Time Running Out to Grab Juniors in Kenya Before They Make Huge Gains

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Time Running Out to Grab Juniors in Kenya Before They Make Huge Gains

Investors: Time may be running out to grab juniors in Kenya before they make their huge gains.

The region’s biggest players and fastest movers are gearing up for a flurry of activity over the next 6 months. A number of catalysts about to happen in East Africa could set off a sea change in valuations, as the full-scale development of the Anza Basin begins to take shape.

Regional catalysts in the coming four months:

• Major farm-out agreement–Taipan Resources
• Spudding of Bahasi-1—Africa Oil
• Optimization of Twiga South-1—Africa Oil/Tullow
• Further testing on Ngamia-1—Africa Oil/Tullow

1. Taipan farm-out—Q2-Q3 2013:

Last summer Africa Oil [AOI:CA] announced the signing of a farmout deal worth $78 million on Block 9 with US giant Marathon Oil [MRO:NYSE].

This year, the market is curious about the adjacent Block 2B, which is held 100% by Taipan Resources [TPN:CA], and is actively being shopped for a partner. Who that will be with, and what value that deal will come with is still up in the air.

When these farmout deals are done, the major producer coming into the play usually pays all previous exploration dollars, and carries the junior through any remaining seismic and 1-2 wells.

That would put Taipan trading at or under its cash value, which is almost always the best time to get in on a junior.

In the meantime, Taipan has been fulfilling all of its commitments through completing its 439 sq km seismic program, all while keeping its gaze on neighboring Block 9. The Africa Oil/Marathon duo is quite active, and will provide further data for Taipan and its speculators in the market to consider when tallying its new valuation.

The most recent NI 51-101 compliant resource estimate on Taipan’s Block 2B from Sproule International estimates an unrisked prospective resource of 387 million barrels. Coming from 17 leads, with prospects ranging in size from 2.5 million barrels to 128 million barrels, with potential for multiple stacked horizons.

Recently the company announced that it has wrapped up the first phase of the exploration period. In doing so, they have effectively competed what was to be a 3-year work program, in only 8 months. It is expected that Taipan will soon announce the initiation of an additional exploration period that will include the drilling of its first well.

Map of recent activity in the region.

2. Spudding of Bahasi-1 (formerly “Kinyonga”)—Q3 2013:

Scheduled to spud in Q3 2013, the upcoming Bahasi-1 well is expected to be a huge boost to the Africa Oil/Marathon partnership, as well as for their neighbors. Drilling both tertiary and cretaceous rock, the goal of Bahasi to target a structure believed to be 60 metres in thickness.

From a geological perspective, the play has what it takes to be big: it’s a large anticlinal structure, trapped by a 4-way closure, which keeps the hydrocarbons they are targeting in place.

But the true excitement regarding the play’s potential comes from the fact that over 6 billion barrels of oil have been discovered along trend in Sudan, under very similar geologic conditions.

This is one of, if not THE biggest target being drilled onshore in East Africa this year, and would provide a regional catalyst for all players, says Adam Zive, a director of Taipan Resources.

“I think the potential analogue that the market is probably not appreciating enough is particularly this Bahasi-1 well on Block 9 right beside us,” says Zive. According to Africa Oil’s presentation, this prospect has a best estimate of 320 million barrels and a high estimate of 656 million barrels.

3. Ngamia-1 Well: Testing—Q3 2013:

Bahasi-1’s multiple-horizon potential mimics that of Africa Oil’s other well, Ngamia-1 which was drilled with AOI’s other partner, Tullow. Located to the west of Block 9 in Block 10BB, Ngamia presents plenty of potential. After already proving the first potentially commercial flow from the Lower Lokhone formation, up next will be 5 more tests into the Auwerwer sandstone formation. The partnership believes that the Auwerwer has a higher quality reservoir than the Lower Lokhone, and the results from the tests are expected in less than three months.

4. Twiga South-1: Increase Production—Q3 2013:

Africa Oil is counting on Ngamia’s entry into the Auwerwer zones to provide closer results to those found in their Twiga South-1 well, also with partner Tullow. This well was much bigger; testing for a combined rate of 2,812 barrels per day of 37 API oil from three Auwerwer zones.

Twiga is actually considered to be an underperforming well. Unfit surface equipment that was initially set in place is believed to be choking off the well’s true potential, and the partnership has stated that, “with optimized equipment these flow rates would increase to a cumulative rate of around 5,200 bbls/d.”

That’s what the market wants to see—5,000 bopd + production from these frontier plays. Just getting the right equipment in place should make this happen. As Africa Oil and Tullow iron out the kinks, the entire play benefits.

As well, the partnership is re-entering the Block with another well in the first half of May, with its Etuko-1 well.

In this part of the world, especially with wells costing upwards of $15 million, it’s incredibly valuable to mitigate risk ahead of time. Observing your neighbors as they break new ground can make all the difference.

Heading north to south down the east coast of Kenya, Africa Oil is active in Block 9, then Taipan in the middle in Block 2B and junior Vanoil [VLE:CA] is also set to spud its first well on Block 3A to the immediate south of Block 2B.

Much like Africa Oil’s Paipai-1 well located on Block 10A, Vanoil’s well will be specifically targeting cretaceous rock. Located at a deeper depth, the cretaceous presents a higher-pressure zone that Vanoil says is in the oil window. These predictions come from the positive results that Paipai delivered, which encountered 55m thick hydrocarbon shows.

Both Taipan and Vanoil are set to benefit from planned infrastructure in the play. Vanoil already has plenty of roads crisscrossing its block, but for both companies the biggest benefit is that of proposed pipelines that come through their vicinity.

“There are a number of pipeline routes that are under discussion right now, but the ones that are the most likely are about 175 kilometers to the south of our block,” says Zive, as the Taipan team postures itself for future production. “But either way, even without a pipeline being built, we can truck oil out when the time comes after a potential discovery.”

Before either junior realizes its commercial potential, many eyes will be on the neighboring projects of Africa Oil and its partners. Investors from the United States will especially be intrigued by the projects involving Marathon, as it would be the first US-based Kenyan oil success story.

The landscape of Kenya’s oil story is set to make a big change, with several near term catalysts. The opportunity window for juniors in the region is closing fast, and the potential is about to be realized. It’s going to be an exciting six months.