written by reader Significant additional discovery in the Africa Oil Ngamia well

By pj2nola, May 7, 2012

With this additional discovery and the primary target at 2700 still remaining, does the valuation of the company increase to several billion dollars? Could you please re-visit the company valuation model based upon a much higher confidence level of even larger reserves..

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Travis Johnson, Stock Gumshoe
May 7, 2012 11:20 am

Hi Prabhat,

I’ve never been able to put together much of a valuation argument for Africa Oil other than one based on the de-risked reserves and the comparables of the fairly recent Uganda asset sales — which means it’s all very up in the air, since the question of how much to pay for a barrel in the ground varies widely depending on reservoir size, government policy, transportation options, etc., and, of course, though we have a much higher certainty of commercial production capacity now with the excellent updated results (100 meters of “pay dirt” versus the prior very good 20 meters, and they still haven’t hit some of their primary targets at depth), I think we have to revise the “risked” percentage we apply.

Using the chart from AOI’s own presentations as a guideline, we could say that now perhaps the chance of AOI finding reserves of a billion barrels (their pre-drilling “best estimate”) in the current block 10BB in Kenya (that’s where the Ngamla well is) maybe has now moved to … what, 50%? If it’s a 50% derisking now, then we can estimate that the value of this one block to Africa Oil might be a bit north of $2 billion (AOI’s share is 50%, the estimates were based on value of oil in the ground being a little more than $4/bbl from the Uganda “best comparable” sale).

AOI now carries a market cap of about $1.5 billion, following the 30%+ jump this morning on the excellent drilling update. So you can probably make a valuation argument that you’re buying the one discovery now and getting the rest for “free” … but I’m not a petroleum geologist and I’m just guessing at the risk valuation metrics that might be reasonable.

My guess is that the next thing that moves the shares, beyond these results and the analysis of the first discovery for commercial potential, will be the potential farm-out of another block as these systems are proven and their value increases (perhaps Tullow will be interested in Block 9? AOI still owns 100% of that one), but other than that it will be a little while before we hear news from any of their other key blocks — they’re looking for a rig for a well on Block 10A now, and the rig currently in use on Block 10BB will move to Block 13T for an exploratory well after it’s done with the current site.

And yes, it’s certainly possible that the imminent news from Somalia drilling, which is still underway with no real news released yet, could impact the share price — but as I’ve made clear many times, I don’t care much about Somalia. It will probably take years for Kenya to be ready to produce meaningful amounts of oil, it may take decades for Somalia, so you can consider that a little cherry on top if it’s successful but I am much more excited about Kenyan prospects. If bad news in Somalia brings the shares down, that might be a buying opportunity if you think the valuation of the Kenya prospects is still good.

As I noted a week or two ago, I sold a third of my AOI holdings to recoup my initial investment and am letting the rest ride — my own variety of “derisking” since it had grown to become a huge portion of my portfolio. Thanks to today’s move, it’s again my largest individual equity holding (though my Sandstorm Gold warrants position is larger), but I will continue to “let it ride” as we see what the future brings — news continues to be shockingly good, and this is still a stock that almost no one has ever heard of.

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Travis Johnson, Stock Gumshoe
May 7, 2012 9:46 pm
Reply to  pj2nola

The numbers I’ve been using are those that Africa Oil presents in their own “best guess” estimates in presentations — you can see the latest presentation here: http://www.africaoilcorp.com/i/pdf/2012-April-Presentation.pdf

The slides I’m talking about are 27 and 28 — basically, the estimated oil in place (not reserves, just estimates based on seismic, some historic drilling, and guesses) for each block and the “geologic chance of success” derisking estimates for valuation. You can make these numbers say almost anything you want based on the percentages you use, so be careful.

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aoibhneas
Member
May 25, 2012 12:00 pm

Hit $10.03 today and backing off a bit now. Wish I could figure out a way to trade it or had a clue where it might be headed. $2 .1 billion cap now.

rmuthup
Irregular
rmuthup
May 25, 2012 1:13 pm

It is unclear if these oil finds could be translated to commercial potential, and what the long term prognosis of such a find. We keep hearing that East Africa is the ‘last’ unexplored basin, and this could be a game changer.
Now that the market cap is over 2.1 Billion dollars, it is unclear if this rise is justified. I wonder if anyone has any insight on the ‘best’ case scenerio and the worst case scenerio.
Thanks Travis, for pointing this one out. I bought a small amount, and has done well so far.

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Travis Johnson, Stock Gumshoe
May 25, 2012 2:24 pm
Reply to  rmuthup

It’s true, they haven’t yet done the analysis or even completed drilling the first well yet — 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.

Even with the profit taking, Africa Oil is becoming a larger and larger part of my portfolio — if it keeps climbing it will soon surpass Sandstorm Gold Warrants as my biggest position.

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