Travis Johnson, Stock Gumshoe says: May 25, 2012 at 2:24 pm
It’s true, they haven’t yet done the analysis or even completed drilling the first well yet [ Kenya ] — but clearly there’s a building optimism from Tullow (their partner) as well as among investors, and they announced today that they’ve found yet more oil in that first well as they’ve hit one of their primary target zones … and they’re not even to the target depth on one well yet (that announcement is why they’re up another 10-15% today).
The first Somalia well they’re drilling, in contrast, has been a bust so far (they found one “pay zone” but it wasn’t enough to merit further testing, and they suspended drilling before hitting their target depth and are moving the rig to try again). Which is fine with me, and more reason to be pleased that they offloaded some of the risk and expense of the Somali project (they still control it, but have partners and it’s run by their spinoff company Horn Petroleum) — finding meaningful oil in Kenya, where there’s hope of producing it within perhaps five years even though there would clearly have to be a lot of infrastructure and regulatory framework built, would be much more valuable than finding meaningful oil in Somalia, which is far, far less developed and ready than Kenya.
But no, per your question, I don’t have a definitive answer on how much this should be worth — they keep getting good news, so it keeps spiking up. If the potential is as huge as it looks like it could be, and it works out that they own half of an “elephant” size oil deposit that can be produced in the coming years, then the shares are still cheap. But “could” is a loaded word and we could always get a bad report or an exogenous negative event, which is why I took my initial investment off the table a few dollars ago and am letting the profits ride. There is no easy logic to be used here, given the huge run and the incredibly large unexplored potential — if it’s just this one field and it ends up being confirmed as commercial and booked as two billion barrels of reserves (a wild guess, based on their “gross best estimate” from before they began drilling, and I think they’ve at least come close to “best estimate” performance so far), then would you pay $4 billion for a billion barrels of reserves? $4 a barrel(ish) is the Uganda sale comparable that Africa Oil has been using in presentations, though the expectation is that you would “risk” that number by some percentage to account for the uncertainty.
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