Beating The Index / February 28, 2014 / The East African Rift Basin system is one of the last of the great rift basins to be explored. It was only in 2012 that Tullow and Africa Oil struck first oil in Kenya. It transformed Africa Oil into a multi-billion dollar company as the stock price shot from under $2 to over $9 in that same year.
Since then, the South Lokichar Basin in Northern Kenya saw seven significant oil discoveries by Africa Oil and its 50% partner Tullow Oil. Now the eastern side of the country is being explored for the first time with modern technology—and chances are there are still several “elephant” reservoirs to be discovered!
Taipan Resources TPN.V is a pure-play on eastern Kenya through 2 Blocks (1 & 2B) that total more than 27,000 square km. Taipan holds a 20% interest in Block 1 which covers an area of 22,711 square kilometers in northeast Kenya. Afren, a major international E&P, is the operator. Their first well gets drilled late summer 2014.
But it’s Block 2B that has investors watching closely—it also gets drilled this year. A neighboring well is being drilled right now, which could have a big impact on nearby Taipan.
Taipan is the Operator with a working interest of 45%. The remaining 55% were farmed out last October to Premier Oil, a $3B UK based major, for a gross investment of $30.5 million. Taipan’s partner will pay for, or carry them, through seismic and the first exploration well. It’s unusual for the junior in the play to be the operator. The Market pays more for the operator.
The Block covers an area of 5,465 square kilometers located at the most southeasterly extension of the NW-SE trending Anza Basin. The Anza Basin is one of the largest Tertiary-age rift-basins in the East African Rift systems that contain multi-billion barrel oil discoveries. Maxwell Birley, Taipan’s CEO, believes that the ‘sweet spot’ of the Anza Basin is located on Block 2B!
The Sala-1 highlighted in blue will have a major impact on the stock
The next potential catalyst for East Africa is Africa Oil’s Sala-1, 400 million barrel prospect, also on Block 9. It’s being drilled now and results are expected by the end of April 2014. Obviously, a hit there will be very good news for Taipan’s shareholders. A miss would dampen market hopes and leave the stock with Mother Nature’s last verdict, oil or no oil!
Taipan’s first exploration well is targeting the Pearl-1 Tertiary prospect that is in a similar geological setting to Tullow/AOI’s Ngamia, Twiga, Ekales, Agete and Amosing discoveries.
An independent reservoir estimate suggests the potential amount of recoverable oil for Pearl -1 is 251 million barrels (MMBOE), that’s 113 MMBoe net for Taipan. Here is how that might translate into Taipan’s share price: if you apply $4.22 per barrel (based on what Tullow Oil paid Heritage Oil in 2010 for analogous discoveries in Uganda) you get:
113 mmbbls * 0.3 COS (Chance Of Success) * $4.22 per bbl = $142 million market cap
Divide that by 147 million fully diluted outstanding shares and you get $0.96 per share or a double from the current level.
These numbers represent just one undrilled prospect. Last month, Taipan reported almost 1.6 billion barrels in Mean Gross un-risked prospective resources on Block 2B. The risked prospective resources (30% COS) net to Taipan (45% WI) comes out to 214 MMBOE.
Drilling the Pearl-1 prospect is planned for Q3-2014. Obviously, a hit on the Pearl-1 prospect is a major company maker; a re-run of the Africa Oil scenario would be quick as the market cap suddenly multiplied. But Pearl-1 has to hit.
That’s the upside—the “one foot planted firmly in the AIR” scenario. Investors should have their second foot firmly planted on the ground.
The Pearl-1 prospect is an exploration target with a 30% success rate at MOST. And while Africa Oil was able to hit several consecutive oil discoveries, the 300 MMBOE Bahasi well drilled in the Anza Basin on Block 9 was recently plugged and abandoned.
The dry Bahasi well has a red square around it; if you look at the map above you will notice that this is one of the closest wells to be drilled next to Taipan’s Block 2B. While the fact that it did not hit is not terminal for the Pearl-1 prospect, it is a good reminder that exploration drilling is a HIGH RISK endeavor.
The high-risk, high-reward nature of exploration for a junior player requires skillful risk management as you don’t want the game to end too early if you miss your first drill. A junior company reduces its exploration risk by reducing their percentage ownership (“farming out”) of its block. Taipan still retains 20% in Block 1 and 45% in Block 2B.
Taipan can still sell part of this 45% in exchange for cash, allowing them to pursue additional acreage new opportunities a la Pearl-1.
Finally, the company is debt free, getting carried for Block 2B’s first high profile well and has a $6M work commitment that includes drilling the 390 MMBOE Khorof prospect on Block 1. Taipan’s partner on Block 1 is also planning to drill their prospect in Q3-2014. There are 2 upcoming wells in Q3 for an exposure to more than 190 MMBOE in unrisked prospective resources. Any one of them is a company maker if successful.
Beating The Index