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UPDATE - Circle Oil up 18% after it makes significant Morocco gas discovery

Last updated: 13:01 22 Dec 2014 GMT, First published: 14:01 22 Dec 2014 GMT

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Shares in Circle Oil (LON:COP) advanced 18% after it said its latest well on the Sebou permit in Morocco found the thickest layer of gas sands of the drilling campaign so far.

Wireline log analysis of KSR-12 revealed there is 19.5 metres of net gas pay in the main target, the Intra Hoot sands, and one metre in the Upper Hoot.

The Main Hoot sands flowed at a sustained rate of 8.09mln cubic feet a day (MMscf) over eight hours, while the Upper Hoot sands produced at a stabilised rate of 2.32MMscf/d over 10 hours.

The well will be completed for future production in the Main Hoot sands and the Upper Hoot will be completed for production once the primary gas sands have been depleted.

Chief executive Chris Green said: "We are delighted with the results of the KSR-12 well, which has found the thickest gas sand interval to date of our Sebou wells.

“We believe that this well will add significant volumes to our reserves for potential gas production and at rates not subject to oil price fluctuation.”

KSR-12 is the third well of six to be drilled with the Morocco state oil company ONHYM on Sebou. It plans another six in the country on the Lalla Mimouna permit.

It is located within the central area of the permit, about 1.2 kilometres to the south-west of the KSR gas gathering station and was drilled to a total depth of 1,980 metres.

Separately, there has been a change of plan for Circle, whose next well was to be at Lalla Mimouna. Heavy rains mean the drill rig will be diverted to the KAB-1 bis target on the Sebou permit, where access is possible.

The shares rose 18% to 12.2p, valuing the business at £68.5mln. Investec reckons the current share price still significantly undervalues Circle, which it says is worth 60p a share.

In a note to clients, analyst Brian Gallagher said: “KSR-12 is, in our view, just what was required against an unsettled commodity backdrop and a company in transition.”

Broker Westhouse has a slightly less punchy price target of 31p a share, but is nonetheless bullish on the outlook for the shares.

Circle Oil is one of our top stocks for 2015 and we believe that its profitable North African production and interesting exploration and appraisal upside in Tunisia and Oman make it a possible takeover target,” said analyst Mark Henderson.

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