Listed Oil Juniors Hitting Success in Africa

Listed Oil Juniors Hitting Success in Africa (Source: Resource Investor)

By Cyril Widdershoven
02 Dec 2006 at 11:28 AM GMT-05:00

AMSTERDAM (ResourceInvestor.com) -- After decades of being the battle ground for oil and gas majors, African oil operations have become the operating focus of oil and gas minnows. The latter, listed at the Alternative Investment Market (AIM) or on several European stock exchanges, such as Afren [AIM:AFR], Lundin Petroleum [SEK:LUPE], Heritage [TSX:HOC] and Artumas [Oslo:AGI], could be the new leads investors are looking for.

Within the last few weeks, AIM-listed Afren has signed a deal paving the way for its entry into Angola while also completing its purchase of a stake in the Republic of Congo (Brazzaville). The London based oil minnow has stated that it has signed a heads of agreement (HoA) with Gulf Energy [OTCPK:GFEC] on the acquisition of a carried 5% stake in the Cabinda Central Block B. The latter block, situated in one of Angola’s main oil and gas regions, could mean the road to success for Afren.

After decades of civil war, Cabinda has just begun to open up to international investors, such as Afren and Gulf Energy, promising huge incentives for success. The 1,125-square-kilometre Block B is described by Afren as being highly prospective with a number of light oil discoveries. Furthermore, there is around 950 kilometres of 2-D seismic on the block. The company noted that plans for the area are expected to see a further 650 kilometres of 2-D seismic shot in 2007. And exploration and appraisal drilling activity is scheduled to get underway in 2008.

U.S.-based Devon Energy [NYSE:DVN] operates the block with a 30% stake. Spain’s Repsol YPF [NYSE:REP] has 25%; Angola’s Sonangol has 20% while Portugal-based Petrogal has a similar interest. Devon is to carry the Gulf Energy stake for the first $18 million of expenditures.

At the same time, Afren has reported that it has wrapped up a deal to buy Heritage Congo, a subsidiary of Canada’s Heritage Oil. The Congolese subsidiary has a 14% stake in the Noumbi permit, in Congo (Brazzaville). The London-based company paid $21 million along with warrants for 1.5 million Afren shares. These are valid for five years at a price of GBP0.6 ($1.1) each. Afren’s move, however, has been pre-empted by French oil and gas minnow French Maurel et Prom [Paris:MAUNV] and the U.K.’s Burren Energy [LSE:BUR].

Heritage said in a statement that it now expected to receive cash of $7.37 million along with “an overriding royalty of 15% over a 30% working interest” in the Kouakouala B licence’s Mengo field. Afren’s HoA and acquisition - on the Block B and Noumbi permit, respectively - both situated on a trend with the M’Boundi development, the company said. This field holds around 300 million barrels of oil and is producing 50,000 barrels per day.

At the same time, another oil minnow Artumas has reported that its Tanzanian oil, gas and power operations have become very successful. In its update of the first nine months of 2006, Artumas reported that its Mtwara Energy Project is progressing as planned. Artumas will be focusing the coming months on Phase 2 of the Mtwara Energy Project, which entails the appraisal, exploration and development of the Mnazi Bay concession by drilling three new wells; the installation of production facilities and the construction of a pipeline from the Mnazi Bay well-site to the power generation facilities at Mtwara. The last nine months, upstream activities have led to a success on the drilling of and testing and completion of the Mnazi Bay-2 well.

In addition, Artumas acquired 12 MW capacity gas reciprocating engines and conducted survey work. The Tanzanian government also has awarded Artumas the Development License for the Mnazi Bay natural gas concession. In March, Artumas already was awarded the Rovuma Onshore Block in Mozambique. The concession agreement is expected to be formalized before the end of 2006. Artumas has committed itself to acquiring 250 kilometres of 2-D seismic on the Mocimboa and other structures, re-entering and testing of the Mocimboa-1 well and if not successful, the drilling of an additional well.

Projected costs of the latter operations in Tanzania ($160 million), related to the Mtwara Energy Project, in 2007 will be covered by part company equity, part external financing, such as debt facility of up to $35 million currently being negotiated with the Emerging Africa Infrastructure Fund, the participation of FMO in up to 20% of ongoing project costs and a grant from The Netherlands government of up to 22.5 million euros ($30 million), which is available to finance 50% of the development costs for the regional transmission and distribution system.

The total projected costs for the Mozambiquean operations are set at $22 million during the initial 3-year exploration period. Artumas future looks promising, based on the prospectively of the concessions in hand, and the already signed agreements regarding off take of its power generation project in Tanzania. With the support of several international financiers, the company will be able to progress towards a financially more stable future, as soon as the first gas reserves come on-stream.

Conclusion

In the coming years, Africa will show a growing commitment towards taking advantage of the knowledge and risk-taking structure of the respective gas and oil juniors. The time that majors were ruling the Dark Continent is over, especially due to the fact that the search for new elephant fields has shown little positive results.

The fact that there are still interesting cherries to be picked, small but healthy, will attract the interest largely of second tier players, such as Apache [NYSE:APA], Devon [NYSE:DVN], Tullow [LSE:TLW] or Premier Oil [LSE:PMO], but the real diamonds could be there for the so-called single-players, as Artumas, DNO (Iraq) or Afren.

It is now the time for stock market investors to start investing in these ‘unknown rough diamonds,’ with a little bit of work, the rewards can be immense. If Afren or Artumas hit the expected reserves, stock prices will go through the roof, making yields that no Shell [NYSE:RDS-B], ExxonMobil [NYSE:XOM] or ENI [NYSE:E] can even dream off.

Big is not always better; have a look at Africa’s current developments and make a choice. With the support of the investment community, these players can become major players to reckon with.