Capital Markets

Kenya oil finds boost European listed firms’ shares

An oil rig at Ngamia 1 in Turkana where Tullow and Oil Africa has found more oil. FILE
An oil rig at Ngamia 1 in Turkana where Tullow and Oil Africa has found more oil. FILE 

Recent oil discoveries in northern Kenya have brightened the share price outlook for Tullow and Africa Oil, promising shareholders of the two exploration firms behind a string of successful finds in Turkana outsized returns.

A research report by Citibank said that Swedish Stock Exchange-listed Africa Oil is likely to earn its shareholders the highest returns among seven exploration firms operating in Africa.

Kenyans are, however, yet to get clear signs on when commercial production of the black gold will start, because the exploration firms are still at the stage of establishing total estimated deposits.

“We continue to see Africa Oil as one of the highest impact exploration stories in European exploration and production. Exploration activity continues in the Lokichar Basin (Turkana), but Africa Oil is targeting new frontier basins through 2014,” said the Citigroup report.

Oil sector related firms, such as the Nairobi Securities Exchange-listed TransCentury, have been beneficiaries of the discoveries having won contracts to transport drilling rigs and build infrastructure for the prospectors.

The US-based commercial and investment banking group notes in the report that Africa Oil is set to record the sharpest rise in share price and dividend payout to earn investors an expected total return (ETR) of 49 per cent for this year.

Tullow Oil, the British exploration firm which was first to describe Kenya’s oil discoveries as being commercially viable, is tipped to earn its shareholders an ETR of 11 per cent according to the projections by Citi.

Despite being at the centre of the Kenyan oil discoveries, Tullow Oil, which is listed on the London Stock Exchange, is projected to have a lower ETR because of lower-than-expected oil production guidance in West Africa.

“The positive news from Kenya is partially offset by weaker-than-expected production guidance (for 2014). Recent disappointing well results have led to de-rating in Tullow’s shares.”

Citi said in the report that the two recent oil discoveries in Turkana’s Lokichar basin, Emosing and Ewoi, had contributed to the forecast of higher prices for both firms.

Tullow and Africa Oil are involved in the exploration of oil in Kenya with each holding 50 per cent shareholding in Block 10BB where crude-rich Lokichar is located. The firms have discovered oil in several wells around the basin including at Ngamia-1 and Twiga-1.

Citi puts Africa Oil price target at $4.6 per share (Sh391 or 65 Swedish Kronor) by year-end up from $3.1 (43.50 kronor) while Tullow’s price could hit 11.30 British pounds (Sh1,605) up from 10.27 pounds as at January 27.

Following oil finds in the two new wells, the firms recently estimated the basin could hold more than one billion barrels. Looking at the 100 per cent success rate in the basin, Citi said in its report that it had confidence that the estimate given was credible.

“Africa Oil and Tullow have announced two further discoveries...This continues the 100 per cent exploration success rate in the core Lokichar Basin and gives us confidence that the basin could hold in excess of one billion barrels,” said Citi.

For Africa Oil, Citi said that it had earlier included only 11 Swedish Kronor (80 US cents) as a risked extra book value or net asset value per share for the two new prospects before the discovery, but the bank says it has more than doubled this to an extra 25 Swedish kronor ($1.80) after the new results.

This was premium over the company’s price of $6.86 per share (96 kronor) as at the report date of January 27.