International oil plays are where the 10-baggers are for energy investors. Because they are generally higher risk, they get financed at a lower price. That sets the stage for Life Changing Wins--if and when they hit their target.
There’s still a lot of low hanging fruit—read: easy, big discoveries—out there in the world. The latest area to get investor attention is East Africa; specifically Kenya. Africa Oil (AOI-TSXv) jumped from $2-$11 last year after a big discovery in March 2012—and they have four high profile wells this year.
The international stock to watch in 2013 in East Africa is Taipan Resources (TPN-TSXv; $0.35) which has a big land position directly southeast of Africa Oil’s most active land block this year: Block 9.
This area is attracting a lot of capital right now. The industry is willing to pay Big Money to play here: Marathon Oil (MRO-NYSE) paid roughly $50 million to joint venture into Block 9.
Taipan shareholders get a free look at the surrounding geology in 2013—three wells are being drilled around them in the next six months. Two are to the north of Taipan—by Marathon/Africa Oil—and one is to the south, by another Canadian junior.
Any success on these three wells will give Taipan a big boost in valuation. It makes for a lot of near term catalysts for this fully funded junior.
At just under 10 million acres, they have the fourth largest acreage position in Kenya, all acquired at a very reasonable cost.
But The Big Prize is their Block 2B property. The western part of the block sits in the Anza Basin in east Kenya—one of the top rift plays in East Africa—Africa Oil’s/Tullow Oil (TLW-L) big discovery is a rift play, where the ground is slowly spreading apart over millions of years. It is north and south of Block 2B where three, maybe even four wells will get drilled in 2013--all of which could be catalysts for TPN.
On Block 2B, Taipan has two geological targets—the primary target is in the upper “Tertiary” zone. This is the same zone where Africa Oil hit. These are oil prone rocks.
What has the market excited about Taipan is that the thickness of the Tertiary aged section present on their acreage--between 9500 to 12,000 feet, or 2900 to 3800 metres. That could support a massive oil column. Tapping into something like that would make Taipan the best performing oil stock in 2013.
The secondary target is in the lower “Cretaceous” zone.
The first catalyst for Taipan could be a joint venture partner on Block 2B—it has the right address; Anza Basin rift play with large Tertiary formation. There is no more good acreage to stake in the Kenyan rift plays, so big companies have to joint venture into the land positions staked out by the early juniors like Taipan.
In the near term, there are three big wells that investors need to look at, when assessing the value of what Taipan is sitting on. First will be Africa Oil’s PaiPai well on Block 10A, which has already spud, and will likely announce first results in February 2013.
TPN could get a boost PaiPai hits, but it really is the least important however, as it’s targeting Cretaceous rock, and is farther away. Taipan thinks that Block 2B has oil potential in both types of rock, but they’re focused on the Tertiary with the larger potential payzone.
And before July 31, two other Cretaceous wells will be drilled just south of Block 2B by Vanoil (VLE-TSXv). With wells on either side, Taipan’s technical team will get a much better idea on geology and how to drill it later in 2013.
But the most important (geological) catalyst in 2013 for Taipan will be Africa Oil’s Kinyonga and Pundamilla wells—located in Block 9 just northwest of Taipan's block. Pundamilla is believed to be the largest play of AOI’s entire portfolio, while Kinyonga will be the first to be drilled which also has huge potential at stake.
Like Taipan, AOI is quite intrigued by the 9500 foot thick potential of the Tertiary rock in this part of Kenya. While both Pundamilla and Kinyonga have multiple targets, it’s what comes from the Tertiary that both Taipan and AOI will be most intrigued about.
The Tertiary potential on these Block 9 prospects are very, very big. Some have estimated that the Pundamilla well has the potential for 402 million barrels. This is FOUR TIMES the typical prospect size in the area. At 320 million barrels estimated, Kinyonga is also gigantic, making these two wells on Block 9 a monstrous pair if successful.
What both parties want to see is their assertion that the Tertiary rock is more oil-rich. Expect Taipan shareholders to be very happy if Kinyonga hits, and even happier if Pundamilla does as well. Kinyonga is the next on deck, and doesn’t get drilled until mid-late summer.
Taipan is sitting on top of a land block with a potential resource of a few hundred million barrels. The 9500-12500 foot thick target has the potential to be the crown jewel of the entire East African region, if it’s productive.
It’s hard to believe, but there are only 35 wells drilled onshore in total in Kenya, and only three of those have been drilled since the early 1990s—all of which have been discoveries. So, now that the code has been cracked on the type of plays to be drilled onshore, there is huge untapped potential in place.
It took a while for these onshore plays to gain attention, but seismic and drilling activity is at record pace now.
In total, Taipan has interests in 9.7 million acres (3.5 million net acres) between their Block 1 (20% WI) and Block 2B (100% WI), making them the fourth largest oil lease holder in Kenya. No other junior in the region even comes close to this.
Now, the majors are scrambling to gain a foothold in the region, but the quality oil prospects are all spoken for—great news for the early entrants like Taipan.
Taipan will drill its first well in late 2013, or early 2014. By then, drilling costs are expected to come down dramatically to around $12 million. Pipelines are being discussed , and almost all routes would be laid close to their Block 2B, adding to the value of that land.
A joint venture will cash up the company, and likely give it a carried interest on that first well.
Guiding Taipan through all this is CEO Max Birley, who has the discovery of nearly 2 billion barrels of oil equivalent to his name.
Birley has held high-level international roles with companies such as Marathon Oil, Premier Oil, in Africa and Asia.
Birley also lives in Kenya, which is a bonus for Taipan.
“I’m living in Nairobi (Kenya’s capital) so we can keep a very close eye on operations and obviously building a good relationship with the government,” says Birley.
Independent geological reports give Taipan over half a billion barrels of “prospective” resources right now.
Judging by the prices paid by third parties on other deals, the market is willing to pay a premium to acquire resources in Kenyan and other parts of East Africa. So even at this very early stage of exploration, the market is willing to pay an average of roughly $1.00 per prospective barrel.
Based on this, Canadian brokerage firm Mackie Research has a share price target of $1.02/fd share for Taipan on a risked basis, and $3.02/fd share unrisked.
Taipan also should be able to place much of this prospective resource into a more confident “contingent” resource, based on the drilling of the company and its neighbours, along with enhanced seismic operations.
Contingent resources in the region have averaged about $4.50 per barrel, so Mackie sees this as a potential blue-sky value of $3.85/fully diluted share on a risked basis and $12.95/fully diluted share unrisked.
That’s more than a 10-bagger from the current 35 cents; it’s the reason we invest in junior oil stocks. But a lot of work, and some luck need to happen to realize that kind of gain. However, Africa Oil has shown it can be done, and the market is now watching this play more than ever before.