerpope.com
Disclaimer and risk warnings
Attention is drawn to the disclaimers
and risk warnings at the end of this
document.
This is a non-independent marketing
communication. The analyst who has
prepared this report is aware that TPI has a
relationship with the company covered in
this report. Accordingly, it has not been
prepared in accordance with legal
requirements designed to promote the
independence of investment research and
is not subject to any prohibition on dealing
ahead of the dissemination of investment
research.
TPI has acted as a placing agent for Cluff
Natural Resources PLC.
Retail clients (as defined by the rules of
the FCA) must not rely on this document.
Barney Gray Research Analyst
Tel: 0203 621 4120 [email protected]
12 July 2018
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Core asset base – the UK Southern North Sea Cluff Natural Resources (Cluff) is an oil and gas investing company with a focus on exciting low cost, high-
impact gas exploration assets in the UK Southern and Central North Sea. The company’s management team,
with Algy Cluff in the key role of Chairman, possesses deep and wide ranging experience within the natural
resources sector and the North Sea in particular (see Appendix 1 for detailed management biographies).
Cluff’s core asset base is situated in the UK Southern North Sea (SNS). The company possesses 1,974 km2 of
gross area under licence, representing the largest acreage position in the SNS Carboniferous hydrocarbon
fairway. This extensive portfolio comprises 11 blocks of which all but two are 100% owned and operated by
Cluff. This provides the company with maximum operational flexibility to expedite potential farm-out deals
with third parties. The acreage position, which is outlined in greater detail on the map below, contains at
least 26 independently verified leads and prospects with potential resource upside in excess of 4.3 TCF.
Key areas of operation
Source: Company
12 July 2018
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SNS - 28th Offshore Licencing Round assets
Cluff’s core SNS asset base comprises two major assets awarded to the company by the UK Oil and Gas
Authority (OGA) in the UK’s 28th Offshore Licencing Round in November 2014. These licences which are
100% owned by Cluff are P2248 and P2252.
Licence P2248 contains the large Cadence group of prospects, which are estimated to contain unrisked P50
prospective gas resources of 929 BCF over three stacked reservoirs. In addition, the ‘Bunter’ group of
prospects, namely Bassett, Bathurst and Beckett are estimated to contain aggregate P50 gas resources of 806
BCF within all three prospects. The Bunter prospects in particular are located in a proven gas fairway and
given the relatively target water depths, exploration drilling costs are expected to be low in the order of £8m-
£9m for an exploration well.
Licence P2248 - Net prospective resources (BCF) (Cluff: 100%)
Project ID Status Low Mid High Mean Risk factor
P90 P50 P10
Cadence Scremerston Prospect 59 165 410 206 26%
Cadence Fell Sandstone Prospect 111 604 2,175 923 16%
Cadence Camden Prospect 58 160 405 204 26%
Bassett Prospect 36 128 303 153 37%
Bathurst Prospect 119 275 571 317 18%
Beckett Prospect 97 403 892 460 22%
Total 480 1,735 4,756 2,263
Source: Company
Licence P2252 is also highly prospective with the sizable Pensacola target estimated to contain P50
prospective gas resources of 424 BCF over two intervals. This is complemented by the smaller Lytham and
Fairhaven prospects which are estimated to contain a further 212 BCF of gas combined.
Licence P2252 - Net prospective resources (BCF) (Cluff: 100%)
Project ID Status Low Mid High Mean Risk factor
P90 P50 P10
Lytham Permian Prospect 52 123 244 137 49%
Lytham Carboniferous Prospect 12 44 149 68 30%
Fairhaven Prospect 18 45 98 53 43%
Pensacola Fringing Reef Prospect 113 270 650 338 20%
Pensacola Lagoon fill Prospect 67 154 347 186 16%
Total 262 636 1,488 782
Source: Company
Continuation of the core licences
On 31 May 2018, the UK OGA waived its requirement for Cluff to complete a farm-out on P2248 and P2252
by the end of May 2018. The OGA has now extended the Promote Period and the Initial Term of each licence
for six months until 30 November 2018 subject to a ‘drill or drop’ decision being made by 30 September 2018.
This move will enable Cluff to continue the farm-out process while also enabling the company to explore
other forms of financing to support future drilling activities on these licences.
12 July 2018
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SNS - 30th Offshore Licencing Round assets
In May 2018, Cluff was provisionally awarded a portfolio of licences covering 10 full and part oil and gas
blocks as part of the OGA’s 30th Offshore Licensing Round. With the exception of two blocks where Cluff has
been awarded 25% interests with Parkmead Group plc as the operator of both, all the blocks were awarded to
Cluff on a 100% basis.
Blocks awarded in 30th Offshore Licencing Round
Southern North Sea Block Equity Notes
42/14 100%
42/15b 100%
43/7 100%
43/8 100%
48/8b 100%
47/10d 25% Parkmead is operator
48/6d 25% Parkmead is operator
Central North Sea Block Equity Notes
22/19f 100%
22/24f 100% Part block
22/25c 100% Part block
Source: Company
Focus on the SNS
The company believes that the 30th Round portfolio is highly prospective, containing a large number of
undeveloped discoveries, prospects and leads. The table below outlines the prospectivity in the SNS blocks
alone. In addition to two modest discoveries in Furasta and Sloop, the portfolio contains two sizable prospects
in the form of Burbank and Selene and a range of large leads located in the Carboniferous and Permian
intervals.
Lead and prospect portfolio on the SNS licences awarded in the 30th Round licences
Block Key prospect ID Age Status Net Prospective Resources GCoS
P90 P50 P10
42/14 & 42/15b Furasta Triassic Discovery 7.2 17.6 29.6 100%
Burbank Triassic Prospect 70 200 567 32%
Cortez Carboniferous Lead 24 107 433 29%
Cortez South Carboniferous Lead 129 331 732 28%
43/7 & 43/8 Cupertino Scremerston Carboniferous Lead 69 262 914 21%
Cupertino Fell Sandstone Carboniferous Lead 147 558 2,090 19%
48/8b Sloop Permian Discovery 7 18 38 100%
Selene Permian Prospect 191 253 328 38%
Endymion Permian Lead 36 48 62 27%
Rig & Jib Permian Lead 11 29 58 35%
47/10d & 48/6d Bob (Teviot) Permian Discovery 2.8 5.5 10.3 100%
Blackadder Permian Prospect 17.8 28.3 42.5 45%
Total
712 1,857 5,304
Source: Company
12 July 2018
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Upside in the Central North Sea
The part blocks 22/24f and 22/25c in the CNS are located in a comparatively under explored area although
they are adjacent to the large Marnock-Skua field. These blocks contain the Tesla discovery in the Pentland
Formation in addition to the low risk Dewar prospect in the Forties Sandstone.
Block 22-19f is also believed to contain multi-level oil prospectivity in the proven Fulmar, Skagerrak and
Rotliegend formations and previous operators have identified a significant number of additional leads and
prospects which require further assessment by the company.
Cluff’s strategy Cluff has built a large portfolio of exploration and appraisal assets focused predominantly on the SNS. The
group’s strategy is to leverage several factors including an urgent strategic requirement for significant
exploration activity in the UKCS, historically low drilling costs, strong gas prices and a very attractive
supply/demand imbalance in the UK.
The company has acquired its acreage in relatively shallow water adjacent to existing discoveries and existing
or proposed gas distribution infrastructure in order to minimise future potential development costs. The
company is also seeking to gain maximum exposure at the exploration and appraisal phase, ideally through
utilising the flexibility that 100% ownership of most of the company’s assets provides. As such, Cluff is
actively seeking to attract funding or operating partner ships through farm-in opportunities in order to
advance the development of its core assets.
Value realisation
Cluff states that it is the company’s core strategy to realise value for shareholders through the disposal of
assets to established producers prior to the development phase. Subsequently realised capital can then be
used to fund future exploration or be distributed to shareholders.
In Cluff’s case, the company intends to expedite its current strategy by seeking farm-in opportunities for its
28th Licensing Round assets in order to launch an exploration drilling programme in 2019. Simultaneously,
work to de-risk the company’s 30th Licensing Round portfolio is continuing and Cluff intends to acquire
further seismic data in 2018/19 with a view to exploration drilling in the following years.
Extending the horizons further, Cluff also intends to participate in the 32nd Licencing Round during
2019/2020 by applying for additional acreage and if successful, propagate the company’s strategy further by
conducting seismic activity with a view to further exploration drilling.
A repeatable strategy
We believe that Cluff has built a self-propagating business model. Should Cluff realise value from successful
drilling or asset sales in 2019, new funds can be used to accelerate the development of the 30th Round
portfolio and work up a range of new prospects. With the company’s likely participation in the 32nd Mature
Offshore Licencing Round in 2019/2020, Cluff intends to be in a position to apply for new acreage while
simultaneously bringing in partners to facilitate the drilling of the 30th Round prospects.
12 July 2018
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Strategic focus on gas
Cluff focuses on proven gas basins in the established operating environment of the UK. The UK sector is
particularly attractive to the company given that it has a top quartile fiscal regime and a flexible regulatory
system. In addition, the sector possesses an attractive market backdrop implying that demand for gas and
subsequent pricing will be favourable for gas producers over the next 20 years.
Supply and demand highly favourable
At present, gas provides the energy source for approximately 40%-45% of UK electricity generation depending
on seasonality. As the chart below illustrates, nuclear powered electricity generation remains flat and coal
powered generation has reduced substantially since the start of the decade to the point where coal-fired
electricity production is now virtually non-existent. Although energy derived from renewable sources is
appreciable and likely to continue to increase, gas provides the mainstay of UK power generation, a status
that we expect it to retain for the foreseeable future. Importantly, we also expect gas to replace coal
completely in order to cover seasonal spikes in energy demand as seen clearly on the chart below.
Electricity generation by fuel source
Source: Ofgem
The gas consumption gap
UK gas consumption has exceeded production by a significant margin since the early 1970s and although UK
gas production witnessed an uptick in 2016, this was counter balanced by a more significant increase in gas
consumption as seen on the chart below.
12 July 2018
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British Gas plc indicates that only 43% of UK gas consumption is now derived from domestic production. Of
the balance that is imported to meet demand, 13% is imported in the form of LNG (liquefied natural gas) with
44% delivered via pipelines from continental Europe. This tranche of gas is derived from several locations
including Norway (23% of European gas) but also more politically sensitive regions including Russia which
supplies Europe with 35% of its gas.
Energy security is a substantial political issue and as such, there is a UK government policy framework to
maintain safe and secure future energy supplies. Given the current scale of UKCS gas production and the
potential to extend the productive life of the North Sea for a considerable period, we believe that the
continued growth of UKCS gas production represents a key pillar of UK government policy.
UK gas production vs consumptions (BCF per annum)
Source: BP Statistical Review
UK gas prices are attractive
Cluff indicates that the UK gas production sector also benefits from solid commodity pricing. As can be seen
below, recent data from BP indicates that northern European gas prices converged at a healthy US$6.00 per
mmBtu (mmBtu converts to mcf at a factor of 0.9756, e.g. US$6.00 per mmBtu is equivalent to US$5.85 per
mcf) at the end of 2017 and into Q1 2018 as a function of the increased demand during the winter months.
Although prices remain below the 10-year average, the UK NBP (National Balancing Point) gas price
benchmark consistently trades at a significant premium) to the US Henry Hub benchmark which has been
subdued since 2008. At a current price of cUS$7.00/mcf, NBP is more than double the Henry Hub price.
12 July 2018
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Global gas price indicators (USD per mmbtu)
Source: BP
SNS is a lower cost operating environment
Finally, Cluff is confident that the shallow water areas of the SNS in particular represent a relatively low cost
environment for operators. The price of jack-up rigs has declined significantly since 2015 to average rates of
approximately US$50,000 to US$70,000 per day. It should be noted that the window of opportunity to drill at
historically low costs may shrink beyond 2019 as the trend appears to be for rising rig utilisation which will
eventually feed through into higher day rates.
Northwest Europe harsh standard jack-ups (day rate in US$000 vs utilisation)
Source IHS Markit
12 July 2018
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Core assets: SNS gas basin Cluff is focused on a comparatively under-explored region of the SNS, which is one of the world’s most
prolific gas producing areas. The SNS has been producing gas since the 1960s and the company notes that it
is experiencing a renaissance in recent years, driven by a raft of discoveries including the Breagh, Cygnus,
Tolmount and Pegasus fields.
Cluff’s core assets from the 28th Licencing Round are highlighted below in the solid blue shading on the map
below. The licences are located in an area of stacked plays with reservoirs located at multiple levels. The
company has identified several large prospects on both the P2248 and P2252 licences located within proven
fairways including the Carboniferous and Bunter Sandstone intervals.
Core assets in the SNS gas basin
Source: Company
Acreage located in proven fairways
Current production in the SNS is split between the Permian aged Rotliegend sandstones and older
Carboniferous sandstones which are situated in the north and northeast of the basin. In addition, the early
Triassic Bunter Sandstone, a successor to the Permian Basin, has also proved to be highly prolific. These
proven hydrocarbon fairways contain Cluff’s primary prospect inventory which includes Cadence in the
Carboniferous and Bassett in Bunter Sandstone on Licence P2248.
Cluff notes that emerging plays such as the Zechstein Reefs also hold the potential for major prospectivity and
the company possesses significant prospective resource upside in this formation within its prospect inventory
on Licence P2252.
12 July 2018
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Cluff’s acreage is on trend with several large fields and recent discoveries in the immediate vicinity. These
include:
• Breagh (Carboniferous Scremerston reservoir) – a 600 BCF gas discovery in water depths of c.60m.
Operated by INEOS. First gas was achieved in October 2013.
• Pegasus West Discovery (Carboniferous Namurian sandstone reservoir) – Tested by Centrica at c.91
mmcfpd over three drill stem tests. Suspended as a future producer with a field development plan
anticipated in 2018. Current equity partners are Spirit Energy and Third Energy.
• Cygnus (Carboniferous and Leman reservoirs) – a 630 BCF discovery with upside case of 1.2 TCF.
First gas flowed in early 2016. Current equity partners are Spirit Energy and Neptune Energy.
Exploration on the increase following corporate activity
Cluff believes that activity in the SNS has been supressed to an extent over the last 18 months given that
comparatively high levels of corporate activity have diverted operators’ immediate attention and resources
away from exploration activities. The company highlights recent deals such as Oranje-Nassau Energie’s (ONE)
acquisition of Sterling Resources for US$163m. This enabled ONE to secure a 30% interest in the Breagh gas
field in March 2017.
The Breagh operator, INEOS also acquired DONG Energy for up to US$1.3bn in May 2017. This deal has
provided INEOS with over 100,000 boepd of additional production and a further 570 mmboe of reserves and
resources across the UK, Danish and Norwegian sectors of the North Sea.
Last year was closed out with the formation of Spirit Energy, a merger of Centrica’s Exploration and
Production business and Bayerngas Norge AS in December 2017 and corporate activity continued in February
2018 with the completion of Neptune Energy’s acquisition of Engie E&P for US$3.9bn to create a major pan-
North Sea E&P company.
Upcoming exploration activity
Of particular interest to Cluff will be the expected drilling of the Andromeda Prospect on the Spirit Energy
operated block immediately to the east of P2248. In addition, exploration wells are also planned on the
Ossian-Darach Prospect and the multi-TCF Aurora Prospect located east of P2252 in Q2 2019. This latter
prospect is of particular interest to Cluff given that Aurora is a key analogue for the company’s large Cadence
prospect on which Cluff is planning to drill a well in H2 2019. Exploration success at Aurora, situated in the
Carboniferous Fell Sandstone reservoir would serve to de-risk Cadence to an appreciable degree. Cadence is
examined in greater detail in the next section of this report.
12 July 2018
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Core SNS Licence P2248 Licence P2248 contains several key prospects within Cluff’s portfolio. Of particular interest is the Cadence
Prospect which is estimated to contain a P50 prospective resource of 929 BCF and the Bunter prospects,
represented by three large targets with a combined estimated P50 prospective resource of 806 BCF. The
location of these key targets is illustrated clearly on the map below.
Key prospects on licence P2248
Source: Company
Key prospects – Cadence
Cadence is located on the Pegasus-Andromeda-Crosgan structural trend. Of these structures, Pegasus
represents a major discovery, Andromeda is scheduled to be drilled in late 2018 and Crosgan was a gas
discovery that was plugged and abandoned after encountering gas albeit in a thinner than expected
sandstone.
Cadence is located in early Carboniferous shoreface and fluvial sand reservoirs and as the table below depicts,
is comprised of multiple targets that can be probed by a single exploration well. The largest reservoir target is
the Fell Sandstone, hence the Aurora analogue. However, additional reservoirs, including the Scremerston
and the Camden are also believed to contain significant resource upside. The P50 case is outlined as 929 BCF.
However, if the bounding fault, depicted as the near vertical black line on the seismic chart below, provides
seal to the reservoirs, the upside potential could be as much as 3 TCF as outlined by the P10 case below.
12 July 2018
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Licence P2248 – Net prospective resources (BCF) (Cluff: 100%)
Project ID Status Low Mid High Mean Risk factor
P90 P50 P10
Cadence Scremerston Prospect 59 165 410 206 26%
Cadence Fell Sandstone Prospect 111 604 2,175 923 16%
Cadence Camden Prospect 58 160 405 204 26%
Total 228 929 2,990 1,333
Source: Company
Single well to target multiple targets
Cadence is a four way dip closure and is located at an estimated target depth of 3,100m. It has multi-level
prospectivity with an estimated hydrocarbon column in excess of 500m. The target formations including the
Scremerston, Fell and Yoredale are stacked and a single exploration well, notionally represented by the
dashed line, is planned to probe the crest of each successive structure as outlined below.
Cluff has outlined plans to drill an exploration well on Cadence in Q3 2019 at an estimated cost slightly in
excess of £16m. Given the anticipated cost of such a well, we expect that the company will seek to establish a
farm-out or partnership agreement in order to expedite drilling activity
Cadence prospects highlighted
Source: Company
12 July 2018
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The Bunter Sandstone prospects
The Bunter Sandstone play, a considerably shallower play than the Carboniferous, has proven to be highly
prospective nonetheless. This formation contains the depleted Esmond Gas Complex which comprises the
Esmond, Forbes and Gordon fields located immediately east of Licence P2248.
Cluff has re-processed much of the recent 3D seismic data covering this area of the licence enabling the
company to identify structures and potential traps with a stratigraphic element. With a key focus on AVO
(amplitude versus offset) data which is due for imminent completion, Cluff has identified several potentially
exciting prospects in this relatively shallow horizon (1,300m – 1,700m TD). The three key targets: Bassett,
Bathurst and Beckett are outlined below.
Licence P2248 – Net prospective resources (BCF) (Cluff: 100%)
Project ID Status Low Mid High Mean Risk factor
P90 P50 P10
Bassett Prospect 36 128 303 153 37%
Bathurst Prospect 119 275 571 317 18%
Beckett Prospect 97 403 892 460 22%
Total 252 806 1,766 930
Source: Company
RMS data with Basset prospect (insert)
Source: Company
12 July 2018
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Highly prospective area
The amplitude analysis over P2248 highlights key areas of prospectivity. In particular, the AVO analysis
depicts the Esmond field to the southeast of Cluff’s focus area and also the Furasta gas discovery to the west
on Cluff’s adjoining acreage which is estimated to contain 30 BCF of gas. The amplitude data highlighting the
key Bassett prospect is also enlarged on the map above.
The Bassett prospect
Although Bassett is the smallest of the three primary prospects in this play, it represents the lowest drilling
risk to the company. The prospect is a low relief four-way dip closure with the P50 case assuming seal against
a major salt wall to the northeast. P50 Prospective Resources are estimated to be 128 BCF although the GCoS
(Geological Chance of Success) is relatively high for an exploration well at 37% indicating confidence
regarding the structure.
Beckett and Bathurst are estimated to contain larger potential resources and exploration success at Bassett
would be likely to increase the current respective GCoSs significantly as the play would be de-risked to a
considerable extent in this area.
Exploration drilling would be inexpensive
With shallow water depths of approximately 60 metres enabling drilling by a jack-up rig complemented by
relatively shallow subsurface targets, Cluff estimates that an exploration well would cost only £8.0m-£9.0m to
drill and test given the short time window required. With a high GCoS, the company has identified Bassett
and its lookalike structures on P2248 as a primary candidate for a farm-out or equity partnership in order to
expedite exploration activity next year.
12 July 2018
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Core SNS Licence P2252 Cluff holds 100% in Licence P2252 which contains the potentially exciting Pensacola Prospect in addition to
smaller prospects represented by Fairhaven and Lytham. These are depicted on the map below.
Key prospects on Licence P2252
Source: Company
The Pensacola Prospect
Cluff states that that the Pensacola Reef Complex is classic patch reef architecture which has been partially
imaged on 3D seismic data. A generic morphological outline of major reef types is depicted in the illustration
below. As can be inferred from the illustration, ancient coral reef architecture provides ideal structures for
subsequent sedimentary infill and can serve as effective trapping mechanisms for hydrocarbons.
Cluff notes that analogous reef structures were also identified over the Crosgan and Aurora prospects
although to date, Crosgan is the only analogue drilled that has flowed gas to date.
12 July 2018
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Morphological expression of major reef types
Source: UPRM Department of Geology
Zechstein Reefs
The Zechstein Reef play has numerous hydrocarbon producing analogues across the North East of England
and the SNS in addition to Holland, Germany, Denmark and Poland. This is as a consequence of the
formation of reefs formed over a period of 5-7 million years in the Zechstein Sea some 250 million years ago.
The Zechstein Sea was a vast shallow and isolated inland sea that was formed when the supercontinent
Pangea was starting to rift apart. Reefs developed on the shores of the Zechstein Sea which was transformed
into a large evaporating basin. The reefs were formed by an accumulation of limestone which created
carbonate barriers at the edge of the sea and repeated cycles of marine flooding and evaporation established
sedimentary deposition cycles which represent today’s hydrocarbon reservoirs. These cycles are well
understood by today’s geologists and have been exploited for oil and gas across the whole North Sea and
northern Europe.
Extent of the Zechstein Reefs – North Sea
Source: The Geological Society
12 July 2018
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Pensacola prospectivity
Cluff has partially imaged the Zechstein reef build up on 3D seismic and notes that the Pensacola prospect is a
7 km by 16 km long fringing reef with a substantial lagoon fill. The company notes that the lookalike Crosgan
discovery flowed gas at a rate of 7.6 mmcfpd from a thin Hauptdolomite interval although the reservoir was
thinner than expected.
3D Imaging of the Pensacola Prospect
Source: Company
Resource estimates
The company expects that at this stage, the fringing reef structure, depicted clearly on the chart above,
represents slightly greater upside in terms of resources and GCoS than the lagoon fill. The company estimates
that an exploration well would cost £10m-£11m on a gross basis and is escalating its plans to schedule
drilling in Q4 2019 subject to the completion of a farm-out or similar agreement to fund part or all of the
exploration drilling expenditure.
Licence P2252 Net prospective resources (BCF) (Cluff: 100%)
Project ID Status Low Mid High Mean Risk factor
P90 P50 P10
Pensacola Fringing Reef Prospect 113 270 650 338 20%
Pensacola Lagoon fill Prospect 67 154 347 186 16%
Total 180 424 997 524
Source: Company
12 July 2018
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Lytham and Fairhaven prospects
At present, we regard the Lytham and Fairhaven prospects as secondary targets on Licence P2252. Both
targets were drilled in the 1980s and 2000s with elevated gas shows. However, no flow testing has been
conducted due to several factors including drilling and technical issues and a lack of fracture connectivity
within the reservoirs.
Cluff estimates that further appraisal drilling could cost up to £20m per well which at present, falls outside
the company’s immediate plans.
Licence P2252 Net prospective resources (BCF) (Cluff: 100%)
Project ID Status Low Mid High Mean Risk factor
P90 P50 P10
Lytham Permian Prospect 52 123 244 137 49%
Lytham Carboniferous Prospect 12 44 149 68 30%
Fairhaven Prospect 18 45 98 53 43%
Total 82 212 491 258
Source: Company
12 July 2018
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30th Licensing Round awards – SNS core area As outlined in our introduction, Cluff was provisionally awarded a portfolio of licences covering 10 full and
part oil and gas blocks as part of the OGA’s 30th Offshore Licensing Round in May 2018. With the exception of
two SNS blocks, all the blocks were awarded to Cluff on a 100% basis.
In the SNS core area Cluff has provisionally acquired four highly strategic blocks adjacent to its P2248 licence.
Of particular interest are the Cortez leads and the Burbank prospect on 42/14 and 42/15b in addition to the
Cupertino leads on 43/7 and 43/8 located to the northeast of P2248.
Prospects and leads in Cluff’s core SNS area
Source: Company
Lead and prospect portfolio on the core SNS licences
Block Key prospect ID Age Status Net Prospective Resources GCoS
P90 P50 P10
42/14 & 42/15b Furasta Triassic Discovery 7.2 17.6 29.6 100%
Burbank Triassic Prospect 70 200 567 32%
Cortez Carboniferous Lead 24 107 433 29%
Cortez South Carboniferous Lead 129 331 732 28%
43/7 & 43/8 Cupertino Scremerston Carboniferous Lead 69 262 914 21%
Cupertino Fell Sandstone Carboniferous Lead 147 558 2,090 19%
Total
446 1,476 4,766
Source: Company
12 July 2018
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Blocks 42/14 and 42/15b - Cortez and Burbank (Cluff: 100%)
Block 42/15b already contains Furasta, a modest gas discovery located in the Triassic. However, Cluff believes
that the adjacent block 42/14 could accommodate additional prospectivity. In particular, the Burbank
Prospect is a 200 BCF target located in the Bunter Sandstone and the larger Cortez South lead is a 331 BCF
accumulation at the Carboniferous Scremerston level.
There is already a mix of 2D and 3D seismic data on these blocks. However, Cluff plans to re-process the 2D
data and potentially shoot new 3D seismic as part of plans to firm up these primary targets.
Blocks 43/7 and 43/8 – Cupertino (Cluff: 100%)
This acreage contains the depleted Forbes gas field which drains the Bunter Sandstone interval. Cluff has
identified the Cupertino lead on the Carboniferous which is believed to be a four-way dip structure in footwall
with fault seal upside. Consequently the P10 prospective resource numbers for the Cupertino leads are
considerably higher than the P50 at nearly 3 TCF combined.
Like the analogous Cadence prospect, Cupertino is comprised of stacked Scremerston and Fell Sandstone
reservoirs. The licence already has mixed 2D and 3D seismic data and as with blocks 42/14 and 42/15b, the
company intends to re-process the existing data with the potential to shoot new 3D to firm up the existing
leads.
SNS - Rotliegend area
As outlined on page 2 of this report, the SNS Rotliegend area is located in the central part of the SNS to the
south of Cluff’s core area of focus. Aside from the larger Selene prospect, this area provides Cluff with
strategic entry into a proven hydrocarbon play with the potential for multiple smaller discoveries as outlined
in the table below.
The Permian aged Rotliegend sandstone sequence sits above a secondary Carboniferous sandstone reservoir.
The Rotliegend is a litho-stratigraphic unit (a sequence of rock strata) of middle Permian age that is found in
the subsurface over large areas of western and central Europe and comprises the predominant gas-bearing
reservoir in the Southern North Sea and Anglo-Dutch Basins.
The Rotliegend consists primarily of sandstone and claystone layers and is usually overlain by the limestone
and evaporitic sequences of the Zechstein formation, deposited unconformably on top of regionally variable
sediments formations of late Carboniferous age.
Lead and prospect portfolio on the SNS licences awarded in the 30th Round licences
Block Key prospect ID Age Status Net Prospective Resources GCoS
P90 P50 P10
48/8b Sloop Permian Discovery 7 18 38 100%
Selene Permian Prospect 191 253 328 38%
Endymion Permian Lead 36 48 62 27%
Rig & Jib Permian Lead 11 29 58 35%
47/10d & 48/6d Bob (Teviot) Permian Discovery 2.8 5.5 10.3 100%
Blackadder Permian Prospect 17.8 28.3 42.5 45%
Total
266 382 539
Source: Company
12 July 2018
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Block 48/8b in the SNS Rotliegend area
Source: Company
Prospectivity on Block 48/8b – Selene (Cluff: 100%)
Selene represents the largest potential target in this tranche of Cluff’s portfolio with a P50 prospective
resource estimate of 250+ BCF. However, the company believes that this could be significantly bigger given
that historically, depth conversion has led to uncertainty over volumetrics. A low cost study is likely to provide
greater certainty with regards to resource volumes on Selene which has the potential to increase the size of
the key prospect on this licence significantly.
Blocks 47/10d and 48/6d (Cluff: 25%)
Cluff’s only part owned blocks which are operated by Parkmead Group plc contain the small Teviot (Bob)
discovery and the Blackadder prospect which is a Rotliegend target with a high GCoS.
The company has outlined plans to collaborate on a technical level with Parkmead and any success here is
likely to benefit Cluff given that there is believed to be a direct technical read-across from Blocks 47/10d and
48/6d to the prospects on Block 48/8b which contains Selene and the smaller Rig & Jib and Endymion leads.
12 July 2018
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Central North Sea assets – Blocks 22/24f and 22/25g - Oil
We believe that Cluff’s 22/19f blocks (Cluff: 100%) represents longer term value to the group. However, the
22/24f block is of particular interest in that the licence contains the Tesla discovery which had oil and gas
shows in the Jurassic Pentland Sandstones although these hydrocarbon accumulations were not tested.
There are additional targets on the part block including Tesla South lead and the Dewar prospect which is
estimated to contain 10 mmboe of oil and condensate in the Forties Sandstone formation. Any future drilling
success here has the potential to diversify the portfolio with the additional of hydrocarbon liquids.
Locations of leads on part Block 22/24f
Source: Company
12 July 2018
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Proposed activity timetable Recent fund raising
Cluff recently raised gross proceeds of £2.0m after the placing of 95.2 million shares at 2.1p per share on 27
June 2018. We expect that this cash, of which we estimate net proceeds to be £1.9m, will be sufficient to fund
the company for at least the next year. The company outlined that the new funds will be used principally for:
• Accelerating the technical and commercial potential of the SNS and CNS assets awarded in the 30th
Offshore Licensing Round and firming up future drilling opportunities
• Continuing the process of securing a partner(s) or strategic investors to fund drilling activities on the
company’s core SNS licences, P2245 and P2252
• Continuing the planning of a potential multi-well drilling programme in 2019 on core exploration
targets on SNS licences P2248 and P2252
• General working capital requirements
Well programme planning
In regard to the planned drilling programme, Cluff notes that providing a detailed work programme and
comprehensive well plans is now a key factor in attracting a potential farm-in partner. As is evident from the
timetable and well costing below, a three well programme focusing on Bassett, Cadence and Pensacola is a
significant financial undertaking and Cluff will be required to bring in partners to expedite this programme in
2019.
It is feasible that the company could fund a single well on Bassett for a considerably more modest cost and
success here could de-risk the lookalike prospects, Beckett and Bathurst for future drilling. However, we
believe that the company would prefer a multi-well programme given the binary nature of potential success
on one well.
Complete flexibility
Given that Cluff holds 100% of the all the core licences in its portfolio, the company has complete flexibility
and control of the structure of any deal that it completes. As such, we believe that the company is in the
strongest position to expedite successfully a deal or deals that will enable the company to participate in an
exciting exploration programme in 2019.
Activity timeline 2018-19
P50
Q3 Q4 Q1 Q2 Q3 Q4 Estimated
Formation Prospect (BCF) GCoS 2018 2018 2019 2019 2019 2019 well cost
Bunter Bassett 128 37% Well Planning
Drilling
£8.8m
Beckett 703 22%
£8.6m
Bathurst 275 18%
£8.8m
Carboniferous Cadence 929 26% Well Planning
Drilling
£16.2m
Zechstein Pensacola 270 20% Well Planning Drilling £10.6m
Source: Company
12 July 2018
- 24 -
Ascribing a value to the core portfolio We have endeavoured to place an indicative value on Cluff’s core portfolio comprising the three key prospects,
Bassett, Cadence and Pensacola. These are considered core given that Cluff is actively planning a drilling
programme to encompass all three prospects with a view to attracting a farm-out or funding partner. Within
our valuation, we have also considered the additional upside represented by the Beckett and Bathurst
prospects which we believe would be prime drilling targets if an exploration well on the low risk Bassett
prospect was successful.
Valuation summary
Item Prospect Bassett Bathurst Beckett Cadence Pensacola Core Total
Prospective Resources BCF 128 275 403 929 270 1,327 2,005
GCoS % 37% 18% 22% 26% 20% 26% 24%
Risked resources BCF 47 50 89 242 54 343 481
NPV per mcf USD 1.02 1.02 1.02 1.02 1.02 1.02 1.02
NPV US$m 48 50 90 246 55 350 491
Commercial risk factor % 50% 75% 75% 50% 50% 50% 57%
Risked NPV US$m 24 13 23 123 28 175 210
Exchange rate (USD/GBP) 1.38
Risked NPV £m 18 9 16 89 20 127 153
Source: TP estimates, Company
Methodology
Within our assumptions, we have used the company’s P50 Prospective Resource estimates as published by the
Xodus CPR (2016). To this we have applied the appropriate GCoS as outlined by Cluff to establish a risked
resource. We have subsequently applied a calculated unit NPV (10%) per mcf of US$1.02 based on a
successful development of the Bassett prospect, representing Cluff’s lowest risk target.
Our unit NPV assumes a range of variables including
• 128 BCF of gas produced over 15 years with production commencing in late 2022
• Peak production of 50 mmcfpd in 2023 declining from 2025 onwards
• Flat gas price of US$6.50 per mcf
• Unit opex per mcf of US$1.33 at peak production rising thereafter
• Drilling capex comprising one exploration well and an additional appraisal well
• Development capex of £40m to complete and tie into infrastructure
• Normal UK petroleum profit tax rates applied
• Average USD/GBP exchange rate of $1.38 to reflect average rate since the start of 2018
We note that Cluff has generated a similar success case unit EMV (Expected Monetary Value) for Bassett
based on a risked average of a set of possible scenarios. It is important to note that the company’s unit EMVs
for the other four prospects under consideration are higher than our ascribed unit value and that Cluff has
calculated a blended average unit EMV of US$1.25 across the portfolio. As such, we believe that our
calculations are particularly conservative.
12 July 2018
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Conclusions
We have also applied a significant commercial risk factor to our calculated NPVs given that Cluff’s exploration
well programme is currently unfunded and therefore, we believe a minimum risk factor of 50% should be
applied to account for the likely ceding of its equity interests in order to facilitate farm-out agreements and
funding.
Our assumptions have also applied an aggressive 75% commercial risk factor to the Bunter prospects, Beckett
and Bathurst given that their drilling is largely contingent on success at Beckett, adding an additional layer of
risk to the valuation.
Consequently, we have aggregated our findings an established a base case valuation of £127m to Cluff’s
current 100% in its core licences only. This valuation of the core portfolio is expanded to £153m with the
inclusion of the aggressively risked additional Bunter prospects.
Major upside potential
There is a very substantial degree of upside within Cluff’s core portfolio that we have not included at this
stage. Firstly, we have not included any value for the Lytham and Fairhaven prospects given that they do not
constitute near term drilling targets. However, these are comparatively small prospects within Cluff’s portfolio
and the real upside arguably resides in the P2248 licence where the resource upside could be as much as 4.7
TCF on a P10 basis. Much of this upside is attributed to the Cadence prospect which was outlined in detail
previously. With 3 TCF of the total additional upside potentially attainable through a single exploration well
on Cadence, we believe that Cluff has the potential to make significant progress attracting farm-in partners
over the next six months.
Finally, we should also note that the company’s 10 blocks acquired in the 30th Round also possess a further
potential upside amounting to nearly 1.9 TCF of gas from only seven of the blocks within this portfolio.
Financial position
Cluff retains a very straightforward financial position. The company’s cost base, which has been reducing
gradually over the last five years, is comprised predominantly of employee and key management costs in
addition to data acquisition and reprocessing.
With regards to the balance sheet, the company ended 2017 with approximately £1.0m in cash. This was
augmented by a placing to raise £750,000 at 1.6p per share before expenses in April 2018 and a further
placing to raise gross proceeds of £2.0m at 2.1p per share at the end of June 2018. We expect that operating
costs will escalate temporarily in 2018 as the company accelerates investment in the progression of its newly
awarded blocks, continues its efforts to establish potential farm-out agreements and advances its well
programme planning for 2019. As such, we believe that the company is funded for the next 12 months
(excluding drilling).
Five year financial summary, 2013A – 2017A
Year ended Dec (GBP) 2013 2014 2015 2016 2017
Profit (loss) before tax -1,928,199 -1,725,014 -1,872,099 -1,730,606 -1,590,203
Loss per share -1.99 -1.11 -1.00 -0.70 -0.46
Cash and cash equivalents 2,931,271 1,207,638 1,114,052 1,707,910 1,016,667
Net assets 2,991,048 1,391,867 1,428,054 2,241,141 1,726,715
Source: Company and RNS
12 July 2018
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Appendix 1 – Company directors Algy Cluff – Chairman
In 1972, Mr Cluff formed CCP North Sea Associates to bid for North Sea oil licences in the UK sector and
subsequently founded Cluff Oil Ltd. CCP discovered the Buchan Field, the 14th commercial oil field in the UK
North Sea, in 1975. He then founded and became Chairman of Cluff Resources plc. From the early 1980s,
Cluff Resources began to focus on mineral exploration in Africa and made several significant discoveries
including the Geita Mine in Tanzania, the Freda Rebecca Mine in Zimbabwe, the Ayanfuri Mine in Ghana and
in Côte d’Ivoire, Yaoure the largest undeveloped gold deposit in West Africa. Mr Cluff was the Founder,
Executive Chairman and CEO of Cluff Gold (now Amara Mining Plc) from 2004 to December 2010, Executive
Chairman until July 2011 and subsequently Non-Executive Chairman up to April 2012, when he stepped
down to concentrate on Cluff Natural Resources.
Graham Swindells – Chief Executive
Mr Swindells joined the company in 2013 as CFO before becoming Finance Director and most recently, Chief
Executive. He previously worked in corporate finance for 12 years, during which time he specialised in
advising mid and small-cap public companies. Most recently, he was a Director in Ernst & Young’s Mergers &
Acquisitions Team. Previously, Graham was a Director in Corporate Finance at Arbuthnot Securities where he
gained significant natural resources experience acting as nominated adviser and broker to a variety of
companies in the sector. He qualified as a Chartered Accountant in Scotland with BDO Stoy Hayward and
subsequently spent two years at PricewaterhouseCoopers specialising in corporate recovery and restructuring.
Graham graduated from the University of Glasgow with a Bachelor of Accountancy Degree.
Andrew Nunn – Chief Operating Officer
Mr Nunn is a Chartered Geologist with over 16 years of experience working on exploration, mining and geo-
environmental projects in Europe, Australasia and Africa. For the last six years he has worked on UK and
European unconventional gas projects including coal bed methane, tight gas and shale gas, most recently as
Exploration Manager for Dart Energy. He holds a B.Sc. (Hons) in Economic Geology and an M.Sc. in
Environmental Management.
Peter Cowley – Non-Executive Director
Mr Cowley is a geologist with 45 years of international experience in the minerals industry and has been
involved in the discovery and development of a number of gold mines in Africa. Peter Cowley was previously
Managing Director of Ashanti Exploration Limited and Group Technical Director of Cluff Resources Plc. He
holds M.Sc. and MBA degrees and is a Fellow of I.M.M.M. Until recently he was also a Non-executive Director
of Banro Corporation and Amara Mining Plc.
Mark Lappin – Non-Executive Director
Mr Lappin has over 35 years of experience in the oil and gas industry. Mark is currently Technical Director at
Cuadrilla and prior to that was Sub-Surface Director for UK and Netherlands at Centrica. Mark began his
career as a Geophysicist at Phillips Petroleum and has held senior technical and commercial roles with Conoco
Phillips, Exxon Mobil and Dart Energy.
12 July 2018
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12 July 2018
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