In today’s note, which was issued in response to Wednesday’s upbeat drilling update, FD Capital analyst Zac Phillips upheld his ‘buy’ recommendation on Red Emperor, while upgrading its target price to 65 pence from 22 pence.
Red Emperor and partner Range Resources (LON:RRL, ASX:RRS) told investors on Wednesday that sandstone intervals in a 400 metre section of the Shabeel-1 well on the Dharoor block had exhibited oil and gas shows, confirming the existence of a working petroleum system.
Investors cheered the news, sending shares in both companies up 25 percent in Wednesday’s session, while broker Panmure Gordon adjusted its estimate of the chance of success to 40 percent from 12 percent.
Phillips said that while Red Emperor and Range have a long way to go before drawing any conclusions from the results of the drilling received to date, traces of oil and gas increase the chance of a commercial success in this well.
Red Emperor and Range each hold a 20 per cent working interest in the licences that encompass the Dharoor and Nugaal valleys in Puntland, while Africa Oil holds a 45 per cent interest through its shareholding in operator Horn Petroleum.
Dharoor and Nugaal are estimated to contain one billion barrels of unrisked and undiscovered oil prospective resources, with P50 gross 300 million barrels (mmbbl) and 375 mmbbl recoverable oil at the Shabeel-1 and Shabeel- North prospects.
“Tremendous drilling progress has been made thus far, and this news enables us to further refine our risk assessment,” said Phillips.
“Oil shows in RMP’s drilling results indicate that the source rock has not only produced hydrocarbons, but expelled them too, which significantly reduces one of the key risks that we are consolidating in our assessment of the company’s valuation.
“Considering the size of the structures that are being targeted, a commercial discovery will go a long way in unlocking the true potential of RMP.”
The new target is more than double yesterday’s closing price of 31.38 pence.
Furthermore, Phillips said if the company makes a discovery that requires appraisal drilling, its value will increase significantly due to the heavy risking and the size of the prospects being targeted.
According to Phillips, Red Emperor’s fair value in that case will rise by 266 pence with the Nugaal permit accounting for 180 pence and Dharoor for the remaining 86 pence.
The analyst also noted that following the recent £6.9 million fundraising, the company is fully funded to meet its near to medium term obligations including wells in Puntland and the Republic of Georgia.