Revisiting the Oil Explorers Dream List

13 mins. to read

Given the deathly environment in the Oil Explorers sector at present, we thought it useful to look back at what we said about our picks during the summer to see if the circumstances that underpinned the ideas then still apply. Beneath each company below is the original text with our updates in bold. 

Gulfsands Petroleum – 99p current price (NOW 81P)

From a high of over 400p in early 2011, the shares continue to touch new lows below 100p. At the current price of 98p the market capitalisation is now just a shade over £115m and yet the company sits with around £68m of net cash. GP is being hammered due to the political and civil unrest in Syria and the effective halting of their activities within Syria in (its principal exploration asset) in the early part of the year. General Petroleum Company (GPC) – Gulfsands’ joint partner in the Syrian operations (known as Block 26), has however continued to pump oil during this period and, at the beginning of February, Gulfsands was owed approximately $25m from GPC. In effect, the market has, at the current price, ascribed zero probability to a resumption of its Syrian activities and attributed almost no value to its other Global operations.

As detailed in the last issue of our magazine, on the 11th May Mr Mahdi Sajjad (a Director) purchased 30,000 shares at 111.75 on behalf of a Discretionary trust his children are beneficiaries of, taking his total beneficial holding up to 8.65m shares. Back in February, Chairman Andrew West also purchased 17,500 shares at 179p. 

There is a further intriguing spin on the Gulfsands story and that is the stake-building by both Michael Kroupeev (the Russian oil financier who has amassed a stake of 18% of the shares in the past few months) and also Soyuzneftegaz (a group headed by Yuri Shafranik, Russia’s former energy minister) that has picked up 3.4%. Clearly these boys see value and they each have prior ‘form’. Rumours of predatory takeover interest by CNOOC (China National Offshore Oil Corporation) is likely to commence in earnest again at these depressed levels…

Finally, recall that back in April 2010 Gulfsands received an unsolicited bid proposal from Oil India Ltd & Indian Oil Corp Ltd at a price of 315p (over 3 times the current price and illustrative of the type of re-rating that will likely occur should the Syrian situation reach a positive conclusion) and that was unanimously rejected as undervaluing the company at that time. Should political signs of stabilisation and/or Government change in Syria become apparent, then I fail to see how the shares cannot re-rate or alternately be swooped upon by a predator.

Gulfsands YTD chart

UPDATE – The situation in Syria has gone from bad to worse over the last few months and after a spike in GPX’s share price in late summer to the 130p level on optimism over a resolution, the stock has come back to trade close to cash value once more. The market simply does not believe the company will operate in Syria again at the current valuation.

Management have been diversifying cash resources recently into Tunisia in particular in an attempt to rebuild the company’s portfolio. Make no mistake however, that the current stock price has what we call a “positive risk reward skew” at this level. A Syrian resolution is an outlier but, if there is progress and the removal of Assad, then the stock will double or triple from here should the Syrian assets be returned to the company and the sanctions lifted. If the civil war continues to roll on then we don’t see much downside beyond 20%. That’s a good bet to us and in fact our favourite play in this list.

Heritage Oil – 128p current price (NOW 187P)

Heritage’s shares, in our opinion, currently trade at the lowest valuation relative to risked NAV within the mid cap Oil & Gas exploration sphere today. The company has been sold down to such a degree over the last 15 months that in fact, the shares now trade at only a modest premium to cash. Indeed, the depletion of shareholder value has been so great that although the path to monetisation of their gas find in Kurdistan is becoming clearer by the day, thatv almost no value is now ascribed to this. It is worth remembering that the Miran field alone has been valued at upto 300p per share.

It is also interesting to note that the major shareholders including Tony Buckingham himself (CEO) and Lansdowne (no fools) have not reduced their holding in the company during this savage downdraft. In fact the company itself has bought back in excess of 30m of their own shares during the last 12 months – with an average purchase price approaching 200p – they saw value here and “Mr Market” has now thrown us the opportunity to pick up shares at 125p.

I would suggest those readers not familiar with our Conviction Buy recommendation (one of very few that we have issued) on this stock take a look at our link here – (Page – 26) and that sets out a detailed valuation case for Heritage Oil.

Heritage YTD Chart

Update – Hoil pulled of a transformative deal in late summer buying into Shells oil fields (OML 30) in Nigeria, whilst selling out of its key Kurdistan Miran fields to partner Genel in order to fund the transaction. The valuation buy-in level of the Nigerian assets was attractive and the stock has almost doubled from our recommendation level and following its re-listing from the short suspension. We continue to see value in Hoil. 

Bowleven – 66p current price (NOW 72P)

Bowleven’s activities focus on West Africa in Cameroon. The Etinde Permit was the main focus of drilling in 2011 (Bowleven 75%; Vitol 25%) and comprises approximately 2,316 km² of exploration acreage located across the Rio del Rey and Douala Basins in offshore Cameroon. In late 2010 and early 2011 the shares rode up to £4 on hopes that its acreage could be the next Tullow oil. However, a series of drilling disappointments on its Sapele well drills hit the shares hard. In February 2012, the company announced a potential takeover bid by Dragon Oil, which to everyones surprise very quickly came to nothing. 

Further drilling activities on the Etinde discoveries are planned for this year and next, with two firm wells and two contingent wells beginning with IM-5 appraisal well on block MLHP. The start of of exploration drilling programme onshore Bomono is also planned for the second half of 2012. Following fund raisings in November 2011, the company had around $125 million of cash at the end of 2011. 

In April the company signed a Memorandum of Understanding between SNH, German company Ferrostaal GmbH and EurOil Ltd with a view to supplying natural gas to a chemical fertilizer plant in Cameroon potentially making its existing gas find a commercial proposition.

With OIP (Oil in place) of around 650 mm barrels plus and substantial gas finds in the exploration undertaken by the company to date, Bowleven already have a substantial base case valuation. Drilling success in Q2/Q3 this year could cause a serious uprating of this share which is currently at 66p. The market cap of £192 million, attibutes only £114 million to the discoveries to date and almost discounts as worthless the permits the company holds. Not without risk, but the risk/reward ratio looks very positive indeed for Bowleven with broker price targes in excess of 200p per share and, during the Dragon Oil bid excitement, valuation justifications upto 250p being put on the stock.

Bowleven YTD Chart

Update – In early November, Bowleven signed a Strategic Alliance Agreement with Petrofac to deliver first production from the Etinde Permit offshore Cameroon in 2016. Petrofac will provide Bowleven with potential access to up to $500 million towards the first stage of development of the Etinde Permit. Earlier in the week the company announced it had submitted the Etinde Exploitation Authorisation Application (EEAA) to the Cameroon authorities. The share price is back to where it was before the Petrofac announcement and with this partner on board, the company’s development plan is signficantly derisked. At this price, there looks to be plenty of upside.  

Xcite Energy – 106p current price (NOW 94P)

North Sea focused Xcite Energy’s shares remain very much in the doldrums after a series of disappointments in 2011. After peaking around £4 in December 2010 on a successful flow test of the company’s Bentley heavy oil field, the shares have been sold off sharply on a reserves announcement which were less than hoped, as well as an extension in the timescale to get commercial oil to market from early 2012 to late late 2013. In January 2P (proven & probable) reserves of 116 mm barrels were confirmed by auditors and in April the company received a $50 million unsecured loan from Canadian based West Face capital.

Xcite is currently drilling the 9/3b-7 well by the Rowan Norway rig to allow an extended well test to take place to validate the Bentley reservoir model. First oil is expected in June, with the test being completed over a 3 month period. The shares should respond to further news on the well test as well as any progress on reserves based lending (RBL) to allow the next stage of the field development. At 106p, XEL looks like an inexpensive and relatively low risk play on the resumption of North Sea oil production. At the current Enterprise value:2P, we wouldn’t be surprised to see a resumption of takeover speculation – something that the volume and share price move in recent days may be pointing to… 

Xcite Energy YTD Chart

Update – In late September Xcite Energy succesfully completed the extended pre-production well test on its North Sea Bentley field with the results exceeded management expectations with 147,000 barrels of oil produced. The test gathered data for reservoir model calibration and production facilities design, enabling optimisation of field development with water ingress to wellbore better than expected (i.e. less water produced). The data from the well test is now being processed with a view to produce an updated reserves report in early 2013 and in addition a data room has been opened to attract a potential farm in partner to allow the full funding of phase 1b of the Bentley development. In addition, a new field development plan will be submitted to DECC early next year allowing production in early 2014. An overhang of stock has been cleared by the recent news that Global Resource Funding Partners LLC which had participated in fund raising had finished selling their shares. At 94p, the shares are still way off their highs seen in 2010 and with 116 million barrels of 2p reserves, offer signficant upside in 2013 if the right farm in deal can be delivered by a board which hasn’t always delivered for shareholders. 

Falklands Oil & Gas – 90p current price (NOW 32P)

Falkland Oil and Gas, is a South Falklands basin focused oil and gas explorer. The Leiv Eiriksson drilling rig was secured in May 2011 through a deal with Borders & Southern and Ocean Rig 1 and is due to start drilling on FOGL acreage following the completion of Border’s stebbing prospect in June/July 2012 at a cost of around $180 million. Two exploration wells will be drilled, Loligo and Scotia or Nimrod. The prospective resources of Loligo are 4.7 billion barrels and Scotia/Nimrod are around 1 billion barrels.

In March 2012 the company announced that it had granted an option to an as yet anonymous company to farm-out a maximum of 25% of the FOGL licences which gives FOGL significant financial leverage to maximise its drilling activities during the remainder of 2012.

Following Borders & Southerns gas find last month in the South Falklands Island basin and the subsequent placing and retracement of BOR’s shares, it is intriguing to note that FOGL have largely held onto the gains running into this announcement. It seems the overhang of stock from the rundown of the old RAB Capital portfolio is no longer an issue too.

Regular readers of our magazine will recall our article in the special Feb/Mar Oil Explorers edition on Pages 76 & 77 (Link here - and where we set out the potential upside for this stock. The discovery of hydrocarbons (gas condensate) in the South Island basin by BOR actually de-risks the exploration program of FOGL and make no mistake if they do strike oil in the potential monster prospect that is Loligo the share price will be many multiples higher.

This is a higher risk prospect with substantial upside on a positive drilling outcome but investors should remember that a chance of success (COS) is around 25% for each well. Don’t bet the house on this one!


Update – Falkland Oil and Gas announced farm in deals with Edison International and Noble Energy earlier in the year, giving the company relatively good funding prospects compared with some of its peers in the Falkland Islands. But, with a gas rather than oil find at its Loligo drill and no substantial hydrocarbons found at its Scotia prospect there is now a high degree of doubt in some circles that the FOGL’s acreage can produce commercial quantities of oil.

Though they have found gas, the cost and complexity of building an LNG (liquefied natural gas) terminal in this remote part of the world makes its unlikely that this alone will be sufficient. The company now has $220 million of cash left to conduct 3D seismics and resume its drilling programme in 2014. Now trading below cash value of around 40p per share, patient shareholders could well be rewarded in 2014 when the drill bit starts turning again but for most, best avoided for now given the uncertanties given the likely news flow. 

Northern Petroleum – 70p current price (NOW 63P)

At the current market cap of £67m Northern Petroleum trade at a premium of £40m to its last reported cash reserves. Nop’s geographical activities include the Netherlands where they are actually producing oil & receiving revenues. The company’s licences include the potential for exploring the Shale basins in the North & West of the Netherlands and where an independent study has estimated gross reserves of between 20-30bn barrels of oil.

The company’s activities also extend to Guyane, Italy & the UK and which includes both gas and oil prospects. Consensus broker price targets exceed 100p per share and at the current price the shares offer good value. Please note however that this is quite an illiquid stock.

Northern Pet YTD Chart

Update – It has been a relatively quiet period for Nothern after the failure of its La Tosca-1 exploration well in Italy during September which proved uneconomic to warrant further drilling. But, with the Geesbrug-2 well in pre drill phase and Geesbrug-3 well in planning in the Netherlands, and a series of wells plannned in Guyane as well as the company’s strong cash position of $28 million to fund drilling, there should be plenty of news flow to look forward to in early 2013. NOP continues to offer good value.

CONCLUSION – With a number of failed drills this yeat amongst the small and mid cap oil explorers, sentiment is presently bombed out. Bid approches have not concluded in the likes of Bowleven & Ithaca and valuations have fallen back now to large discounts to 2P reserves for the risked companies and discounts to cash for others. Our view is that a diversified spread of companies where watch your margin carefully ensuring that you can carry downdrafts is likely to produce positive returns next year as drilling campaigns start again. Any weakness in GPX, Bor, RKH, HOil & XEL on the approach to Xmas is a good opportunity to open/add to positions.

If you’d like to be exposed to the sector in a professionally fund managed & diversified way but within the wrappers and enjoying all the benefits of a spreadbet account, then email us at, quoting “OIL” to register your interest for the forthcoming launch next year of our Titan Investment Partners Oil Explorers fund once FSA authorisation is completed.

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