Africa is well on its way to becoming the next “lucky” continent with an abundance of as yet untapped natural resources. Perhaps the most promising is the rising number of discoveries of oil reserves in Sub-Saharan Africa. The following map of international exploration companies with a presence in Africa is already a bit out of date, but it shows that the big players are committed to African exploration.
Although you won’t see them on this map, there are actually 11 ASX listed oil and gas exploration and production companies with oil assets in Africa. With the exception of Beach Energy Ltd (BPT), all are juniors with most still in the exploration stage of development. Here is a table of the ten by market cap with some relevant balance sheet indicators:
|Company||Code||Mkt Cap||Share Price||52 Wk % Change||Total Cash (MRQ)||Total Debt (MRQ)||Current Ratio|
|Pura Vida Ltd||PVD||$71.4m||$0.77||+8%||$1.9m||0||2.0|
Resource companies still in the exploration stage are in a race against time, pitting the company’s ability to generate cash needed for exploration activities against the day revenue from actual production begins. As such, debt is always a concern, as is the need for frequent capital raises, diminishing shareholder value. All the juniors in the table have negligible or no debt and more than adequate current ratios for short term liquidity. However, at the extreme, one has to wonder how much a company like tiny Xstate Resources (XST) can do with less than half a million cash on hand.
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The flurry of activity in Africa should remind investors “big fish” in the pond are quick to gobble up the “little fish” if they see value. Certainly investing in any of these juniors is a high risk proposition.
Beach Energy (BPT) has revenue generating assets already in place, but not yet in Africa. Of their African assets, UBS notes “plenty of catalysts ahead for investors in FY14′, including the potential of the company’s assets in Tanzania. Investors considering buying or increasing their holdings in Beach are obviously interested in the company’s activities in the Cooper Basin. On the longer term horizon, investors would be well advised to pay attention to the African assets. The following map from the Beach website explains why:
Ireland based Tullow Energy has been at the forefront of oil exploration in Sub-Saharan Africa and is responsible for the recent finds in Uganda and also in neighboring Kenya. Note the involvement of major international players including France’s Total and China’s CNOOC. Beach claims the geology in the Lake Tanganyika region is similar to that of the proven reserves in the Lake Albert region and it would appear Total agrees. Also of significance is Beach’s 100% interest in the stake. Beach also has ongoing activities in Egypt. BPT has rewarded long term investors with a 300% increase in share price appreciation over ten years and 80% over five years. Here is a ten year chart:
Cooper Energy (COE) has operating wells in South Australia in partnership with Beach Energy and Senex Energy (SXY). The company also has exploration permits in Indonesia but it is the offshore exploration in Tunisia that is generating the most interest where Cooper is partnering on three different projects. One of the partners is ASX listed Jacka Resources (JKA), with 15% interest. The majority partner is Dubai based Dragon Oil. The joint venture at Hammermet has been plagued with problems and the share price of JKA and COE has suffered as a result. Cooper’s recent FY 2013 Full Year results had few good points for investors. Company management at Cooper announced plans to divest some of the Tunisian assets. On 21 October shares of JKA went into a trading halt pending a funding announcement. Here is a one year price chart for these two high risk juniors compared to the ASX Energy Index, the XEJ:
Perth based Otto Energy (OEL) has producing wells in the Philippines but Aussie investors should be paying attention to the company’s exploration projects in East Africa as well. Otto Energy is a 50% partner along with another company in our table, Swala Energy (SWE), in Tanzania. There are two exploration licenses involved, granted by the Tanzanian government in February 2012. The partners have proceeded cautiously to preserve funding. The results of a seismic evaluation of the prospective basin are expected by the end of 2013.
Swala Energy went public on the ASX in April 2013. The company is focused exclusively on Africa, with an experienced management team. In addition to the JV with Otto in Tanzania, Swala has substantial assets in Kenya and Zambia.
Kenyan oil production has been in the news lately with pumping scheduled to begin next year and the first imports to come in FY 2016. Tullow Oil made the discovery in Kenya last year and partnered with Canadian oil and gas company Africa Oil. Experts predict the Kenyan reserves will prove larger than originally expected and major firms seem to agree as more than $100 million has flowed into exploration deals in Kenya from the big oil companies.
Tullow and Africa Oil made another major discovery in September in the Ngami region, about 300 kilometres north of Swala’s Kenyan asset. This is one to watch. Otto Energy and Swala Energy have both outperformed the ASX XEJ year over year. Here is the chart:
Far Limited (FAR) is another ASX company focused exclusively on African oil and gas. Far boldly calls itself “the largest holder of exploration licences of any ASX listed oil and gas entity in Africa, with first mover advantage.” Far has onshore exploration assets in Kenya along with offshore assets in Senegal, Guinea-Bissau, and a block jointly controlled by the two countries. The company also has offshore and onshore assets in Western Australia. In Africa, Far is partnering with UK based Cairn Energy. All these juniors are speculative, high risk stocks. As evidence, here is the one year chart for Far.
Pancontinental Oil and Gas (PCL) has offshore assets in joint venture arrangements in Kenya and onshore assets in Namibia as well as three exploration permits and one licence in Western Australia. In Kenya PCL has interest in four licence areas offshore covering about 21 thousand square kilometres. One of the partners, US based Apache Oil with a 50% stake, announced on 10 October it is planning to divest its interest. The following one month chart for PCL is enlightening:
However, investors with patience to hold have seen the share price recover to pre-announcement levels. Pan Continental has an impressive list of partners including UK based BG Group, Tullow Energy, Australia’s Origin Energy, Thailand’s PTTEP Energy, UK based Premier Energy, and US based Anadarko Petroleum.
Pura Vida Energy (PVD) has interest in offshore assets in Morocco and Gabon. In the last twelve months UK based BP (British Petroleum) and US based Chevron have secured asset interests in offshore Morocco. Pure Vida management predicts the possibility of up to a $1 billion investment from the majors in drilling as many as twelve wells over the next twelve to eighteen months. PVD recently entered into an arrangement with US based Freeport-McMoRan for its offshore Morocco operations. This “farmout” arrangement secures needed capital for Pura Vida and places operator responsibility and expense into the hands of Freeport McMoRan. PVD retains 23% interest and Freeport gets controlling interest of 52%. The Freeport arrangement could conceivably mean billions for Pura Vida. PVD is in the process of securing a farmout deal for its Gabbon assets.
Pura Vida has the distinction of being the only junior in the table to have coverage from a major Australian analyst firm. CIMB Securities as of 13 September had an Outperform rating on PVD, citing the Freeport deal as a “major catalyst.” The share price has been in an upward trend since the terms of the deal were disclosed in July. Here is the chart:
Tangiers Petroleum (TPT) holds oil and gas permits here in Australia, but the company claims its Moroccan oil asset is “potentially world class.” The company recently completed an options agreement worth about $7 million to raise its cash on hand to $19 million, which includes a farmout deal with Portugal based Galpa Energia, which will assume operator responsibilities. The deal is awaiting approval from the Moroccan government, with drilling expected to commence in Q2 of 2014. Tangiers maintains a 25% interest in the project. The company trades on the London based AIM, an exchange for small companies, and on the ASX. The stock price, although down 36% year over year, rallied following the funding announcements. Here is the chart:
The final two stocks from our table are small in size and at least one could make most “mad punters” shopping lists. With a market cap of only about $19 million, WHL Energy (WHN) still manages to trade an average three month volume of about 3 million shares per day. Although company management touts its flagship assets in offshore Australia, it does have 100% interest in a substantial petroleum exploration asset off the coast of the island nation the Republic of Seychelles, located north of Madagascar on the Eastern side of Africa. Back in 2008 the company was known as Wind Hydrogen Limited but shifted gears to fossil based energy sources.
Share market participants are apparently not impressed with WHN’s efforts but surprisingly enough the picture is different for tiny Xstate Resources (XST), with a market cap of $2.7 million. Here is a one year price chart comparing these two juniors:
Xstate has assets in Italy and Tunisia and actually discovered oil off the coast of Tunisia in October 2011 but has yet to show a dime of revenue. The company prides itself for its “contrarian” approach and in June 2013 it acquired a 10% interest in seven producing gas wells and associated leases and equipment near Sacramento California. With a three month average volume of 145k shares a day, this one belongs in the Punters Hall of Fame. Yet some investors disagree, as the share price is up 20% year over year, actually outperforming the XEJ!
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