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Time for Ophir Energy to deliver its own exploration success

While the BG-run programme seemingly can’t miss – this week it made its sixteenth consecutive discovery - Ophir’s success in its own operated exploration programmes has been conspicuously absent.

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As the explorer takes over drilling in Tanzania, investors in Ophir Energy (LON:OPHR) will be looking for a success of their own.

A new discovery in the BG-operated Kamba well In Tanzania, Block 4, where Ophir has a fifth of the venture, further boosted an already large offshore gas project, adding another 1tln cubic feet (tcf) of resources for the liquefied natural gas venture, which now boasts some 17tcf.

But while the BG-run programme seemingly can’t miss – Kamba was the sixteenth consecutive discovery - Ophir’s success in its own operated exploration programmes has been conspicuously absent.

In 2014 thus far Ophir has drilled three unsuccessful wells in Gabon, while well results in Equatorial Guinea have been mixed.

As such, the outcome of Ophir’s two upcoming Tanzanian wells will be key to its future.

As Ophir takes on the Deepsea Metro drillship for East Pande and Block 7 acreage, the need to deliver is acute.

With BG’s LNG project now advancing, analysts believe it is a case of ‘when’ not ‘if’ Ophir is the target of a bid, as potential suitors eye the explorer’s remaining 20% stake in the venture.

In an earlier deal in the region, Cove Energy was bought by Thai state oil firm PTT Exploration to give it an 8.5% stake in a similarly large gas project in Mozambique to the north for US$1.9bn.

Indeed, Ophir itself has already sold 20% of the Tanzania project to Singapore’s state-owned Pavilion Energy for US$1.3bn

The more likely buyer of Ophir would be an LNG specialist – a state backed company representing one of Asia’s major gas consumers, for example.

So what would that mean for the unrealised exploration potential in the Ophir portfolio?

New discoveries will either add value to any possible takeover pot, or could perhaps provide a cornerstone of any continuation of the Ophir business separate to the LNG project.

In terms of the LNG venture itself, meanwhile, City broker SP Angel reckons Ophir is faced with a “luxury problem” – as it must decide whether to stay focused on upstream or be involved in the costly business of the value chain.

“One suggests that this might start to weigh on the shares in the longer term.”

SP Angel does, however, point out that a takeover would render this dilemma a moot point.

Liberum Capital also sees the increased possibility of a takeover. “The extra discoveries make Ophir more attractive to companies looking to acquire a long-term position in East Africa gas projects,” the broker said in a note to clients.

The Kamba discovery, announced on Thursday, was better than anticipated.

The well encountered a 140 metre gas column with what is described as “high net to gross, good quality, reservoir sands”.

And Ophir said further analysis is likely to confirm discovered gas volumes in excess of 1.03 trillion cubic feet (tcf).

In light of this latest discovery sufficient resources are now confirmed for one 5mln tonne per year LNG train in Block 4 alone, while together with the gas resources in Block 1 there is now almost enough for a total of three 5mln tonne trains, Ophir chief executive Nick Cooper said.

Lucas Herrmann, an analyst at Deutsche Bank, says the additional Kamba resource itself isn’t likely to ‘move the needle’ but it does enhance the future development plans.

“Aside from the modest uplift, higher volumes on Block 4 also increases confidence that enough feedstock exists to supply an LNG train despite the block’s Northern location and distance to likely location of onshore facilities.”

Ophir, meanwhile, now takes the drillship to the location of the Tende-1 exploration well, which targets a 2.38tcf gas resource.

Tende is located in Ophir’s 70% owned East Pande licence, in a water depth of about 680 metres between the Tanzanian coast and the existing gas discoveries.

The well is expected to take 35 days to drill and it is predicted to have a 15% chance of success.

After Tende, Ophir will drill the Mkuki well in 80% owned Block 7, with a 13% chance of success.

Ophir shares have slumped by a third this year already, which suggests the market is not holding its breath.

Quick facts: Ophir Energy Plc

Price: - GBX

LSE:OPHR
Market: LSE
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