Thursday, 23 February 2012

Paradigm Capital sees "significant upside potential" in Longreach Oil & Gas

Paradigm Capital has recently initiated coverage on Longreach Oil & Gas (CVE:LOI) with a "speculative buy" rating and $2.40 target price, way up from the company's current trading price of 69 cents.
The Canadian capital markets firm says that Longreach "provides significant upside potential from both crude oil and natural gas with a relatively short expected monetization periods on success".
Longreach is a Moroccan‐focused oil and gas company with five licences, creating a well‐balanced portfolio of both onshore and offshore high-impact exploration and near‐term production opportunities.
Paradigm Capital estimates the current unrisked potential resource value of Longreach's concessions to be between $868 million and $2.1 billion, based on current resource estimates and the feasibility study on the Zag concession.
The company's key assets comprise the Sidi Moktar onshore licences, in which Longreach has a 50 percent working interest.
Sidi Moktar comprises three blocks totalling 4,711 square kilometres and is located within the Essaouira Basin in central Morocco, which has been producing onshore gas since the 1950s.
Paradigm Capital's analyst Lyndon Dunkley reckons that Sidi Moktar "provides the greatest near‐term opportunity for [Longreach] and investors".
Longreach also has a gross 10 percent interest in the Sidi Moussa and Foum Draa offshore exploration licences. Located directly west of Agadir, these licences cover an area of 12,714 square kilometres.
Meanwhile, the Tarfaya exploration licence is located in Southern Morocco and covers an area of 13,434 square kilometres. It is prospective for Triassic and Jurassic oil and there are a number of existing discoveries in the region.
Finally, the Zag exploration licence is located in southern Morocco, covering an area of 21,807 square kilometres. It lies within the onshore Zag-Tindouf Basin and is in the westernmost part of the prolific hydrocarbon-producing Palaeozoic Basins of northern Africa, stretching across Algeria, Libya and Tunisia.
Longreach became active in Morocco as a private company in April 2006. Between 2007 and 2009, the company secured varying working interests in four licences to explore for oil and gas both onshore and offshore Morocco, covering a total of 11.8 million acres.
More recently, the company entered into a farm‐in agreement on an additional 1.2 million acres with historical production on the licence and adjacent to current producing fields.
In a research note, Paradigm's Dunkley said: "Longreach represents an opportunity to participate in the last remaining frontier exploration region of North Africa, without the high risk associated with the recent unrest of the overall area."
Morocco has not experienced the same pressures of protests and regime changes of the "Arab Spring" that have swept across North Africa to date. The government is stable and focused on expanding international investment in the region with an eye toward the development of its vast resources.
Paradigm also said that the energy fundamentals of Morocco make domestic exploration for hydrocarbons "highly attractive".
The country is the second‐largest energy importer in Africa, while the largest and fastest‐growing domestic consumer of natural gas and electricity is the expanding phosphate mining industry, ensuring that any domestic discoveries will not be stranded.
Exploration activity is ramping up in Morocco, with very favourable fiscal terms for oil and gas producers.
Indeed, Longreach has benefited from a "first‐mover advantage", securing highly prospective acreage prior to the rush of recent entrants with approximately 13.0 million gross acres - 2.8 million net, the research report noted.
Morocco holds attractive potential due to its geographical region, which consists of some of the most productive and prolific basins. This region accounts for some of the largest producers and exporters in the world, accounting for approximately 40 percent of oil and 20 percent of natural gas exports globally on a daily basis.
Paradigm's Dunkley said he believes Longreach is undervalued, trading at $0.01 enterprise value per barrel for unrisked resources compared to a peer group average of $0.08 enterprise value per barrel, which would imply a trading price of at least $1.70 based on the company’s unrisked net resource estimate of 402 million barrels of oil equivalent.
The current share price is backstopped by working capital of $0.52 per share, although this cash is ear-marked for near-term expenditure exploration and seismic programs funded by working capital, particularly in the development of Sidi Moktar.
In terms of forward risks, Paradigm said that exploration for oil and gas involves a high degree of risk; as such, there is no assurance that expenditures will result in new discoveries of oil or gas.
The capital markets firm believes Longreach will decrease this risk with the application of 2D and 3D seismic surveys, but Morocco is still viewed largely as frontier exploration.
Longreach is not currently funded beyond 2012, Paradigm Capital said, with additional funding being required this year, which will likely come in the form of additional equity.

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