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SacOil to add value through exploration and appraisal, says Shore Capital

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28 Nov 2011

SacOil to add value through exploration and appraisal, says Shore Capital

SacOil (LON:SAC) is expected to start moving its projects up the value chain with exploration and appraisal work in the Congo and Nigeria, according to Shore Capital analyst Craig Howie.

In a note to clients today the analyst points out thatSacOil has assembled a portfolio of assets in Nigeria and the Democratic Republic of Congo (DRC). He says a farm-out deal with Total is expected to kick-start activity on the high-impact Block III in the DRC.

“With its deal-making credentials established, the next step is to move projects up the value chain with active programmes of exploration and appraisal,” Howie said.

The analyst highlighted the fact that the DRC asset is adjacent to significant discoveries in Uganda. He also emphasised that SacOil is fully carried through to commercial development.  In the DRC the partners will target prospective resources of 513 million barrels.

“Total’s backing provides us with lots of encouragement,” Howie said.

He added: “We think that this is a great deal as it brings in a world-class operator, materially limits financial exposure for the foreseeable future and kick-starts activity levels in a highly prospective area.”

Meanwhile in Nigeria SacOil has farmed into two appraisal-stage projects, though its joint venture with Energy Equity Resources (EER).

The Nigerian assets provide low-risk drilling opportunities, Howie said. The analyst reckons there is potential for extended well testing in 2013.

Howie says that the substantial fall in the share price, some 75 per cent, since SacOil got its listing in London is partly down the volatile market conditions, which have affected much of the AIM market.

According to Howie SacOil has a risked net asset value of 12p per share. He believes that the posting of a performance bond (relating to the Nigerian assets) and the start of aeromagnetic survey operations in the DRC could provide important share price catalysts.

ShoreCap isn’t the only City firm looking at the SacOil investment case. In a note last week company research boutique Edison weighed up the group’s prospects.

It says there is potential for SacOil shares to re-rate upon further announcements on operating success in Nigeria or the democratic Republic of Congo.

The research house said in a note that the shares trade at a substantial discount to its core net asset value of 19 pence forSacOil. The stock currently stands at 4 pence.

“The discount is likely to persist while current market conditions are not favouring risky junior plays. However, imminent funding issues have been eased,” it said.

Earlier this month, SacOil reported a 657 percent year-on-year rise in headline earnings for the first half of this year. This came in at the top-end of its own forecasts.

It reported headline earnings of 38.7 million Rand for the six months to August 31 2011, compared with a loss of R6.95 million a year earlier.

In October, the company secured a US$25 million equity credit line funding facility with Yorkville Advisers. Through the Standby Equity Distribution Agreement (SEDA), Yorkville will make the new capital available to SacOil over a three year period. 

Chief executive Robin Vela: "The focus over the last six months has been on managing the company's exposure to the high impact exploration assets in Block III …whilst retaining significant potential upside for shareholders. Our attention has also been on procuring funding in order to de-risk and fast track the work program obligations of our asset portfolio and progressing towards early production and revenues from our oil concession blocks, OPL 233 and OPL 281, in Nigeria. 

“We successfully did this through the farm-out to Total and the SEDA. Combined, this puts us in a good position to fast track and develop our asset position and opportunities and we look forward to the next six months of the financial year with added confidence,” he said.

Source: Proactive Investors