It may seem strange to say that a company whose shares have already increased seven-fold is on the verge of transformation, but several analysts believe Gulf Keystone's shares deserve to rise considerably higher. The share price rose from 13p to over 100p after the company announced a huge oil discovery last August at the Shaikan exploration well in Kurdistan, in which the company has a 75 per cent interest. Shaikan is shaping up to be one of the most successful wells drilled anywhere over the last decade, and the latest estimates are that the field could hold some 4.2bn barrels of oil.
The shares have since drifted back to 77p in the wake of mixed updates. First, following a default by its partner ETAMIC, the company spent $52m (£36m) to take on ETAMIC's positions in four projects in Kurdistan, including Shaikan. But, more recently, the company announced that drilling on the Akri Bijeel project, in which it holds a 20 per cent interest, found oil even before it had reached its planned target depth.
In a recent research note, Richard Nolan, oil and gas analyst at broker Daniel Stewart, argues that Shaikan alone easily justifies a 150p price target even with the other three projects valued at zero. He describes the shares as trading "more on news and momentum and less on valuation", which is unsurprising given the enormous resource potential.
Peer group companies Heritage Oil and DNO have enterprise value (EV) to proved and probable (2P) reserves ratios of 2.2 and 6.7, respectively. Applying these benchmarks to Gulf Keystone implies that the market is expecting 2P reserves of between 193m and 580m barrels of oil, which requires an undemanding 5-14 per cent of Shaikan's 4.2bn resource to justify the current price.
The next significant news is likely to be the result of the Akri Bijeel well, which has already found oil and could further de-risk the company’s acreage. Combined with appraisal drilling this summer to better define Shaikan's potential, which will be helped by the recent £114m placing, this could release the shares towards the broker's target.
Sector: Oil & gas
Share price: 77p
Market capitalisation: £519m
What could transform the share price
1) Results of exploration drilling at the company’s second project, Akri-Bijeel
2) Drilling to appraise the 4.2bn barrel Shaikan oil discovery announced last year
Timeframe: June 2010
Broker target price: 150p, Daniel Stewart
Rough diamond prices have risen markedly in the past few months, recovering most of the sharp losses incurred in the meltdown of late 2008. And, on the verge of bringing its BK11 kimberlite mine in Botswana into production, Firestone Diamonds looks perfectly placed to benefit.
The main driver of the recovery in the diamond price has been rapid growth in demand from China and India, which has offset fragile demand in the US. The US has traditionally been the most important diamond market, representing around half of all sales, but leading producer De Beers estimates that Asian markets will overtake the US in demand terms by 2016.
There is a natural diamond supply-demand imbalance as no significant discoveries have been made in the past couple of decades to replace depleting output from the major producers in Africa and Russia. De Beers recently outlined plans to curb production in an attempt to extend the life of its major mines, which could cause rough diamond prices to rise 5 per cent a year for the next five years, according to analysis by RBC Capital Markets.
With a paucity of diamond miners as well as diamond mines, the improving market is excellent news for Firestone as it joins Petra Diamonds and Gem Diamonds in the very select club of London-traded diamond producers. BK11 alone won't transform Firestone, but the cash flow it produces, boosted by a recent £9.45m placing, will allow accelerated exploration of satellite pipes that could be developed using existing plant and equipment.
Production cash flows will also help Firestone to push forward its Jwaneng tailings project with De Beers and let it negotiate from a stronger position as it seeks a partner to help develop the high-potential but large Tsabong project, also in Botswana. Around 85 kimberlite pipes have already been discovered at Tsabong, of which some 19 have been found to contain diamonds.
Sector: Mining
Share price: 37p
Market capitalisation: £47m
What could transform the share price?
Imminent production from the BK11 pipe in Botswana will provide cash flow that will enable the company to accelerate other projects and add new opportunities.
Timeframe: Ongoing to mid-2011
Broker target price: 60p, Evolution
Global Energy Development (GED) has been flying below most investment radars – including ours. However, this Colombia and Peru-focused oil and gas company has been quietly producing respectable quantities of oil and making steady profits. A busy schedule of drilling should significantly add to reserves and production and is starting to raise the company’s profile.
Current production is 1,050 barrels of oil per day (bopd) and, with 147m barrels of proved and probable (2P) reserves, GED's reserves rank among the highest of any Aim company. GED has just started an intense programme to drill 13 relatively low-risk development wells that aim to significantly increase reserves and potentially lift production as high as 9,000 bopd. Extensive input from consultants Ralph E Davis and Schlumberger identified these 13 locations from 1,000 total prospects, many of which the company will be able to pursue after the current programme.
The cautious approach that has led to the company maintaining a low profile will see it try to self-finance the estimated $110m programme cost from rising production cash flows. This will mean the drilling programme will take some three years to complete, although injecting further finance would allow drilling to be accelerated, as would higher oil prices or higher-than-expected flow rates from wells. The company is drilling its first well at Rio Verde, its most predictable, low-risk, project. This well alone could significantly increase production volumes and the shares will receive further boosts as the company works through its portfolio.
Sector: Oil & gas
Share price: 111p
Market capitalisation: £39m
What could transform the share price?
Aggressive development drilling programme and raising of company profile.
Timeframe: Ongoing
Broker target price: 169p, Matrix
Constrained by a lack of finance and withdrawal of its partner, Aurelian has a history of underperformance. Now refinanced by new investors including George Soros and reinvigorated by new management, the company is finally set to start releasing significant value from highly prospective exploration and development projects that offer rapid reserves growth.
The new management team is focusing on two key areas: tight gas in Poland and exploration drilling in the Carpathians. The lead project is the Siekierki gas development near Poznan in Poland, which involves releasing gas that is tightly held within rocks.
The horizontal drilling technology that Aurelian will use has been successfully proven in identical geology stretching from the southern North Sea to central Europe. Aurelian will be the first company to use this technology in Poland and plans to drill its first well in June and a second potentially before the end of the year. If drilling confirms adequate flow rates, this could prove the commerciality of hundreds of billions of cubic feet of gas and nearly double analysts' core valuations of the business.
Aurelian is also conducting an exploration programme in the Polish and Slovakian Carpathians that could prove equally transformative. Having completed two-dimensional seismic studies, the company plans a four-well exploration programme, with each well targeting a substantial 200m barrels of oil. The first of the four is scheduled for late 2010 and the company estimates a one-in-six chance of success.
A recent placing provides sufficient funds for its two-year work programme, including the first Siekierki well and four Carpathian exploration wells. The only well not now fully funded is the second Siekierki well, for which financing options include mezzanine debt and the sale of non-core assets.
Sector: Oil & gas
Share price: 39p
Market capitalisation: £132m
What could transform the share price?
1) Confirmation of commercial flow rates from drilling the Siekierki tight gas project in Poland
2) Exploration drilling in the Carpathians
Timeframe: June 2010 to early 2011
Broker target price: 75p, Macquarie
African Aura Mining (formerly Mano River Resources) has historically focused on gold and diamond exploration, although it's the Putu iron ore joint venture in Liberia with Russian miner Severstal that could double the share price. Drilling has already defined an iron ore resource of 1.08bn tonnes at Putu and this is based on just 20 per cent of the mineralisation length.
With iron ore typically found continuously along a length of mineralisation, analysts believe the company will ultimately find an awful lot more of it. Broker Ambrian sees real potential for a 2-3bn tonne resource, possibly reaching 2bn tonnes by the end of the year.
The joint venture is now planning a more detailed 60,000m drilling programme to better define the scale of the resource, including exploring the undrilled 80 per cent of the ridge. Half of this drilling should be completed by the end of 2010, at which time an update is expected to confirm substantially more iron ore in the Putu resource. With iron ore prices expected to appreciate in the long term following the recent change to shorter-term sales contracts, the shares could receive quite a boost.
Sector: Mining
Share price: 78p
Market capitalisation: £40m
What could transform the share price?
Growing iron ore resource at the already substantial Putu project in Liberia
Timeframe: Second half of 2010
Broker target price(s): 161p, Ambrian
Years of effort should soon start paying off for European Goldfields as it stands on the brink of securing permitting for its substantial development projects in Greece (Skouries and Olympias) and Romania (Certej). Having passed their respective critical approval hurdles, the company could receive final permitting for Romania in the third quarter of 2010 and for Greece in the fourth quarter. After the lengthy delays, securing permitting is likely to significantly boost the shares.
Such a timetable would allow project construction during 2011 and 2012 and make possible a full year of production from the new projects in 2013. This could see the company produce over 400,000 ounces of gold, together with significant quantities of base metals. Beyond that, the second phase of Olympias would see the resumption of underground mining, and that project alone could reach production of 200,000 ounces of gold a year when fully expanded.
The company largely ignored exploration while embroiled in the politically-sensitive permitting processes, but will refocus on adding to already considerable reserves this year. In particular, management has identified a number of attractive targets on existing properties, which could be developed at relatively low cost by sharing plant and facilities. Most notably, management describes the Piavitsa prospect in Greece as an "Olympias lookalike". The company has budgeted $15m for exploration this year, the majority of which will be applied to an aggressive drilling programme in Greece that's scheduled to start imminently.
Good progress is also being made on financing the major projects. The company is in advanced negotiations with a group of institutions for the financing of Certej. That group has also expressed interest in financing Skouries, although the company has a number of financing options for that project.
Sector: Mining
Share price: 409p
Market capitalisation: £746m
What could transform the share price?
1) Securing final permitting for major projects in Greece and Romania
2) Confirming project financing
Timeframe: Second half of 2010
Broker target price: 640p, Numis
Cove Energy was transformed when the Windjammer prospect (in which Cove has an 8.5 per cent interest) made a significant gas discovery offshore Mozambique. Windjammer could hold up to 4bn cubic feet of recoverable gas and proves the existence of a source rock capable of generating significant further quantities of hydrocarbons in the surrounding area. This potentially opens up a new oil and gas basin, with Windjammer alone estimated to be sufficient to justify building a liquefied natural gas operation.
Cove's operating partner, Anadarko Petroleum, is seeking to accelerate the exploration programme and, with the drilling rig contracted through to 2013, may increase the number of wells drilled from four to six. Cove's share of total monthly drilling costs of $30m is around $3m and the company is funded to participate in the programme through to 2012.
Drilling of the second prospect, Collier, had to be suspended when it encountered high pressures above the target reservoir, although it is thought Collier could contain significant gas together with oil at shallower depths. The partners will drill Collier again once they have procured the necessary high-pressure equipment. Meanwhile, the rig is moving to drill the next prospect in the programme, Ironclad. This is believed to have similar characteristics to Collier and could hold both gas and oil. This will be followed by the Barquentine exploration well in June, which will test the extent of the Windjammer prospect, before returning to Collier in July.
The busy drilling programme should provide a boost to Cove's valuation, which would be significant on the basis of discovering gas alone. If the prospects are also found to contain oil, the upside would be substantially higher.
Sector: Oil & gas
Share price: 50p
Market capitalisation: £166m
What could transform the share price?
Further exploration and appraisal drilling success, particularly confirming the discovery of oil as well as gas
Timeframe: Ongoing
Broker target price: 100p, Panmure Gordon
