Canaccord Genuity this morning initiated coverage of Nigeria- focused Eland Oil & Gas with a buy recommendation and 180 pence a share price target.
“Eland is one of several companies that have taken advantage of Shell’s retrenchment in the western part of the onshore Niger delta, but is the only UK listed, solely Nigerian focussed E&P company,” analyst Charlie Sharp said in a note to clients.
“Its most obvious peers are Heritage and Afren, but they are larger and have a more diverse asset base in Africa and beyond.”
Eland’s September listing raised £118 million, or US$191 million, making it the largest float on the junior market since 2009.
The cash has been put to good use, acquiring a 45 per cent interest OML 40 from Shell, Total and Agip for US$154 million.
This is an onshore licence in the Niger Delta with 2P reserves of 71.5 million barrels of light sweet crude with huge further potential.
The field started production in 1975 until and closed in 2006. It is the smallest of four licences put on the auction block in 2010 by Shell as part of plans to reshape its operations in the country.
The acquisition was made via a special purpose vehicle in which Eland will initially hold 45 per cent with the remaining 55 per cent held by local Nigerian partner Starcrest, the investment vehicle for local entrepreneur Sir Emeka Offor.
On the face of it this gives Eland investors around a 20 per cent interest in 71.5 million barrels of 2P reserves.
But as you peel away the layers the effective interest is much higher, as the SPV will be funded through a debt facility to be provided by Eland, and the opportunity will undoubtedly be a lot larger than the initial CPR of 71.5 million of proven and probable reserves.
Shell itself had certified OML40’s 2P reserves at 180 million barrels, while Eland is also looking to convert the 356 million barrels of prospective resources , the additional upside, into reserves with historical success rates in Nigeria of over 75 per cent.
The longer term plan includes cranking production up to 50,000 gross barrels a day by 2016 through an aggressive programme of development drilling.
It seems an unlikely target until you realise Eland will have two drill rigs spinning on OML40 with first oil expected within six months of the LSE listing.
“The next six months of operations are focused on delivering first oil from the Opuama field on licence OML 40, and progress towards that (infrastructure renovation and well re-opening) should provide the initial company newsflow,” said Canaccord’s Sharp.
His ‘core valuation’ of the stock is 107 pence at US$90 a barrel Brent crude, with total valuation, which Sharp says includes “near and mid-term upside”, of 236 pence. We set our target price, close to our central value [of 178 pence].
At 11am, the stock was up a penny at 127 pence, valuing the group at £172 million. It is up 27 per cent since float.