Tullow Seen Beating Peers With $30 Billion Africa Find: Energy

February 17, 2012

With Canadian partner Africa Oil Corp., Tullow is aiming for at least 300 million barrels of oil worth $30 billion or more with its first two sites in an underdeveloped area stretching from Kenya to Ethiopia, a plot almost the size of England. Shallow wells for seismic surveys have shown so-called oil seeps — an indicator of potential reservoirs.

Tullow “is well-placed to find oil in East Africa, probably one of the better places to try frontier opportunity,” said Jason Kenney, an analyst at Banco Santander SA in Edinburgh.

Tullow leapfrogged peers by finding some 4 billion barrels in French Guiana and Ghana since 2007, and is poised to complete the sale of two-thirds of its Uganda discovery to Total SA (FP) and Cnooc Ltd. (883) for $2.9 billion. Tullow’s ability to find new fields has made it the U.K.’s most-expensive oil explorer, based on the price that investors are willing to pay for a share of its earnings.

The shares rose as much as 4.8 percent to a record 1,609 pence in London and traded at 1,581 pence at 9:40 a.m.

The Kenyan prospect has similar geology to Uganda, and oil prices are currently at least 7 times higher than benchmark U.S. natural gas, based on their energy content.

While Eni SpA (ENI) of Rome and Anadarko Petroleum Corp. (APC), based in The Woodlands, Texas, led exploration off Africa’s east coast that yielded the biggest gas finds in a decade, Tullow Exploration Director Angus McCoss said the company has “made a very deliberate decision to stay focused on oil.”
‘Magic Opportunity’

The strategy evolved since the Uganda find and counters the industry view that the local geology is more likely to yield gas, McCoss said.

“That’s the magic,” McCoss said. “That’s how the industry got it so wrong and that was our opportunity. We quite like these deeply entrenched notions the others have, and we challenge them.”

Tullow has outperformed both the benchmark FTSE All-Share Index and the 19-member oil and gas subindex in the last 12 months. Thirty-five analysts out of 38 surveyed by Bloomberg recommend buying or holding the shares.

Investors are endorsing its strategy. They’re paying about 33 times expected profit for Tullow shares, the highest price to earnings ratio on the 19-member FTSE All-Share Oil & Gas Producers Index. Tullow had a slow start this year, gaining 9.5 percent, ranking eighth out of 19 stocks behind leader Afren Plc. (AFR)
Peers Follow

Tullow’s find in Uganda is attracting other explorers to the region. About 14 companies including Anadarko, Vancouver- based Vanoil Energy Ltd. (VEL) and Afren have signed 26 production- sharing agreements with Kenya, the country’s Petroleum Commissioner Martin Heya said in August.

Kenya has no proven oil reserves. Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) found gas in the Anza Basin in 1976. Tanzania to the south produces gas from two offshore deposits for domestic power generation, and neighboring South Sudan is sub-Saharan Africa’s third-biggest oil producer, after Angola and Nigeria.

“The early indications we have in the rift basin is that they are generally oil prone,” said Africa Oil Chief Executive Officer Keith Hill. Royal Dutch Shell Plc (RDSA) and Amoco Corp., now part of BP Plc (BP/), drilled wells in Kenya and recovered oil in the early 1990s, according to Hill.
Cradle of Mankind

Tullow and Africa Oil hired China’s BGP Inc. to survey the South Omo Block in the Omo River Delta in Ethiopia, the area where Richard Leakey and a team of paleontologists discovered in 1967 the oldest remains of Homo sapiens known to science. The partners last month started drilling the Ngamia-1 well in Kenya’s Block 10BB, part of a plan for two wells in Kenya and one in Ethiopia this year. It will take at least 60 days to drill and the rig will then move to spud the Paipai-1 well in Block 10A in the second quarter.

It will be “a multi-year exploration program,” Tullow Chief Operating Officer Paul McDade said.

“There should be some oil,” said Oswald Clint, an analyst at Sanford C. Bernstein & Co. in London, said. “It’s tough to say until you drill. Nothing has been discovered yet. It’s a very underexplored region.”

About 500 exploratory wells have been drilled in East Africa, according to data from U.K.-based Afren, which has exploration licenses in Kenya, Ethiopia and Tanzania. That compares with almost 15,000 in the west of the continent and 20,000 in north and central Africa.
‘Oily Area’

The geological formations Tullow is exploring are formed by tectonic forces pulling apart, trying to split an old plate into two and creating rifts in the earth’s surface. The company is focusing on the intersection of a rift that runs diagonally from South Sudan into Kenya and a North-South rift that resembles the Lake Albert formation to the west.

“We are particularly interested in the intersection of the two geological trends,” McCoss said. “There are interesting parallels” with Uganda.

Afren is betting on the Gondwanaland theory, that oil can be found in places including Kenya and Ethiopia where the ancient mega-continent broke apart 200 million years ago.

“Geologically it’s a very oily area,” CEO Osman Shahenshah said.

Tullow seemed to prove the Gondwanaland hypothesis last year with a discovery in the new frontier off French Guiana, which mirrors oil-rich West Africa across the Atlantic.

Premier Oil Plc (PMO) and partners including BG Group Plc (BG/) and Cove Energy Plc (COV) are exploring off Kenya and hoping that gas discoveries made to the south in Tanzania and Mozambique are stretching into their waters.

In Kenyan “deeper-water offshore we are convinced it will be gas if it works,” said Premier CEO Simon Lockett. “But in the shallow section there is a potential for oil.”