Questor share tip: hold onto an exploration company with hot prospects

Ophir Energy
£0 -0p
Questor says HOLD

After floating in July this year, the Africa-focused oil explorer, which is backed by Indian steel billionaire Lakshmi Mittal, entered the mid-cap index in the reshuffle in September. Mittal Investments owns 15.68pc of the group.

Investors are excited because the company has a drilling programme of potentially high-value wells over the next year. This programme is fully funded after the initial public offering.

The company has exploration assets in Tanzania, Senegal, Equatorial Guinea, Gabon, Madagascar and Somaliland. Management have a strategy of unlocking value in these assets by reducing risk through exploration and then farming them out to major companies. Farm outs in Tanzania and Equatorial Guinea could happen as soon as the second half of next year.

Ophir plans to drill about 10 wells over the next year – the majority being in Tanzania.

The most important near-term thing to consider is the prospects for its liquefied natural gas (LNG) assets in Tanzania, where it is working in partnership with BG Group.

News from rival Anadarko yesterday showed just how prospective the area is. The US energy giant more than doubled the estimated size of its biggest natural gas discovery to 30,000bn to 50,000bn cubic feet. Ophir's Tanzania acreage borders this block to the north.

The company is also in the process of buying Dominion Petroleum, which has further acreage in Tanzania.

All of this is exciting enough, but there is a further additional positive story that has got investors excited – and it is risk-free for the company.

In Western Africa, Ophir farmed out its pre-salt blocks Mbeli and Ntsina to Petrobras, the industry's most experienced player in pre-salt formations. Pre-salt areas are where the major discoveries in the Santos Basin offshore Brazil have been made by Petrobras and BG Group. There is evidence to show that the geology from this basin is contiguous with that in West Africa – and planned drilling will show whether this is the case for hydrocarbon deposits.

Not only will Petrobras fund the seismic work and drilling – which is the risk-free aspect for Ophir – but the Brazilian state-owned company is the most experienced in the world at drilling in the pre-salt formations. Its interest is an endorsement of Ophir's geological interest in the area.

Questor has always shied away from pure exploration companies. The security for investors that cashflow brings cannot be understated, as drilling programme can burn through cash at an astonishing rate should wells prove to be dry. That's why Questor can only say hold – because it is this strategy that prevents losses.

However, there is no doubt that the geology of the areas in which Ophir operates is very exciting indeed – as the Anadarko announcement yesterday and Petrobras's involvement shows. This has got the City very excited.

Of the City analysts covering the shares and monitored by Bloomberg, all 11 have a buy rating with an average price target of 356p, some 46pc above the current share price.

This company is definitely one to keep on the radar – and newsflow should be very strong over the next 12 months.