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Momentum building in African exploration, says Westhouse

Broker Westhouse describes the region as underexplored and high impact, but it is apparent that efforts to address the underexplored nature of the continent are gaining momentum. This can be seen, it says, in work being undertaken, from early field studies, through seismic acquisition to drilling.


Africa is under-explored and the oil and gas firms operating there offer investors, who are willing to take risk, 'exceptional' opportunities, according to broker Westhouse.

"In light of the general reassessment of risk in the market, and the recent adverse impact on exploration companies, we believe exceptional opportunities for a re-rating in the sub-sector now exists," said analyst Andrew Matharu in a note to clients.

His research looks at the increasing momentum behind African exploration and singles out six top picks with "buy" recommendations.

They are Tower Resources (LON:TRP), Chariot Oil & Gas (LON:CHAR), Dominion Petroleum (LON:DPL), Cove Energy (LON:COV), Victoria Oil & Gas (LON:VOG) and Bowleven (LON:BLVN).

Although relatively underexplored, Africa, according to statistics, already holds a significant proportion (8.8 percent) of the world’s hydrocarbon reserves.

In the last decade, according to BP data, oil and gas reserves in Africa have increased by 95.9 billion barrels and, of this, 74 percent was oil.

And this increase of proven reserves is expected to accelerate in the next decade, as is the amount of oil and gas exports, said Westhouse.

Focusing on what attracts firms to Africa, the analysts earmarked the positive changes in the political landscape and advances in exploration techniques.

They also highlighted the mix of acreage types and 'company-making' finds from the likes of Tullow Oil (LON:TLW) and Heritage Oil (LON:HOIL), which have raised the continent's profile.

The size of the discoveries mean both majors and state firms are interested in farm-in deals and the improved marketability of gas has increased the interest in gas acreages, added the analysts.

Tower Resources' (Buy, target price: 15.7 pence) main operations are in two of the most exciting "new" exploration regions, Uganda and Namibia, said Westhouse. Short term, exploration drilling is expected in Uganda before the end of the year, and in Namibia in the first half of 2012.

The broker says it believes investors are being overly cautious with regard to Tower and it represents an "outstanding" buying opportunity.

"At current levels around 4.5p, the shares effectively value Uganda and the DeltaM prospect (Namibia), leaving the DeltaP prospect and the Delta leads as free upside."

Chariot Oil & Gas
(Buy, target price: 332 pence) is exclusively focused offshore Namibia, where it has interests in four licences on eight blocks.

As well as being one of the largest acreage holders in the region, the distribution of the blocks across several distinctive basins also helps to diversify exploration risk.

"This is an important consideration as the group, and its partners, move closer towards the commencement of drilling operations," said Westhouse analyst Matharu.

The market is also being too cautious on Dominion Petroleum (Buy, target price: 6.4 pence), says Westhouse. Its main interests are offshore Tanzania and Kenya.

The most likely near-term catalysts for the firm are farm-out agreements in Tanzania, and potentially Kenya, followed by Uganda, said the broker. Also keenly awaited is the updated Competent Persons Report for Block 7 in Tanzania because of the expected significant increase in resource estimates.

East African specialist Cove Energy (Buy, target price: 109 pence) has a strategy of taking non-operated stakes in high-potential frontier regions and has so far been very successful offshore Mozambique, where it has participated in four major gas discoveries.

Its near-term catalysts will be driven by its sustained appraisal, exploration and testing programmes over the next two years, said Westhouse analysts.

"Success was achieved relatively quickly with the WBL and Tubarao discoveries, offshore Mozambique, and it appears that the group has the chance to achieve similar success within its portfolio of interests established offshore Kenya."

Victoria Oil & Gas
(Buy, target price: 10.8 pence) has its core projects in Cameroon, where the start of gas sales (from Logbaba) at the end of the year represents a key milestone.

"The announcement of additional gas sales agreements to better utilise the field and infrastructure would also be a positive catalyst," said Westhouse.

"Ultimately, gas supply to a large independent power producer, or a third-party LNG facility, is most likely to be required for VOG to capitalise on the full productive potential of Logbaba.

"In the meantime, higher-value contracts with industrial consumers will continue to provide significant value."

Westhouse has initiated coverage on Bowleven (Buy, target price 331 pence), which also operates in Cameroon and also has two permits in Gabon.

"With an active exploration and drilling programme over the next twelve months, further derisking of prospects and delineation of discoveries will provide the catalysts for Bowleven in the near term."

The broker added: "We believe that Bowleven’s active drilling programme during the remainder of 2011 and throughout 2012, has the potential to add significant new resources to current estimates, while also continuing to de-risk existing discoveries."

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