Quadrant and Carnarvon are excited and so they should be. The next steps are to appraise the field to prove up the recoverable volumes, while also progressing a development concept. A floating production storage and offloading (FPSO) facility is the most likely solution as it does not require the construction or installation of any fixed platforms. However, drilling the wells, purchasing subsea equipment and buying or leasing an FPSO would still require significant upfront investment.
Possible trigger for M&A activity
Therein lies an additional issue: small-cap explorers such as Carnarvon tend not to be in the big oil development game, in part because of the deep pockets required. With Quadrant's financial backers apparently looking at exit options, the find could spark M&A activity for the partners and those with acreage in the vicinity. Australia has not seen many high-profile new entrants to its upstream sector for a good few years – the opening of the Great Australian Bight was the last big ticket event. Could Dorado be the next catalyst?
If a high case outcome for Dorado materialises, could an E&P company or a large independent take a shot at Quadrant and/or Carnarvon? The options to secure 'value' from the find before development include a trade sale, farm-down, re-opening the Quadrant IPO idea, or splitting the business.
A trade sale may open up an exciting opportunity for a new buyer looking for a complementary business with cash flow positive assets to fund the future exploration and development costs of a conventional oil play in a politically stable region. For Quadrant, the excitement and potential upside of Dorado should be enough to overcome investor concerns about the maturity of the existing portfolio, putting a public listing back on the table.
Other routes to monetisation
The last option involves monetising Dorado upfront via an asset sale or farm-down. The question here becomes, is the discovery more valuable to the financial backers as a standalone asset sale, or rolled up into Quadrant's portfolio as a sweetener to the trade sale that has attracted very little interest?
For Carnarvon, the possibility remains of monetising the discovery upfront, if a player is looking for upside in a non-operated oil interest. Alternatively, options for funding include: project financing against the resource once volumes are confirmed, or an equity raising, which has been made significantly easier by the recent increase in share price.
A hot new exploration play in Western Australia
Putting corporate manoeuvres to one side, the Dorado oil find opens up a hot new exploration play in the region. We cannot underestimate how important the oil aspect is for the attractiveness of the play. A medium-sized gas play in this remote location would most likely be uneconomic – the isolation and the 75 tcf of undeveloped gas in neighbouring basins would see to that. But even a 50-million-barrel oil discovery should break even at US$49/barrel, well below today's oil price of US$73/barrel, without requiring the complexity of new export infrastructure or commercial arrangements.
The Dorado find has shown companies what the next big thing in Australia could be. We are anticipating exploration in the area to return with a vengeance. A key indicator will be the level of interest in nearby acreage releases W17-4 and W18-4 – the bidding on which is due to close in the fourth quarter of 2018.