Summary
- CAMAC Energy saw a delay in production from a leak in the blowout preventer; however, drilling has resumed and the company is back on track to increase production.
- A recent assessment on other leads and prospects in OML 120/121 increased the estimated recoverable oil five-fold.
- Analysts are beginning to take notice, and three companies are now covering CAK with an average target of $.96, 75% higher than the current price of $.55.
I'll be the first to say that I'm a big bull when it comes to CAMAC Energy (NYSEMKT:CAK). The last few articles I've written highlight how the company has changed over the past two years. Now that the company owns 100% interest in OML 120 and 121, there are a few serious catalysts coming up (and a few good news stories in the past month) that should have investors excited.
Production from OYO 7/8
The company has drilled two new wells that have hit pay dirt. While production has yet to begin, the company estimates OYO-8 will begin production in December 14 and OYO-7 will begin in January 2015. These dates have been pushed back from the original estimated dates due to leaks in hoses in the blowout preventer. While the delay is frustrating, the company is taking the necessary steps to avoid future accidents that could derail the entire project, and is continuing with drilling.
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(Source: Company presentation)
The company will report likely report Q3'14 results in mid-November. So while production will likely not have started, the company should give a good update on how close it is to turning on the flow. While the company has yet to announce the completion of moving the umbilicals and flowlines, it should be completed in the coming days, if not week. The FPSO is already set in place and contracted through the end of 2015, with extension options written into the contract.
Increased Estimates
The company had previously released the estimates in OML 120 and 121:
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(Source: Company presentation)
On September 29th, the company released new estimates that were compiled based on recent testing, and the results came back with a five-fold increase in potential recoverable assets.
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(Source: Data compiled from field report)
While the company has other prospects and leads, the only ones that were reported on were the P, G, Ereng, and Ewo Deep. The company bases the increase off the P50 values, which indicates that if it develops the field, there is a 50% probability it will meet or exceed the estimate. The low figure assumes that if the company develops the field, there is a 90% probability it will meet or exceed those estimates. The high figure assumes that if the company develops the field, there is a 10% probability it will meet or exceed those estimates. So while the 50% probability of hitting 2,377 MMbbls is a five-fold increase, it is really the middle value in a range of potential.
Increased Attention from Wall Street
CAK has been attracting attention from more analysts, as well as visibility. Over the past six months, three companies have initiated coverage of the company with a "Buy" rating: Arctic Securities, CSL, and Aegis Capital Corp.
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CSL released the most behind their recommendation:
CSL initiates coverage on CAMAC (CAK, JSE: CME) with a BUY recommendation and target price of US$0.98/share using a RENAV based valuation methodology which includes a core value (2P) of US$0.45/share, and exploration value for one prospect of US$0.54/share. CSL's core valuation is supported by historic acquisition prices for CAMAC's core acreage offshore Nigeria in OML 120/121.
Further in the press release, the company added the following:
As a further catalyst for the share price, the probability of a reserves and/or resources upgrade appears high. This is due to the fact that management has previously stated in an April 2014 update that they have high graded three prospects with over 200mmboe unrisked potential each. CSL estimates this is worth US$0.54/share risked.
While the company has yet to alter its target price or assessment, the recently released estimates should alter its math. The original math was based on 200mmboe of unrisked potential in three prospects, and the recent release might alter its target.
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Conclusion
CAK saw a setback this past quarter, with the delay in drilling due to a leak in the blowout preventer. While it may be a minor setback, the company is still moving ahead to complete the wells and increase production. The recent report has expanded the potential for continued drilling and production within the same region. While the company is still working to gain recognition on Wall Street, analysts are beginning to take notice and are making "Buy" recommendations. Once the oil starts flowing, investors will see significant gains.
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