The recent announcement of the $1.35 billion Glencore Xstrata (GLNCY-LON) takeover of Chad oil producer Caracal Energy (CRCL-LON) and the $1.55 billion Al Mirqab Capital takeover of Heritage Oil (HOIL-LON) announced last week are the beginning of a big year for African oils consolidation.
GMP Securities analyst Tao Ly commented recently: “following Glencore’s bid for Caracal, we think the significance of this latest bid for Heritage again confirms that valuations in the sector are low enough to attract opportune M&A…”
In addition to low valuations, the key driver of further consolidation in the African oil space will be access to rift basin assets. These basins have accounted for almost all of the billion-barrel-plus oil discoveries onshore Africa in recent years with the Kenya rift basins currently ranked as the hottest onshore exploration jurisdiction in the world.
With significant industry interest, low valuations relative to resource potential, and large rift basin acreage positions, Kenyan rift oil companies Africa Oil Corp. (AOI-TSX; AOIFF-US) and Taipan Resources (TPN-TSX-V; TAIPF-US) are primed for potential takeovers.
The first major rift basin oil acquisition was completed by Tullow Oil (TLW-LON) in 2010 with the $1.45 billion purchase of the Heritage Oil Lake Albert Rift Basin assets in Uganda. Tullow then sold two-thirds of the Lake Albert assets to Chinese National Oil Company CNOOC (CEO-NYSE) and Supermajor Total SA (TOT-NYSE) in 2011 for $2.9 billion. Tullow estimates that there is 1.7 billion barrels of recoverable oil in the Lake Albert Rift Basin and is going to spend billions of dollars developing this asset with its partners.
Tullow has also been a leader in the rift basin in Kenya where it farmed-into the Kenyan exploration assets of Africa Oil Corp. prior to the play-opening Ngamia-1 discovery that was made in 2012.
Early entrants into the rift basins In Kenya have had huge exploration success and stock market gains. The market cap of Africa Oil Corp. increased from $250 million prior to drilling to $2.5 billion after the Ngamia-1 well. There have been a number of follow-on discoveries in Kenya and Africa Oil Corp. now has 7 rigs operating in the region with partners Tullow, Marathon Oil (MRO-NYSE), and Afren (AFR-LON) and is drilling six new basin opening wells this year.
Over 368 million barrels of oil have been discovered so far in Kenya with expectations for the total amount of resources to be well above a billion barrels of oil. With large scalable concentrated rift basin assets, Africa Oil is firmly in the sweet spot to be acquired by larger oil companies like CNOOC and Total. The question is not if, but when and for how much.
It is likely that Africa Oil Corp. has already had a number of approaches from Big Oil and is waiting for the right time to sell. This is likely to be later this year after the company has completed further appraisal wells and well tests to better determine the value of its discovered resources in the Lokichar basin. The company is also drilling a number of potential basin-opening wells this year that it may want to complete prior to a take-out.
One of the other reasons Africa Oil is so attractive is that the company has a market cap of only $2.5 billion, making it an easy tuck-in acquisition for Big Oil companies. Most of the other companies operating in Kenya like Marathon Oil and Tullow have market caps of well over $10 billion, while mid-cap companies like Afren have an asset base that is too diversified.
Taipan Resources is the fourth largest acreage holder in Kenya and has a two well fully funded drilling program in 2014 targeting over $1 billion of resources net to the company. Sproule International has also independently assessed that on Taipan’s operated Block 2B alone, there is mean gross unrisked prospective prospective resources of 1.6 billion barrels based on 19 exploration leads. Taipan has a market cap of only $40 million, making the company the other likely takeover candidate in Kenya in 2014.
Big Oil won’t be interested in Taipan, they are willing to pay billions of dollars after a discovery is made. But mid-sized exploration companies can’t afford to wait and will take the opportunity to make a cheap acquisition with two high impact oil wells fully carried and funded. With 19 exploration leads Block 2B would also give a larger, cash rich oil company years of drilling inventory in the hottest onshore rift basin exploration region in the world.
While the market hasn’t yet fully appreciated the potential of Taipan’s assets, industry certainly has. Premier Oil (PMO-LON) is spending $30.5 million on one of Taipan’s blocks this year to drill the Badada prospect after agreeing to a farm-in deal in 2013, and Afren is spending a similar amount on Taipan’s other block to drill the Khorof prospect this year.
Paul Logan, who was the Chief Geologist at Heritage Oil that made the original Lake Albert Rift Basin discoveries, also joined Taipan late last year. Logan discovered the 1.7 billion barrels in the Lake Albert Rift Basin, drilling six discovery wells in a row with 100% exploration success.
At the recent Premier Oil investor day, Andrew Lodge Exploration Director of Premier also commented on Block 2B:
“the trick to this is to attempt to identify the Tertiary Rift Basins within the Anza Basin which are analogous to Uganda and the Lokichar discoveries. We think we’ve found that through farming into Taipan’s acreage. We took a 55% interest. We have just done some prospective seismic survey, verified the main prospect and will drill that prospect, Badada this year. The ultimate resource potential in the block is over 1 billion barrels but the key to this, the key unlocker will be the Badada well….”
Taipan is now fully funded for the Badada and Khorof wells this year with an unrisked NPV net to Taipan of $1.34 billion. This equates to over $8 per share on a fully diluted basis. Taipan closed at $0.40 per share yesterday.
The risked value of Taipan’s two wells this year is $1.50 per share. This means that an acquirer could justify paying up to $1.50 per share pre-drilling.
At $0.40 per share Taipan is an attractive risk/reward proposition for mid-sized exploration company. If the market doesn’t close the Taipan valuation gap, industry will.