Analysts at Renaissance Capital (RenCap) have published a report in which they have rated African oil exploration and production (E&P) high, saying there are upside potentials in most of the companies that should necessitate investment considerations. The E& P companies covered by RenCap span 27 with a combined market capitalisation of $30 billion according to This Day.
In the report titled, “African Oil and Gas, Think Local, Be Selective,” RenCap said African E&Ps have tended to show more robust economics than their peers, breaking even at a $40 per barrel oil price, while North American shale E& Ps require a $60-70 per barrel price.
According to RenCap, they initiated coverage of eight stocks which include: Afren, African Oil, Caverton Offshore Support Group Plc, Eland Oil & Gas, Lekoil, Mart Resources, Oando Energy Resources, Savannah Petroleum and Seplat Petroleum and Development Plc.
Out of the eight, RenCap said its top three picks from the pack are, Seplat, Lekoil and Africa Oil, adding that their target prices for the stocks imply 50-100 per cent upside potential.
Explaining its selection of Seplat among the top picks, RenCap said they see the biggest upside risk to its valuation from possible M&A transactions, believing Seplat is strongly positioned to capture upcoming non-organic growth opportunities and could possibly complete one or two deals in the next 12 months. “We see the greatest upside for Seplat coming from possible merger and acquisition (M&A) transactions, and believe it is strongly positioned to capture upcoming non-organic growth opportunities thanks to its indigenous status” the report said.
On Lekoil, RenCap explained that they expect Lekoil to post one the highest returns in the medium term. “Our positive investment stance on Lekoil is based on the combination of an attractive and undervalued asset base offering both high cash returns and material exploration upside; strong delivery by management since IPO; and indigenous status, which should allow the company to receive additional tax breaks and increases its chances for future asset acquisitions,” the firm said.
On Africa Oil, RenCap said with its world-class discoveries and exploration portfolio, African Oil is one of the three top picks. “Following a 50 per cent decline in the company’s share price since the end of last year, we now see the current share price as reflecting only the value of the Lokichar basin, implying zero value being attributed to its Ethiopian discovery and all other exploration prospects,” RenCap said.
Source: This Day