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Lekoil lays the foundations for success

Published: 00:55 24 Jun 2014 AEST

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If you provided a check-list of what makes a successful junior oiler then the ‘must-have’ elements would include the potential for early production, appraisal assets, plus a dash of blue-sky exploration.

Of course, it is also crucial to have access to capital and be guided by a management team that’s technically equipped to build on the opportunities offered.

Unfortunately, few if any of AIM’s aspiring Tullows, Afrens and Cairns tick all of these boxes – and it has taken Lekoil (LON:LEK) around three-and-a-half years to build its foundation.

But then Lekoil, led by Lekan Akinyanmi, was slightly unorthodox in its approach.

It acquired the higher-risk exploration and appraisal assets first and only added the final piece of the jigsaw – near-term production – last month.

The speed at which Lekoil was able to raise the US$37mln equity funding required to bankroll the development of its latest acquisition, Otakikpo, in the swamps of the Niger Delta, reveals the firm is now starting to gain traction with the UK investment community.

The 100% rise in the share price over the last 12 months underlines this.

Akinyanmi’s careful development of Lekoil draws from his experience with Schlumberger, UBS and Alliance Bernstein, where he managed a US$1bn portfolio focused on Energy and Natural Resources investments.

The choice of projects, from Otakikpo, the hugely prospective Dahomey Basin off the coast Nigeria and its acreage in Namibia, are borne out of meticulous research.

It is telling that Lekoil has been presented with more than 40 opportunities, yet has invested in only two.

The dial started moving in a very positive direction for the group when it farmed into and funded the successful drilling of the first well on the Ogo well on block OPL310, which is part of Dahomy Basin play off the coast of Nigeria.

It partnered with Afren and local group Optimum and uncovered a gross hydrocarbon section of 524 feet, with 216 feet stacked, net pay.

The resource estimate is 774mln barrels of oil, or 232mln net to Lekoil based on its 30% holding.

With all of the company’s investments there’s “significant upside potential”.

Ogo proved the Upper Cretaceous horizons are hydrocarbon bearing. However, additional barrels will be added as more wells are drilled into the Syn-Rift section.

Further appraisal drilling will aim to assess the potential of the Syn-Rift with a second well planned before the end of the year.

A recently completed 3D seismic programme will help narrow down a number of other targets on the licence area.

Akinyanmi says the partners will reach a “strategic decision point” sometime after drilling, when they will decide how to proceed with the development of the asset.

The company has seen interest from the oil industry in the OPL 310, says the chief executive. However, in the short term, its focus is on de-risking the prospects and investigating the extent of the opportunity.

Closer inspection of Lekoil’s portfolio reveals an elegant logic to it - both in its risk profile and the ability to fund development.

The cash flow will be provided by Otakikpo where Lekoil acquired a 40% stake from Green Energy for an initial upfront US$7mln payment, which will be followed by a US$4mln production bonus.

It has also committed to an initial US$67mln work programme developing three wells that should generate 10,000 barrels a day of production in the first phase.

This will be funded from the proceeds of last month’s US$37mln share placing and a reserve based lending facility of up to US$55mln.

The plan is to double production in the second phase, while Lekoil plans eventually to have pipeline capacity for 30,000 barrels.

It will also look to take advantage of a number of opportunities to utilise the gas domestically.

The net back on production should be around US$28 a barrel.

If it gains pioneer tax certification then this figure should rise significantly and improve the profitability of the project.

With three historic wells, Otakikpo is host to 36mln barrels of recoverable oil, which is classed as a marginal field in Nigeria.

Work on the first two wells, both re-entries, is expected to get underway sometime in the next six months, Akinyanmi reveals.

Initial production rates are expected to be between 3 and 5,000 barrels a day per well.

If the first two wells come in at the upper figure then Lekoil, which will be the technical partner and asset manager, may drill into a new structure to the south.

If not, then it will side-track the first well on the property.

The upside to Otakikpo resides in the potentially oil bearing structures around the southern area that could add to the company’s reserves base.

Turning to Namibia, Akinyanmi says the asset is “undergoing geological and geophysical studies, the results of which will determine the next steps”.

The shake-out in Nigeria means that the majors are offloading fields. And while Lekoil is interested in picking up assets, it is being careful not to overpay.

“We are very returns focused,” says Akinyanmi.

“The problem we have had with the auction processes is the prices have been too high.

“We have pulled out of processes because we thought the price had gone too high.

“But if these had not been ongoing we would have had a lot more competition for Otakikpo.”

Westhouse Securities said Lekoil is “quickly becoming a significant Nigerian player” when it upgraded the stock to ‘buy’ from ‘add’. The shares would need to rise a further 20% to hit the City broker’s fairly conservative price target of 86p.

“Further asset divestments by Shell and Chevron and more marginal field activity will provide plenty of opportunities for Lekoil and the momentum that the company is generating is making it a more credible acquirer,” said analyst Mark Henderson in a note to clients.

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