SacOil’s potential in Nigeria and the DRC adds up to 28 pence a share, says Growth Equities

Growth Equities & Company Research today initiated coverage of Africa-focused SacOil (LON:SAC, JSE:SAC) with a buy recommendation and 28 pence a share price target.

The punchy valuation (the current price is 5.74 pence) reflects the production potential of the company’s assets in Nigeria and the blue-sky offered by its exploration target in the Democratic Republic of Congo.

The DRC project has been “neatly de-risked” by the farm in by French major Total, according to analyst Dr Michael Green.

In Nigeria, meanwhile, “the company has been buying into projects at what would appear to be 70 per cent discount to open market prices”, he adds.

Here it has stakes in licences OPL 233 and 281, which have already seen oil discoveries and where there is obvious scope to add value by turning a contingentresource into reserves.

OPL 233 is expected to be developed first, and the plan here is to book reserves and start production.

Investors don’t have long to wait as a seismic survey is due to be shot in September and October with an appraisal well planned for in the second and third quarter of next year.

“There does seem scope for a substantial increase in reserves at OPL 233 with consultants TRACS identifying more than 100 feet of net oil and given that this block lies adjacent to the 600 million barrels plus Apoi field,” Green points out.

“Good seismic here together with this well data could allow a significant resource to be proved up by the end of 2012.”

Two wells already exist on OPL 281 as well as good seismic data, which points to one large field that may potentially contain close on 100 million barrels.

All that could be confirmed by future appraisal drilling which looks set to begin in April or May 2013, the GECR analyst adds.

In the DRC SacOil owns a 3,177 kilometre licence area known simply Block III.

It is in the Albetine Graben, the source of Tullow Oil’s (LON:TLW) Kingfisher and Giraffe-Buffalo discoveries over the border in Uganda.

“To date the real excitement in this region has been on the Ugandan side of the border where discoveries have produced well flow rates anywhere from 350 to 13,000 barrels of oil a day,” Green says.

“In this region discoveries made to date add up to over 800 million barrels of P50 contingent Resources and these have come from two distinct types of oil plays which are either escarpment/near-shore plays such as Kingfisher or Victoria Nile Delta plays, which includes the biggest find so far at Giraffe-Buffalo.

“Geologists believe that Block III has the characteristics to host both these two types of plays.

“Although Block III DRC has yet to be drilled, Kibuki oil seeps suggest that oil is likely to be found at least in the Northern part of the Block.

“Block III actually lies on trend with Lake Albert discoveries of Tullow Oil etc and the source rocks in the Albertine Graben are oil and gas prone.

“On top of that the main source kitchen is believed to be below the deeper parts of Lake Albert; and there is the possibility of the presence of a smaller kitchen underneath the southern part of Block III.

“Total is now the operator and will be funding the whole exploration programme and it is expected that the production decision could be made within three years. The plan seems to be for drilling to begin at the end of 2012.”

The deal with Total could ultimately be worth US$300 million to SacOil, which will receive US$61.5 million staged over the next five years, of which US$7.5 million has already been paid.

It also leaves the company with a 12.5 per cent interest in the licence.

As important, the group receives a free carry on all the exploration work right up to the final investment decision phase – in other words the point at which it is decided whether Block III is commercially viable and bank debt financeable.

Under the terms of the fairly rigid timetable it has with Total, this final decision phase will occur in around three years, which means we could see first oil from Block III in five years.

SacOil owns its stake in the oil licence via a DRC company called Semliki, which is half owned by a consortium oflocal business people.

The tie-up with Total is hugely beneficial for SacOil on a number of levels. First, it is a massive vindication of the quality of the asset.

“Total wouldn’t come in with us if the asset wasn’t going to move the needle for them”, said chief executive Robin Vela in a recent interview.

“It also helps mitigate the exploration, exploitation and expropriation risks. Total bring a lot more to the table than they take away,” he explains.

“This includes foreign direct investment, validation of the acreage, expedition of time to production, a commercialisation route given its access to infrastructure in the area and the introduction of industry norms to the country.

“They are experienced in the continent, so investors can sleep at night now Block III is being operated by a world class operator.”

The competent person’s report talks of a contingent resource to SacOil of around 24 million barrels of oil, which could be worth as much as US$125 million based on recent deals in the area.

Source: Proactive Investors