Goldman Re rating of Chariot to BUY Guys
This on the wire today:
Source of opportunity
We add Chariot Oil & Gas (Buy) to the Conviction List, with a 12-month target price of 193p (from 197p),
implying 162% upside. The stock has underperformed our E&P universe by c.40% following the announcement
of the Tapir South well result. Given this, we believe the risk/reward profile is now skewed sufficiently to the
upside, with the recent share price weakness providing an attractive entry point to short-term value and
catalysts. We currently value the next prospect we expect to be drilled – Nimrod, in which Chariot has a 25%
working interest – at 183p/share. Chariot is partnered in this well with BP (45%) and Petrobras (30%), both of
which we believe lend credibility to the play. Chariot is carried for the cost of this exploration well, which is
scheduled to be drilled in 3Q2012. Following updates with management, we adjust our assumptions on the
chance of success and valuation of Nimrod. We decrease our value per barrel assumption, as we incorporate the
likely additional costs necessitated by the large areal extent of the prospect. However, we increase our chances
of success to 15% (with a 50/50 chance of oil versus gas) as we have become more comfortable with migration
and reservoir risk. Both changes largely offset one another. We note that risks remain in frontier exploration of
this nature, so we assume a conservative 7.5% chance of success of the prospect being oil prone and a 7.5%
chance of it being gas prone (15% CoS overall). We believe Chariot offers an inexpensive option on significant
re-rating potential with a highly attractive balance of risk/reward, and in the event of success in the oil case
would value the Nimrod prospect at c. £17/share on a fully de-risked basis. Farmout discussions continue on
Chariot’s acreage positions, but we note that the company has sufficient funds for drilling post Nimrod. Overall, on
a sector-relative basis, we believe Chariot offers a compelling investment opportunity and thus add the stock to the
Conviction List.
Catalyst
We believe exploration success at the Nimrod prospect will be the biggest driver of a re-rating of the stock.
However, in the interim, we believe unwinding of the applied market discount in the approach to drilling could
also be a positive. Progress on another farmout on the company’s acreage would also be a positive, in our view.
Valuation
Our 12-month SOTP-based target price of 193p (down from 197p) is calculated using a long-run oil price of
US$100/bl. We value pre-sanctioned discoveries and exploration assets using a risked NPV/bl approach.
Consistent across our E&P universe, we apply a discount to those assets for which the company is not fully
funded to develop through from exploration to production and exclude value for higher-risk discoveries and
exploration wells not being drilled in the next six months.
Key risks
The main downside risk to our view and price target is failure at the Nimrod exploration prospect. We assume a
50% possibility that the prospect could be oil prone; a gasier outcome would be less attractive for the stock in
our opinion, although still a positive.