Three directors of Ophir Energy (OPHR) opened their wallets last month to buy shares in the Africa-focused oil explorer and investors with a moderate taste for risk should quickly follow their lead. Not only is the company a tempting takeover target for major oil groups based on existing discoveries in Tanzania and Equatorial Guinea, but Ophir is flush with cash from a recent financing and is drilling nearly a dozen enormous new oil and gas prospects over the next 15 months – giving investors high-quality exposure to blue-sky exploration upside across multiple regions and plays.
- Director buying
- Blue-sky exploration upside
- Flush with cash
- Takeover target
- No guarantee of farm-outs
- Drilling timetable pushed back
Directors Alan Booth, William Schrader and Vivien Gibney each acquired between 10,000 and 25,000 shares on the open market in August at prices above and below Ophir’s current share price.
Ophir’s shares are on the summer sale rack having declined in value by over 37 per cent in the past 12 months and 14 per cent in August alone. While such price action doesn’t inspire a lot of confidence at first glance, we view this as an attractive buying opportunity on valuation grounds as we believe the sell-off has been well and truly overdone.
So what has caused the sharp share price decline? Shareholders have two main concerns. First, Ophir has been largely silent about ongoing efforts to secure farm-out partners for its prospective licences in Equatorial Guinea, Gabon, Tanzania and Kenya. (Typically, a farm-out deal will involve Ophir receiving a combination of cash – for back-costs – and potential carries on future drilling or development costs.) Management has been understandably tight-lipped on how negotiations are coming along but the market has construed this silence as a lack of industry interest in the assets – leaving scope for a rerating if a farm-out agreement or two were to occur on favourable terms over the next six months. What’s more, Ophir has good form here – having secured farm-down deals for assets in Tanzania and Gabon with BG Group (BG.) and Petrobras in 2010 and 2011, respectively.
OPHIR ENERGY (OPHR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 325p | MARKET VALUE: | £ 1.9bn | |
| TOUCH: | 324-325p | 12-MONTH HIGH/LOW: | 557p | 298p |
| FWD DIVIDEND YIELD: | NIL | FWD PE RATIO: | NA | |
| NET ASSET VALUE: | 321¢ | NET CASH: | $839m | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
| 2011 | 14.7 | -19.1 | -7.00 | nil |
| 2012 | 1.02 | -40.9 | -10.2 | nil |
| 2013* | 1.00 | -80.9 | -13.8 | nil |
| 2014* | 1.00 | -39.3 | -6.70 | nil |
| % change | - | - | - | - |
Normal market size: 5,000 Matched Bargain Trading Beta: 0.79 £1=$1.56 *Investec forecasts | ||||
The second concern for investors is that Ophir has not kept to its drilling schedule. As a company exclusively focused on exploration, delays to drilling new prospects can have a harmful effect on sentiment. This uncertainty has hit home doubly hard of late since some of Ophir’s future drilling plans also depend heavily on farm-out agreements being signed.
Yet according to management, Ophir’s exploration programme is now the firmest it has been since late 2012. Granted, this might not be saying much, as the company has broadly failed to deliver on its ambitious timetable from that time onwards, but thanks to a £553m ($833m) placing and rights issue completed in March, Ophir now has the financial firepower to execute its share of the drill program listed in the table below. Of note, drilling of the Affanga Deep well in Gabon, and drilling in Kenya and Equatorial Guinea, may need farm-out transactions being completed and drill rigs being contracted. So investors would be wise to build in some extra slack to those estimates. Upcoming wells in Tanzania and Gabon should provide plenty of potential catalysts for the shares in the meantime.
| Ophir Energy's 2013/2014 drilling programme | ||||||
| Country | Well name | Working interest | Gross prospect size (mmboe) | Chance of success | Potential impact | Expected spud date |
| Tanzania | Pweza appraisal | 40% | - | - | Low | Q3 2013 |
| Tanzania | Mzia-3 appraisal | 40% | - | - | Low | Q4 2013 |
| Tanzania | Mlinzi | 80% | 3500 | 20% | High | Q4 2013 |
| Tanzania | Terrace TBD | 40% | 467 | 15% | High | Q1 2014 |
| Gabon | Padouck Deep | 50% | 990 | 15% | High | Q1 2014 |
| Tanzania | Tende | 70% | 379 | 15% | High | Q1 2014 |
| Tanzania | Mzia-4 appraisal | 40% | - | - | Low | Q2 2014 |
| Gabon | Affanga Deep | 100% | 317 | 20% | High | Q2 2014 |
| Gabon | Okula | 50% | 354 | 23% | High | Q3 2014 |
| Equatorial Guinea | EG Phase 1 | 80% | 250 | 35% | Medium | H2 2014 |
| Kenya | Kenya-1 | 90% | 330 | 15% | High | Q4 2014 |
Source: Ophir, Investec, Investors Chronicle | ||||||
Of course, this all assumes Ophir will still be around in 12 months time to carry out the programme. The oil explorer is a top analyst takeover tip due it its strategic foothold in an area that is widely expected to be one of the world’s most important gas producing regions over the coming decades. Ophir holds a 40-per-cent stake in three huge gas blocks offshore Tanzania, where it and partner BG have discovered 15 trillion cubic feet (Tcf) of recoverable gas resource. Major oil firms ExxonMobil and Norway’s Statoil have also discovered more than 15Tcf of gas in a neighbouring block. And slightly further afield lies the Rovuma gas discovery offshore Mozambique, where Thailand’s biggest energy group, PTT, outbid Royal Dutch Shell to acquire Cove Energy’s 8.5 per cent stake in the licence for £1.22bn.
