Aim newcomer Lekoil (LEK) got off to a flying start last summer when its first ever exploration well discovered more than three-quarters of a billion barrels of oil-equivalent (boe) resources offshore Nigeria. Geological understanding of the field is limited, however, and equity markets are refusing to ascribe anything close to full value for Lekoil's 30 per cent economic interest in the licence until joint-venture partner Afren (AFR) conducts more work to prove the oil and gas could be commercially extracted.
- Massive oil discovery offshore Nigeria
- BlackRock buying shares
- Fully funded after $100m equity raise
- Low-risk, high-impact work programme
- Operating in Nigeria comes with major risks
- Corporate governance concerns
But having raised $100m (£60m) of equity at 55p a share in November, Lekoil is now fully funded to join Afren's appraisal work programme in 2014, which could substantially de-risk the play and even double or treble the current resources. Considerable upside therefore remains on the table despite the 70 per cent rise from Lekoil's 40p May 2013 float price.
And while Lekoil remains under the radar of many investors (or off the radar completely because of the inherent risks surrounding Nigeria), some of the world's top investment houses have been building substantial positions in the new explorer. BlackRock increased its holding to 34.3m shares in December from 19.4m shares prior to drilling, while Capital Group and Investec also have stakes.
The attraction is what UBS analyst Daniel Ekstein believes could be "one of the biggest shallow water discoveries in West Africa of the past decade". He conservatively estimates, assuming no value for the gas, that the oil and condensates alone justify a risked net present value of $2.9bn for the entire field; Lekoil's stake is currently worth 120p a share under his estimate, representing 74 per cent upside to the current share price. By comparison, leading consultancy group WoodMackenzie has valued the field at $3.8bn.
LEKOIL (LEK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 69p | MARKET VALUE: | £228m | |
| TOUCH: | 68-69p | 12-MONTH HIGH: | 74p | LOW: 35p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | na | |
| NET ASSET VALUE: | 13¢* | NET CASH: | $57m*** | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
| 2011 | nil | -4.2 | -64 | nil |
| 2012 | nil | -3.8 | -19 | nil |
| 2013** | nil | -20 | -5.0 | nil |
| 2014** | nil | -9.5 | -1.0 | nil |
| % change | - | - | - | - |
Normal market size: 10,000 Matched Bargain Trading Beta: 1.28 £1=$1.63 *Includes intangible assets of $36.9m, or 11¢ a share **UBS estimates ***Pro-forma cash as of year-end 2013, estimated by UBS | ||||
Moreover, the field's value should rise considerably as it becomes further derisked. And should further exploration of the OPL 310 licence find oil on the undrilled northern and eastern flanks of the original discovery complex, or the untested Ado and Shasha structures, Mr Ekstein calculates "the gross resource base on the block could be greater than 2bn boe" - implying a net asset value approaching 444p - or much higher if a gas offtake agreement were secured.
For now, Lekoil and its partners will concentrate on acquiring 3D seismic data across the whole block. Only 25 per cent of it is currently covered. In addition, at least one follow-on well is planned in the second half of this year.
The biggest risk for investors is that appraisal drilling could prove disappointing. Indications on reservoir quality have been very positive so far, but the first drill hole had to be abandoned prematurely due to equipment-related problems before a flow test could be carried out. If reservoir quality is poorer than expected, then the resource estimate could fall dramatically. UBS ran a downside scenario through its model that implied net asset value falling to 40p a share.
Lekoil's management team is also fairly new to the City. Most are ex-employees of AllianceBernstein, a New York-based investment management company. However, Lekoil has structured its business so that it can benefit from being an indigenous Nigerian corporation, and this could lead to corporate governance concerns. More encouragingly, Lekoil's technical team is led by Sam Olotu, a 20-year industry veteran and most recently Shell's regional head of geophysics for Sub-Saharan Africa, who had been studying the under-explored OPL 310 licence for many years prior to Lekoil's farm-in.
