No question the title may sound a little wonky! However this minnow sized Kenyan Oil and Gas exploration company happens to be the fourth largest oil and gas concession land owner in geo-politically friendly and oil prolific Kenya. The company currently trades at a valuation which is 38% less than cash value, which will be explained later, but first let's look at the exploration region Taipan Resources (GM:TAIPF) is located in and some of the major oil discoveries that have taken place in the last year or so in the blocks near to Taipan's.
Kenya and East Africa have become oil and gas prolific
Oil and gas investment in Kenya has been driven by the opportunity to obtain exposure to a world class Tertiary oil exploration play. The recent increase in hydrocarbon exploration success in the East Africa region, notably in the Tertiary Albert Basin of Uganda and in the Lokichar Basin of Kenya has focused much investor attention on the region.
Regionally, East Africa is a proven and rapidly growing hydrocarbon province. In South Sudan, 6 billion barrels of resources have been proven in the Cretaceous Muglat and Merlut Basins, which happen to be on-trend to Taipan's Kenyan blocks. Other spectacular recent oil and gas discoveries, such as Anadarko's Windjammer-1 (a whopping 365 m high gas column) in the east of Mozambique, and the Sino Union Energy oil discovery (estimated 2 billion barrels) in onshore Madagascar have emphasised this trend.
The first major oil discovery in Kenya was drilled on the Africa Oil (OTCPK:AOIFF) / Tullow Oil (OTCPK:TUWLF) block 10BB in the Lokichar Basin. In March 2012, Tullow Oil announced that the Ngamia-1 well in the tertiary aged Lokichar Basin had flowed at 3200 bopd with the potential to flow at 5400 bopd. This was quickly followed by the South Twiga discovery which flowed at the rate of 2812 bopd from the same formations. Africa Oil prior to their major discoveries was a junior exploration minnow similar to Taipan... a land concession holder that farmed out percentages of their land blocks for a well carry by a major independent E&P. The company now has a multi-billion market cap and its share price has grown some 3200% in the last 9 years with most of the growth coming in the last two years with their multi-discoveries.
The Etuko, Ekales and Agete discoveries are still to be tested and encountered between 40 and 100 metres of net pay in the Auwerwer and Upper Lokhone Formations. The remaining four undrilled prospects have Best Estimate prospective resources of 1,242 MMBO which is huge.
Field | Contingent Resource (MMBO) | Prospective Resource (MMBO) |
Ngamia | 180 | 281 |
Twiga | 87 | 132 |
Etuko | 100 | - |
Ekales | - | 234 |
Agete | - | 276 |
Total | 367 | 923 |
NOTE: MMBO stands for Millions of barrels of oil
In March 2013, it was announced that oil had been encountered in the Sabisa well in the tertiary Turkana Basin of Ethiopia. This will extend the tertiary oil play hundreds of kilometres to the north. Based on geochemical studies, as well as geological and geophysical data, it is believed that the next basin in which the Tertiary oil play will be proven will be the "Anza Basin." Taipan holds a significant interest and prime position in the Anza Basin through their ownership of Block 2B.
In summary, the East Africa exploration region offers promising resource potential, extensive under-explored acreage and easy access to markets which combine to make it attractive to explorers.
A bit of history and detail on the company
As indicated in the opening paragraph, Taipan Resources is the fourth largest acreage holder in onshore Kenya with 6.8 million acres (27,712 square kilometres) with multiple exploration plays in multiple basins, and estimated total net prospective resource of 328 MMBOE. The highest resolution (560 fold) 2D seismic to be shot in Kenya to date was completed for Taipan by Bureau of Geophysical Prospecting of China in April this year across Block 2B, and this new seismic formed the basis for the successful Farm Out process - Management expect a new CPR report to be released by Sproule in the coming weeks based on the new seismic and leads identified which could potentially significantly increase the prospective resources on Block 2B . Management has a track record of repeated exploration success, having discovered over 3.75 billion barrels of oil equivalent in frontier regions.
(click to enlarge)
The company recently signed an agreement with Premier Oil plc (LSE: GM:PMOIF) to farm out 55% of its interest in Block 2B. After the farmout, Taipan will retain a 45% working interest in Block 2B and also retain operatorship of the exploration program.
The principal terms of the farmout agreement are as follows:
- Premier will pay Taipan's working interest share of the cost of drilling and testing the Pearl-1 prospect and future costs on Block 2B up to a cap of US$ 13.275 million in addition to its own working interest share of costs. The total work programme for the First Additional Exploration Period is estimated at $29.5 million.
- Premier will provide guarantees for the minimum work and expenditure obligations for the First Additional Exploration Period on Block 2B of US$13.0 million.
- Premier will pay Taipan US$1 million as a reimbursement for back costs
This puts the total consideration at $30.5 million and the deal is expected to close in December. At closing, it is estimated that the company will have over $5 million of cash on hand (and zero debt) in addition to its carry of the exploration well costs in Block 2B funded by partner Premier.
In addition to this coup with Premier, the Company also maintains a 20% interest in its huge Block 1 which is currently operated by Afren plc (AFR.L). Having carried Taipan for 1,200 kms of seismic and shot 1,900 in total, Afren is also planning an exploration well on the Khorof prospect on Block 1 in Q3 of 2014. Premier and Afren are two great frontier E&P companies to be partnered with, as they both have had great success in finding oil and gas in frontier regions.
Taipan Resources is listed on the Toronto Venture Exchange under the ticker symbol (TPN.V) in addition to its US OTC listing (TAIRF). The Canadian listing is much more liquid than the US listing. Taipan is headquartered in Nairobi, Kenya and has offices in London, UK and Vancouver, Canada.
The company is headed by Max Birley an internationally seasoned oil and gas exploration executive:
- +30 years international exploration & production experience
- Senior roles with Marathon, Premier, Oil Search
- Discovered over 2.0 BBOE in 8 fields across 3 continents
- Involved with producing projects totalling 500,000 boepd
- In-country operating experience - Equatorial Guinea, India, Pakistan, Yemen, Kenya
- Managed & developed multi-billion dollar African assets
Taipan is fortunate to have a seasoned CEO with such a vast experience base and a proven Oil finder. The day before Taipan announced the Farm Out with Premier, they announced the appointment of Paul Logan. Paul was previously Chief Geologist at Heritage Oil Plc where he was part of the team that discovered approximately 1.75 billion barrels of oil in Uganda on Blocks 1 and Block 3A in the Albert Basin of Uganda in a similar tertiary rift play as Taipan and Premier are targeting on Block 2B.
Two exploration wells being drilled in the next eight months
The company has been able to leverage its very large land holdings to attract very high quality exploration partners. As a result of the company's farming out an interest in its two blocks to highly reputable and successful international frontier exploration companies like Premier (block 2B) and Afren (block 1), the company has a fully funded exploration for 2014 on block 2B and 80% funded in block 1.
The following image is of the East African exploration region and indicates that there has been drilling success all around Taipan's blocks (in red outline). The Lokichar basin (in the center of the image) is where Africa Oil and partner Tullow Oil have made a number of significant discoveries. As previously mentioned, the Anza basin is highly prospective and as indicated in the image, all ten wells that have been drilled in the basin to date have had oil and gas shows. Taipan's blocks are surrounded by oil find success.
(click to enlarge)
This next image more specifically shows the drilling activity in Kenya. There have been two tested discoveries in the Lokichar basin in the last year-and-a-half and three wells drilled with big net oil pays that will very likely flow on test. There are 6 exploration wells planned in the region for 2014 with two of those on Taipan's block 1 and 2B (outlined in red).
click to enlarge)
The investment thesis is two fold
1) Potential oil discovery
It is very clear to the experienced resource investor that Taipan resources is a high risk/high reward investment. As a "minnow sized" exploration junior, the company does not yet generate revenue. However, the company is fully funded for its block 2B 2014 exploration program including the Pearl -1 well which is fully funded by Premier, and has only 20% interest to pay for the Khorof well in block 1 with Afren as operator. The wells are being drilled in basins that show great promise of discovery based on new quality seismic as well as major oil discoveries in the general proximity to these upcoming wells. It is also very obvious that if (as Africa Oil did), one of their wells to be drilled next year hits commercial oil, the share price will likely become a ten bagger almost overnight given that the company's market cap is currently just $19.5 million. The following graph highlights what happened to Africa Oil's share price since the former minnow and Tullow encountered a major oil find in the adjacent Lokichar Basin in early 2012 with their Ngamia well. This discovery was followed up with the next four wells being drilled in the basin all being discoveries. They are five for five in the Lokichar basin (which is adjacent to Taipan's Block 2B).
This graph of Africa Oil's share price since the Ngamia discovery is clear evidence that this first discovery transformed this former "minnow" small cap into a "Jaws" like mid cap.
2) The company is currently significantly undervalued
In addition to the potential for huge increase in share price if one of their wells encounters oil next year, the share price is currently very undervalued when considering the cash value of the company based on the cash raised over the last couple of years including the recent farmout to Premier. The shares retreated significantly since they announced the farmout from the high 30s to the low 20s. The reason for this is that it is believed that a significant legacy shareholder, dating back to the days when Taipan was a shell company with a depressed share price, has been using the recent great news, share price and liquidity strength leading up to and after the farmout announcement to liquidate his position and take profits. This has knocked the share price down to create a compelling entry point for early investors that wish to take advantage of the dislocation in share price. The following chart shows the cash value of the company:
Event Date | Cash Raised | Comments |
March 2011-December 2012 | $2,400,000 | Seismic carry 1200 kms from Afren - Taipan 20% |
17 July 2012 | $11,500,000 | Capital raising |
13 February 2013 | $3,107,450 | Capital raising |
15 October 2013 | $1,000,000 | back costs Premier Deal |
15 October 2013 | $13,275,000 | Carry Net to Taipan Premier Deal - Taipan 45% |
Total Cash Value | $31,282,450 | |
Shares in issue | 85,299,363 | |
CASH VALUE PER SHARE | 37 | cents per share |
The management and board are aware of the situation this shareholder has created in not allowing the share price to rise to its expected pre-drill level of around $1-$1.50 range. Management are taking proactive steps to deal with this which may result in a strategic buy-out of the shareholders shares and warrants, thus eliminating the below-cash valuation drag on the stock. It is believed that once this action has been taken, the share price will not face selling pressure as 78% of the capital raising was completed at 50 cents per share and the other 22% was completed at 35 cents per share .
The following is a chart that shows the share price decline since the announcement of the farmout agreement with Premier in early October.
Another couple of points regarding the current dislocation in share price. Mackie Research, one of the analysis firms covering Taipan Resources, in their recent research report calculated a share price valuation of 90 cents based on their estimation of the value of Taipans prospective resource of 328 MMBO (a 400% upside from Taipan's current share price). The second point is that a recent Goldman Sachs E&P 50 report suggests that the market only begins to price in the real risked NPV of an early stage oil company with its first big drilling catalyst, 6 months before drilling.
"Exploration: Time horizons for valuing catalysts have shrunk since 2010 from ten to two months. We believe that one of the major changes in the sector since mid 2011 has been a significant shortening of the time horizons over which markets are willing to pay for exploration catalysts. The timeframe appears to have shrunk significantly, and we now believe the market only starts pricing in potential catalysts around 50 trading days, or two months, before a significant well result. As a result, we reduce the time period in which we value exploration catalysts to six months - still a longer time horizon than the market appears to be operating on, but leaving less time for these catalysts to be priced in."
Source: Goldman Sachs E&P 50 report
If the current share price was being fairly valued, then an interested investor could take the chance and wait until closer to Q3 of next year (when the well drilling commences). However with the current 38% discount to cash value, the fact that the legacy shareholder is in the process of being dealt with and the adjacent block upcoming well results then the share price could easily rise to the 50 cent level where other similar risked pre drill exploration juniors trade at.
Two Upside scenarios
1) Pre drill Potential - As the drilling date approaches and the current dislocation in share price becomes more evident to investors, the share price will trade much higher than the current price and more in line with a risked junior with big partners in a prolific region such as Kenya. Mackie Research has this value set at 90 cents, in their most recent research report, which is a 400% increase from today's share price.
This kind of share price appreciation is entirely possible as the timeline to the commencement of the drilling program shortens and the legacy shareholder issue is dealt with. Also remember that the cash value work up is ~37 cents and does not include anything for the prospective resource of 328 MMBO and the value of the Taipan's remaining percentage ownership of their two concessions blocks. In other words, the share price should have a 20% measure of drilling success speculation built into the share price above the cash value but instead is trading at a 38% discount to the cash value!
Also of consideration is the fact that Management is just completing a three continent road trip which is meant to introduce Taipan to a select number of resource investment funds. It is very likely that a number of these institutional investors will begin to accumulate shares as soon as Taipan announce the closing of their Farm Out deal with Premier this December.
2) Post Drill Potential - If the company is fortunate to strike oil at one of their 2014 exploration wells, then of course this would have a similar effect on the company as it had on Africa Oil which experienced a 3200% increase in its share price since 2009 and a tenfold increase taking place when Ngamia well struck oil in spring of 2012 over its price a year earlier.
The downside scenario has both a pre and post drill view as well. From a pre drill perspective, I do not see much downside in the share price from here as the price is significantly undervalued compared to its pre drill valuation and cash value which is perceived to be the result of a legacy shareholder taking the opportunity to take profits. So the current under valuation scenario creates a very good risk/reward situation from a pre drill trading perspective. An investor could choose to buy and hold until the pre drill price appreciates as the exploration well drilling commencement approaches and then sell into strength prior to results being published.
Investors with a higher risk taking profile may opt to hold out for the results and either see a stupendous rise in share price or see the share price get at least cut in half as result of both well results being "dry" or perhaps with oil shows but not deemed commercially feasible.
Near term catalysts that could move the share price
- Closing of Farm Out Deal with Premier Oil - Institutional shareholders will begin to invest when the farmout deal closes before Christmas.
- Removal of the current share price appreciation impediment - Management are actively working on a plan to buy-out the legacy shareholder who also holds warrants.
- New Updated Block 2B Competent Persons Report (Sproule Consultants) due in December - Previous 2012 report was based on old seismic which indicated mean unrisked prospective resources of 410 million barrels (identified in 17 leads). Hopefully the new 560-fold 2D seismic recently completed will increase this resource estimate substantially.
- Bahasi exploration well results - Not an analogue well but being drilled by Africa Oil in the Anza Basin near Block 2B and the proposed location for Taipan's exploration well next year. Results expected before Christmas
- El Kuran exploration well results - Just about 100 kilometres North of Taipan and Afren's Block 1. Results expected before Christmas
- Block 1 and or Block 2B further Farm down -This could happen sooner rather than later. The company may choose to further farm down their concessions to raise additional working capital. With Afren already on Block 1 and Premier on Block 2B, this should be a straight forward process. They've got the big company stamp of approval on seismic on both blocks which raises the block value significantly.
- Further exploration acreage - The company likely wants to stay in Africa. One option would be to go South into the Rwandan rift basin. Good portfolio move to further diversify exploration geography.
- Tutule exploration well results - Being drilled in South Ethiopia and Close to Sabisa 1 where oil shows prompted them to spud Tutule a few kilometres East. Results out soon and again, any discovery outside the Lokichar basin should light a fire under the junior Explorers in the general proximity.
- Sala 1 exploration well results - This Africa Oil well spuds around year end (after Bahasi completed) and this is a Tertiary play along bounding fault and in very close proximity to Taipan's Block 2B.
Risks to the investment thesis
There are obvious and substantial risks to investing in an oil and gas exploration junior like Taipan that has not reached the revenue generation stage:
Dry wells - the well results of their two well exploration in 2014 indicate that the wells were either dry or perhaps have an oil show but no indication of the wells being potentially commercially viable
Liquidity - It is estimated that the company will have over $5 million cash on hand after the farmout agreement with Premier closes (expected in later December). However, without a discovery, the possibility still exists that the company could run out of cash and either have to raise more capital through an equity issue or cease as a going concern.
Dilution - The company may have to conduct equity placements to raise additional working capital
Geopolitical - Though Kenya has proven to be a very geo-politically friendly jurisdiction for oil and gas exploration, this could change to a much more harsher environment.
Key Personnel - The departure of its Nairobi based CEO with his high degree of oil finding experience would likely weigh on the share price
Farmout Closure - The closing of the $30.5 million farmout with Premier is expected to close before year end. Either a lengthy postponement of cancellation of this closing would heavily weigh on the share price.
Conclusion
Taipan Resources is a minnow sized oil and gas exploration junior operating in highly prolific Rift Basins of Eastern Africa. The company has a fully funded 2014 well exploration program on block 2B and has only 20% of the cost on block 1. There has been multiple oil finds in Kenya during the last year. So this company is an option on an oil discovery in one of these two upcoming wells. A discovery in either one would be a bonanza to say the least but a failure in both could lead to the cessation of the company as a going concern and loss of investment capital if it was not able to raise addition capital.
Notwithstanding, with the company having a market cap of just $19.5 million at the time writing, Taipan is trading at 38% less than the cash it has raised to date.
Obviously this type of higher risk investment is not for every investor, no more than an investment in Africa Oil was prior to its transformation from a oil and gas exploration "minnow" into a "Jaws like" 30 bagger (since 2009). However, there are those that have the risk profile and risk capital allocated in their investment portfolios that may find the article the beginning of their due diligence and eventually invest a portion of their high risk capital in Taipan Resources as a high return option of exploration success in one of the most prolific oil exploration hot spots on the Globe.
Disclosure: I am long GM:TAIPF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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