A Focus on East Africa’s Junior Oil and Gas Companies

The importance of Africa as an emerging new source of oil and gas can hardly be underestimated; the region had a total of 132.4 billion barrels of oil and 513.2 Tcf proved gas reserves in 2012. Historically, oil and gas reserves have been associated with North and West Africa, where countries such as Algeria, Angola, Egypt, Libya and Nigeria accounted for 84% and 91% of Africa’s oil and gas production in 2012, respectively. In recent years, however, the East African region has become hot property for energy investors, following huge gas discoveries in Tanzania and Mozambique and oil discoveries in Uganda and Kenya. With the increase in reserves and frequency of large discoveries, the region has attracted not only majors and national oil companies, but also junior and independent oil and gas players. One success story here is Cove Energy, a small London-listed oil explorer that was part of large gas discoveries made in the Rovuma Area 1 field during 2010-2011 (8.5% stake in the Anadarko led consortium exploring offshore Mozambique and Tanzania). Following the discoveries, Cove Energy was acquired in February 2012 for £1.22bn by Thailand’s PTT Exploration and Production, after a bidding war with Shell.

This acquisition by PTTEP has attracted great interest into other companies of Cove’s size in the region. The Evaluate Energy database provides a detailed insight into how these companies have been performing, and how much they are spending. The graph below shows the capital expenditure by region for 34 small and mid-cap oil and gas companies in Africa over the last 3 years.

Source: Evaluate Energy

Capital expenditures by small and mid-cap Oil and Gas companies in Africa totalled US$39,512 billion during 2012; representing an increase of 20% from 2011 when the total reached US$32,897 billion. The East African region remains the region with the most investment taking place, between US$9.4 to US$12.8 billion in 2012, and has experienced rises by 15% and 24% for 2011 and 2012 respectively. Other regions such as North Africa and West Africa have experienced similar increases in 2012, spending having gone up by 23% and 20% respectively. Capital expenditure in Southern Africa by small and mid-cap companies also displays an upward trend, albeit on a smaller scale, mainly attributable to the recent shale developments in the region.

However, on the whole, huge challenges persist in the East Africa region that must be overcome before full development work can go ahead; the building of infrastructure such as pipelines, LNG plants, refineries, and storage tanks, training of a skilled labour force, and setting a functioning regulatory framework (taxation, legislation, and political stability). The region is working towards the elimination of these hurdles; for example, assuming everything goes to plan, we should see the first LNG exports from East Africa in 2018.

Evaluate Energy’s Companies to Watch in East Africa

Africa Oil Corp

Africa Oil (TSXV:AOI) is a TSXV listed oil and gas company with exploration and development activities in Kenya, Ethiopia, and Puntland (Somalia). During the interim 2013, the company reported a pre-tax loss of US$9.535m, increases in interest income (attributable to a non-brokered private placement in December 2012) and a slight fall by 3.4% of its Enterprise Value. Despite these less than spectacular financial results, there is cause for optimism. The company has a substantial acreage position in this high-potential region (80,000 square kilometres covering five key basins) and it has partnered with the very successful Tullow Oil in Kenya and Ethiopia – their joint drilling plan involves 10 exploration wells and 4 test wells. Also, greater potential was recently identified on the company’s Kenyan and Ethiopian and South Lokichar Basin acreage based on significant increases of the contingent and risked prospective resources, estimated by an independent research.

Ophir Energy PLC

Ophir Energy (LSE:OPHR) is a FTSE 250 listed exploration company with an extensive portfolio of assets including 20 licences in 10 countries across East and West Africa. Ophir Energy holds the largest net acreage in offshore East Africa and has recently announced the successful completion of the Pweza-3 appraisal well and flow test in Block 4 in partnership with BG Group in Tanzania. Whilst its focus on blocks with slightly smaller prospective resources, delays in drilling programmes and the inability to farm out some of its acreage have raised a few doubts in recent months, the company does seem to have potential. During the first half of 2013, the company reported a pre-tax loss of US$19.374m, a reduction of G&A costs by 28% from the previous year and a fall in the Enterprise Value by 11%.

Wentworth Resources Ltd.

Wentworth Resources (AIM:WRL) is an AIM and Oslo listed E&P Company with exploration activities in Uganda (oil), Mozambique and Tanzania (gas). It has a 31% stake in the coastal Mnazi Bay licence and 11.59% stake in Mozambique. The company also reported a pre-tax loss during the first half of 2013, but recorded a decline in G&A costs by 11% and an increase in enterprise value of 21%. The company used to operate in the power sector in Tanzania, but it has sold this business unit and it is solely focused now on its E&P activities. The company is particularly interesting because it is active in Mozambique’s Rovuma basin the same area as Cove Energy. Alongside the investments coming into East Africa via the proposed LNG projects, another important project in the region that will boost Wentworth is the construction of the Dar es Salaam pipeline – being built by PetroChina – that is expected to be completed in early 2015.

Source: Evaluate Energy

The Evaluate Energy database provides clients with full historical financial and operating data and news for the 34 small to mid-cap African-focused companies used in this report, which included Afren, Beach Energy, Chariot Oil & Gas, Circle Oil and Pancontinental Oil & Gas, amongst others. In total, the database covers over 300 companies worldwide, delivering efficient data solutions for oil and gas company analysis and benchmarking, with 20+ years of financial, operating data and performance ratios, along with global assets, refinery and M&A databases.

Evaluate Energy is a leading
data provider Oil & Gas professionals and the financial services
industry. The Oil Blog is written
by members of their team of professional analysts and provides comment
on market movement and industry trends within the oil industry.