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.
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
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
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
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.
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
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.