There are thousands of investors who search for the next big thing among the international oil and gas plays. An impressive exploration success is a major catalyst that can create the next multi-bagger, and many people are actively seeking the company that'll get them the biggest bang for their buck in the short term. For instance, the oil discovery at Ngamia-1 well in Kenya was a major catalyst that pushed Africa Oil's stock from $2 to $10 in March 2012. That was the company's first well in Kenya. However "the markets have a tendency to overshoot at both ends", according to Warren Buffet, and this is why the stock has corrected significantly from its highs in 2012.
This made me write a heads-up article about the following companies which have some major near-term catalysts. None of them operate in North America. They operate primarily in Africa and South America where there is a flurry of activity currently and this vibrant activity is going to continue over the next years. These regions are the new Eldorado of the energy patch and many investors believe that there is huge untapped potential in place. There is the expectation that primarily these two continents, Africa and South America, have still a lot of low hanging fruit a.k.a. big discoveries, although these wells carry higher risk than the wells in North America. This is why many E&P companies have been trying to crack the code on several onshore plays there, which is great news primarily for the oilfield companies as I have discussed in my articles here and here.
The oilfield companies are the first beneficiaries of the exploration developments either the well proves to be a dry hole or a gusher. Demand for oilfield services exceeds supply primarily in Africa and South America. For instance, there are only 50 onshore rigs in Africa currently. This is why I want to be an early mover and identify grossly undervalued oilfield companies with exposure to selected international markets that have a tremendous upside potential.
Africa Oil is another Lundin venture. The Lundin Group also has stakes in BlackPearl Resources (OTCPK:BLKPF) focused on heavy oil in Alberta, Lundin Mining (OTCPK:LUNMF) that is hoping to take advantage of the copper assets distressed majors are getting rid of, the African miner Lucara Diamond (OTCPK:LUCRF), Denison Mines (DNN) on the uranium front, the Kurdish oil and gas company ShaMaran Petroleum (OTCPK:SHASF) and Lundin Petroleum (OTCPK:LNDNF).
I strongly believe that Africa Oil can be the next Red Back Mining, and Africa Oil's potential acquisition at the current sky high valuation will be for the suitor's CEO as catastrophic as Red Back Mining's acquisition was for Kinross Gold's (KGC) CEO. Red Back Mining owned the Tasiast project in Mauritania, the Chirano mine in Ghana, and had exploration projects in both countries. Kinross Gold purchased Red Back for a remarkable $8 billion (including the purchase of the first stake) which was a pretty nice price tag for an asset that Lundin had only put ~$800 million into. That acquisition essentially set the CEO Tye Burt out of Kinross. He was fired in 2012. Red Back Mining was a grossly overvalued company at ~$8 billion, and that was a value-destroying acquisition.
Africa Oil is in an effort to reach commercial thresholds in Kenya, but the results from its first wells in Africa have been mixed thus far. Ngamia-1 and Twinga-1 wells found oil, but the initial shows from Paipai-1 were not encouraging. The expectations for Paipai-1 were high back in late 2012 but the final results were well below expectations.
- The company and its partner (Tullow) on Block 10BB are currently conducting tests on a series of six zones at the Ngamia-1 discovery. Ngamia-1 was the country's first crude deposit, which is still being tested for commercial viability. Ngamia-1 was drilled in 2012, but testing operations were postponed until appropriate artificial lift equipment was sourced to properly assess the accumulation.
The first of these tests was in the Lower Lokhone formation and the result was disappointing as the well flowed only 281 bbl/d from this zone. Apparently the bulls cannot rejoice with this result, considering the extremely high cost of the well. In this part of the world, the wells cost upwards of $15 million.
The remaining five tests are being conducted in the Auwerwer formation, and the results of these remaining tests are expected to be announced in June 2013.
- The company and its partners (Tullow, Marathon Oil) on the South Omo Block (Ethiopia) spudded the Sabisa-1 well in January 2013. The well was drilled to a preliminary total depth of 1,810 meters. Due to hole instability issues the company has delayed to provide the drilling results, and a result is expected in early June.
The Sabisa-1 well is located in East Africa's Tertiary Rift, a geological fault that has yielded oil in Uganda as well as Kenya. An Ethiopian find may prove a new oil province. For Ethiopia, evidence of crude could help the government curb energy imports and diversify an economy that relied on coffee for about a quarter of export earnings in 2011. "We are importing every drop of oil and gas and we want to change this game" according to Ethiopian Mines Minister Sinknesh Ejigu.
Africa Oil's Vice President of Business Development James Phillips said in an interview in Addis Ababa that "this is a huge well for Ethiopia, this is really a key well". According to some analysts: "Sabisa represents a trigger well with the potential to open up a new basin".
The Sabisa well is targeting about 140 million barrels of oil resources. The Kenya-Ethiopia frontier basin may hold as much as 10 billion barrels of oil and gas resources, Nomura Holdings Inc. said in a January note.
- The company also spudded the Etuko-1 well in Block 10BB in Kenya in early May 2013. This well targets a new play area in the Lockichar Basin where a working petroleum system has been confirmed by recent discoveries at Ngamia and Twiga. The well will focus on the "eastern flank play" where oil was discovered in 1992 by Shell (RDS.A). The gross best estimate of prospective resources for the prospect are 231 million barrels of oil. The well is expected to take approximately 60 days to drill and the results are expected by the end of June or early July 2013.
2) Mart Resources (OTCPK:MAUXF): This company holds a stake in the Umusadege ﬁeld in Nigeria, which is being developed in partnership with Midwestern Oil and SunTrust Oil. The company's UMU-9 well was drilled successfully and the share price rose more than 50% in early 2012. The discovery of UMU-10 well in late 2012 pushed the share price higher more than 60%. The stock hit $1.8 but it has corrected much lately.
- The company is preparing to spud the UMU-11 well continuing Umusadege field development. Will the history repeat itself? Assuming the UMU-11 well is as successful as UMU-9 and UMU-10 wells, the share price can rise substantially from the current levels driven by investors who set aside at least temporarily the turbulence, the uncertainty and the social unrest in Nigeria.
The UMU-11 well will be drilled from the same surface location as UMU-9 and UMU-10. The oil reservoirs expected to be completed in the UMU-11 well are the XIIb, XIIc, XVIa, and XVIb sands, which had a combined 79 feet of oil pay in UMU-10. The UMU-10 well encountered 479 feet of gross hydrocarbon pay in 20 sands in late 2012.
3) Canacol Energy (CAAED.PK): After the recent acquisition of Shona Energy, Canacol is one of the biggest land owners in Colombia holding 3.3 million net acres currently in three different basins, the Magdalena, the Llanos and the Putumayo Basin. It also holds light oil producing assets in the neighboring Ecuador. Given the size of the exploration targets on the table, some investors could also consider Canacol's stock as a long-dated call option on the company's huge exploration asset base.
With the completion of the Shona acquisition, Canacol added a significant natural gas production asset to its portfolio. The Esperanza field, located in the Lower Magdalena Basin of Colombia, produces dry natural gas for sale to local customers under long-term contracts.
In April 2013, the company produced ~7,500 boepd. The production split is approximately 60% oil from its Labrador, Rancho Hermoso, Libertador-Atacapi, and Capella fields in Colombia and Ecuador, and 40% gas from its operated gas fields at Esperanza in Colombia.
Through both VMM2 and Santa Isabel contracts, Canacol owns significant acreage in a potentially large, unconventional shale oil fairway in the thick Cretaceous La Luna and Tablazo formations analogous to the Eagle Ford formation in the United States and the Vaca Muerta Formation in Argentina. Ranked as one of the most productive source rocks in the world, the La Luna is also the primary source rock in Venezuela's Maracaibo basin, which contains over 250 billion barrels of recoverable oil. After all, the wells from these two contracts, if successful, can impact substantially the company's current production of 7,500 boepd.
- In October 2012, Canacol announced that the Mona Arana 1 exploration well on its VMM2 contract located in the Middle Magdalena Basin had encountered 85 feet of net potential oil pay within the conventional Lisama sandstone reservoir. A subsequent test of the interval in January 2013 produced 1,242 bopd.
In late January 2013, Canacol announced that the Mona Arana 1 well had encountered 230 feet of potential net oil pay within 700 gross feet of the non-conventional Upper La Luna shale.
ExxonMobil (XOM) has taken over operatorship of the Mono Arana 1 well, and the final flow test results from the La Luna shale in the Mono Arana 1 well are expected in Q3 of calendar 2013.
- In February 2013, Canacol announced the farm-out of its Santa Isabel contract to ConocoPhillips (COP). Canacol kept 30% WI (30,000 net acres) on the Santa Isabel which is located in the Middle Magdalena basin.
The first exploration well on the Santa Isabel contract, the Oso Pardo 1 well, will be spud in Q2 of calendar 2013 with the company's new co-venturer, ConocoPhillips. The Oso Pardo 1 well is located approximately 12 kilometers to the west of the Mono Arana 1 well.
4) WesternZagros Resources (OTCPK:WZGRF): The company's assets are in Kurdistan. Iraq, Kurdistan's neighbor, hosts three of the world's largest oil fields (West Qurna, Majnoon, Rumaila) according to Forbes. However, these three fields are far from Kurdistan as they are located in Southern Iraq.
The company holds a 40% WI in two Production Sharing Contracts (PSC) with the Government of Kurdistan. The first one is the Garmian and the second one is the Kurdamir contract. The Government of Kurdistan holds a 20% WI in both PSCs. WesternZagros operates in the Garmian contract area of 1780 square km where the Russian Gazprom (OTCQX:GZPFY) also holds a 40% WI. Talisman (TLM) is the operator at the Kurdamir contract area of 340 square km, holding a 40% WI.
In March 2013, Houston-based Crest Energy International paid $63 million for 10% of WesternZagros, which upped Crest's ownership of the Calgary-based junior company to 19.8%.
It must be noted that the company's wells are very expensive and they cost at least $25 million per well. The company has not declared commerciality yet.
The company's results from the Kurdamir contract are a rather mixed bag. The Kurdamir-1 exploration well was a heavily natural gas weighted well, achieving a maximum flow rate of 18.3 million cubic feet per day of gas and a maximum yield of 86 barrels of natural gas liquids per million cubic feet of gas from the Oligocene reservoir.
In addition, the rig found oil at the Oligocene reservoir of the Kurdamir-2 well in July 2012. This boosted the share price almost 100% in late 2012. However, the recent results from Kurdamir-2 well on the Shiranish Formation exhibited non-commercial flow rates in this location. Additionally, the results from the Eocene reservoir of the Kurdamir-2 well resulted in the flow of light, 45 degree API oil at sub-commercial flow rates.
- The company's Kurdamir-3 was spud in February 2013 and will take four months to drill. The well is located around 3 km and 5 km from the Kurdamir-1 and Kurdamir-2 discovery wells, respectively. This well is testing the potential for an estimated 150 to 250 MMboe of Gross Mean Prospective Resources, and the company expects the gross costs of drilling and testing operations to be $50 million. This newest well will appraise the extent of the oil leg in the Oligocene interval previously encountered in the Kurdamir 1 and 2 wells. Testing results from Kurdamir-3 are anticipated in Q3 2013.
Tag completed a major infrastructure project in April 2013, which made the company completely self-sufficient in producing, processing, and marketing all oil and gas it drills.
Based on the recent stock performance, many investors appear to be willing to sell Tag and move on to the next play. The stock dropped ~50% last week, and the pendulum of sentiment for Tag has swung back into negative territory lately due to the fact that the company's production was well below the initial corporate estimates. The production came in at 2,700 boepd, way below the expected 5,000 boepd management was guiding for after the completion of the infrastructure expansion. Can the company turn things around and improve the current ugly stock performance?
- Tag Oil has over 1.7 million net acres in the East Coast Basin which is an unconventional play with oil-rich and naturally fractured formations that have many similarities to North America's Bakken formation in the Williston Basin.
Tag Oil is currently drilling an exploration well in the East Coast Basin. It is a fact that the exploration wells are inherently risky. However these wells also carry a high-impact upside which cannot be taken off the table in the near term, and Tag Oil has enough money to test more than one high-impact targets in that Basin. A new discovery in the East Coast Basin has the ability to alter the face of the company. The first signs are encouraging, and the final results are expected in July 2013.
It must be noted that these five companies take significant exploration risk. They are drilling into uncharted land which has not been de-risked yet, targeting the potential giant oil fields of tomorrow. This is a difficult task, resulting in significant risks associated with these stocks. After all, an investor must be both cautious and patient with his investment in these companies which might come through several difficulties first before reaping some rewards from their exploration programs.