Great article about Africa, ERHC has a knack for being in the hot spots. Hopefully we will be the taipan in this article next year!
Africa continues to experience heightened levels of exploration activity, with more than 27 high impact wells being drilled this year, targeting over 17 billion barrels of oil equivalent. This accounts for over half of the world’s high impact wells to be drilled in 2014 according to the “50ish wells to Watch” a recent research report published by Tudor Pickering Holt analyst Anish Kapadia.
Kenya will also continue to be at the forefront of onshore rift basin drilling as host to the largest number of high-impact wells to be drilled this year in Sub-Saharan Africa.
All of the major discoveries in the first quarter of 2014 were also in Africa, including the onshore rift basin Bitanda well in Chad drilled by Glencore (LON:GLNCY) and Caracal (LON:CRCL), the Notus well offshore Egypt drilled by partners BG (LON:BG) and BP (NYSE:BP), and the Orca-1 well offshore Angola drilled by partners Cobalt (NYSE:CIE) and BP.
The list of big wells being drilled this year is dominated by Supermajor oil companies like ExxonMobil (NYSE:XOM), Petrobras (NYSE:PBR), Royal Dutch Shell (LON:RDSA), and Total SA (NYSE:TOT) as well as Super Independents like Canadian Natural Resources (NYSE:CNQ), Murphy Oil (NYSE:MUR), Marathon (NYSE:MRO) and Tullow (LON:TLW). This is not surprising as most of the offshore wells being drilled cost $100 million or more and also tend to have greater geological risk than onshore prospects. For investors, however, these big wells don’t offer much upside, as discoveries made by companies this large are not likely to have a major impact on share prices.
There are a few exceptions of smaller companies drilling top exploration prospects this year with market caps below $5 billion. These include companies like Africa Oil Corp. (TSX:AOI), Afren (LON:AFR), Ophir Energy (LON:OPHR) and Premier Oil (LON:PMO).
The biggest prospect expected to be drilled onshore Africa this year is the Sala well, which is being drilled by Africa Oil Corp. and Marathon, with results expected during the second quarter. This well is currently drilling in the Anza Basin in Kenya and is targeting 402 million barrels of prospective resources. All of the previous wells drilled in the Anza basin have had either oil or gas shows, including the 1.88 trillion cubic feet (300 million barrels of oil equivalent) Bogal gas discovery.
Africa Oil is a great example of how lower onshore well costs provide smaller companies and investors an opportunity to participate in high impact wells. The market cap of Africa Oil Corp. increased from $250 million prior to drilling to $2.5 billion after making a major discovery onshore Kenya, at the Ngamia-1 well in 2012.
There are very few microcap companies drilling top exploration prospects this year. There is only one company with a market cap below $100 million that is drilling two of the largest onshore prospects in Africa later this year. Taipan Resources (TSX-V:TPN) is drilling the 251 million barrel Badada prospect onshore Kenya with partners Premier Oil (LON:PMO) and Tower Resources (LON:TRP) and the 390 million barrel Khorof prospect onshore Kenya with partner Afren.
Rift basin prospects like Badada, have delivered some of the most consistent exploration results in recent years. In Uganda, Heritage Oil drilled 6 exploration wells with 100% success in the Lake Albert Rift Basin, which is now estimated to have 1.7 billion barrels of recoverable oil resources. In Kenya, Tullow and Africa Oil have drilled wells with an 88% success rate in the Lokichar rift basin discovering over 368 million barrels of oil.
The next largest prospect to be drilled this year onshore Africa after Sala is the Khorof prospect on Block 1 in Kenya targeting 390 million barrels. This well is being drilled by Afren, with Taipan Resources holding a 20% interest. According to Afren, this prospect is “a large 4-way dip-closure down-dip of an oil seep.” Afren has also said that Block 1 contains many prospects with “successful analogues in the Ethiopian sector of the basin immediately north of Block 1.” The latest Taipan Resources company presentation also states that on Block 1 the company “may drill an even larger prospect” than Khorof. If this is the case, then Taipan could be participating in the largest onshore well to be drilled in Africa this year.
Taipan is fully funded for the Badada and Khorof wells this year, with an unrisked NPV net to Taipan of $1 billion or $7 per share on a fully diluted basis. The risked (pre-drill) value of Taipan’s two wells this year is $1.80 on a fully diluted basis.
Significant pre-drill upside remains from Taipan’s current share price of $0.50 per share. Expect the market to take notice as the company continues to move closer to drilling.
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