Dominion Petroleum’s Tanzania farm-out deal welcomed by analysts

City analysts have welcomed the news that Dominion Petroleum (LON:DPL) has sold a 20 per cent stake in its offshore Tanzania exploration block to Abu Dhabi firm Mubadala Oil & Gas.

Importantly the US$22.4 million deal - comprising US$20 million upfront and carried costs of US$2.4 million – has set an attractive valuation from Dominion’s remaining 80 per cent stake in the Tanzanian asset, analysts say.

With the remaining stake being valued at US$80 million the deal highlights the fact that Dominion’s share price undervalues the company and its prospects, according to RBC Capital analyst Al Stanton.

“(The) news should put the spotlight on Dominion’s low valuation – it is very rare for an E&P company to trade at or below the read-through valuation of a farm-out deal,” Stanton said in a note to clients.

“And, this assumes no value for Dominion’s other assets, which include promising exploration acreage offshore Kenya and longer-term opportunities in Uganda/DRC.”

Additionally the analyst said that the US$20 million upfront payment was a welcome cash injection.

“Given Dominion’s improved liquidity and the endorsement provided by today’s farm-in deal, we believe investors should be happy buying the East Africa-focused stock at today's level,” the RBC analyst added.

RBC have an ‘outperform’ rating for Dominion with a 10 pence price target, which implies the stock could more than treble in value from the current price of 3 pence a share.

Meanwhile analysts at Westhouse Securities, which has a ‘buy’ recommendation and a 6.4 pence target, looked ahead to the potential for other tie-ups between Dominion, its new Abu Dhabi partner and other majors.

“By retaining an 80 per cent interest and the operatorship in the Block, we believe another deal, with an industry major, is likely ahead of the 2012 well,” Westhouse said in a note to clients.

“We also note the comments by Dominion and Mubadala’s respective CEOs, which indicate that additional deals are likely. While Kenya would appear to be the most likely area for another partnership, it seems early, given that Dominion was only awarded the PSCs earlier this year and little exploration has occurred.” 

“However, anticipated drilling in Block L8 (2012) may provide the catalyst for making a deal early than otherwise expected.”

The Mubadala farm out also gives Dominion much needed cash to advance its preliminary exploration work on its newly acquired assets in Kenya, the production sharing contracts for Block 9 and Block L15. Dominion separately confirmed that the Block L15 PSC was signed in Nairobi today.

Dominion explained that it will spend at least US$2.85 million on the initial exploration of Block L15. 

It plans to reprocess existing 2D seismic data, as well as carry out block wide geochemical and geophysical studies. It will also acquire at least 250 square kilometres of 3D seismic data during the first two years. 

Dominion said that Block L15, which like Block L9 is on the Davy-Walu structural trend, lies immediately to the north of Block L8 - owned by Pancontinental Oil & Gas - where a well is likely to be drilled in mid-2012 to test the Mbawa prospect.

“Planned drilling by other operators along the Davy-Walu trend over the next 12 months may serve to de-risk the prospectivity in both L9 and L15 before firm drilling commitments are made in either PSC,” Dominion added.

Additionally the company also announced that the Tanzanian authorities have formally accepted Dominion's request to relinquish the PSC covering the Selous Contract Area, onshore Tanzania.  Notably the Ministry of Energy and Minerals has also allowed US$500,000 of fees, already paid by Dominion, to be used as credit for the group’s commitments for Block 7.