Pan-African 2014 drilling in focus
2014 is set to be a landmark year in terms of African exploration, especially for investors in smaller independent E&Ps. In this report we look at a group of E&Ps that are targeting over 27bnboe from wells being drilled over the next 12 months that could, in the success case, open up more than 70bnboe of play opening resource. Our analyses take into consideration a range of criteria including resource size, geological and commercial risks, funding constraints and fiscal terms as we seek to identify those companies with the most compelling valuation upside. While almost all companies offer value at current share prices, a few consistently shine brightest across our various analytical lenses.
Valuation disconnect clearly evident
Despite recent gains, equity markets continue to excessively discount explorers and in particular small caps with poor liquidity and little or no asset diversity. This can be seen across multiple analyses including comparisons with DCF-risked resource valuations, analyst consensus target prices and, probably most significantly, industry terms determined from farm-outs.
Large price multiples on offer even on a risked basis
When considering net risked resource valuations we see substantial upside to current share prices across the peer group, although not surprisingly there is wide variability in our results. Pura Vida Energy and Tower Resources are probably the standout names, with Pura Vida offering 20x upside (even on a risked basis) from its Moroccan activities alone, while Tower is targeting an eye-watering 9.9bnboe (gross) from a single well (Welwitschia-1).
Funding and partners more important than ever
Funding is key for many of these smaller companies working in Africa, especially those with offshore activities where costs continue to rise dramatically. As such, both ‘running room’ and multi-well carries should be important considerations for investors, with Hyperdynamics, Pura Vida and to a lesser extent Fastnet Oil & Gas and Canadian Overseas Petroleum (COPL) all seen as compelling plays in this respect. Sterling Energy is the standout name in terms of straight cash coverage. Attracting strong partners is also the most compelling way to demonstrate comprehensive due diligence to what is a notoriously sceptical market.
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