UBS reiterated its "buy" recommendation for Chariot Oil and Gas (LON:CHAR) today and said the firm's recent share price weakness represented a good buying opportunity.
The research arm of the investment giant targeted a price of 510 pence (current share price 155.25 pence).
On Thursday last week, the AIM-listed explorer, which has eight licences offshore Namibia hosting an estimated 15.5 billion barrels of oil, revealed that it has struck a deal to farm out two of its offshore licences.
As negotiations for a third farm-out licence are ongoing the precise details of the deal could not be disclosed, it emerged. The shares dropped over 20 percent in Thursday’s trading.
Analyst Melanie Savage said the shares were now trading at 75 percent discount to risked NAV implying an average 3 percent chance of success on the two wells in its near term drilling programme (assuming farm-out).
"The heads of terms agreements, while non-binding, imply that two blocks are in a fairly late stage of the farm-out process.
"After this we expect the company to sign a 'farm-out agreement' followed by a ‘joint operating agreement’, at which stage we expect Chariot to announce the companies involved as well as the terms," she said.
She suggests investors buy the stock to gain exposure to significant positive potential from drilling on two wells in late 2011 and 2012 depending on the firm securing a rig.
"In a farm-out scenario (assuming Chariot reduces its stakes by 50 percent) we see 150 percent upside to NAV (20 percent downside) for a success on Tapir North and a 440 percent upside to NAV for success on Nimrod and G Barremian (75 percent downside)."
UBS reiterates "buy" for Chariot Oil and Gas
Published: 11:25 27 Jun 2011 BST