AFRICA OIL. – AOI (BUY, TARGET C$14.00, SPECULATIVE RISK)

Total return since inclusion (15-July-13): 3.6%

David Dudlyke .. dundeesecurities.com

Recommendation and Valuation

We consider Africa Oil a Top Pick in our coverage space with a BUY recommendation and a C$14.50 share target price, the latter in-line with our 'base case' risked NAV of C$14.51/share – which equates to 530 mmbbls of net WI recoverable oil, or a 5.6% chance of success across the company's entire unrisked resource base (excluding Somalia).

Our 'floor' valuation - based solely on the South Lokichar basin (Blocks 10BB/13T) stands at C$8.42/share, with recent success at Etuko-1 'pushing' the discovered resources within the basin well beyond the commercial threshold.

Corporate Profile

Africa Oil holds material interests in significant tracts of exploration acreage within the underexplored countries of Kenya, Ethiopia and Somalia in East Africa. The company's Somalia (Puntland) acreage is held through its 45% equity interest in TST-listed Horn Petroleum (HRN-T).

South Lokichar Basin - Well In Excess Of Commercial 'Threshold', Ongoing Exploration

Successful exploration results from the now completed Etuko-1 exploration well have ‘pushed’ the South Lokichar Basin well over the commercial development ‘threshold’ – a noteworthy result, in our view, achieved in just 16 months with just three successful exploration wells.

Following success at Ngamia, Twiga South, and Etuko, aggregate discovered resource volumes are now well in excess of 300 mmbbls, considered to be the commercial ‘threshold’ for the basin and the JV partners plan to initiate discussions with the Kenyan government and other relevant stakeholders to consider development options.

Note that, unlike Uganda, Kenya is not land-locked and, with domestic oil demand of 82,000 bopd - ca. 5X that of Uganda, an early production option, subject to approval, could be achieved via track & rail, ahead of completion of a full pipeline development.

Exploration within the basin continues - the Ekales-1 exploration well spud recently, its objective being a 3-way closure (64 mmbbls, gross unrisked P50), akin to Ngamia & Twiga South. A second rig will soon mobilise to drill the Agete (Twiga North) prospect (112 mmbbls, gross unrisked P50).

Sabisa-1 Confirms Key Components For Future Exploration Success

Elsewhere, Africa Oil's fully-funded 2013 exploration drilling program continues to offer significant near-term upside potential: the recently drilled Sabisa-1 frontier exploration well on Ethiopia’s South Omo block demonstrated that three of the four key components for future exploration success are in place – an oil-prone source rock, reservoir-quality sands and a thick shale section. The Tultule-1 well is expected to spud in late 3Q13 - the objective being a horst-block structural trap – success would thus complete the ‘jigsaw’ required for a successful discovery and thus prove up a new frontier basin.