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African Oil With Kosmos Energy is the focus of investment

         Date: 2012-03-27

           Tag: African Oil, African Oil investment

Summary: With oil prices securely above $100 per barrel at the moment, there’s still a mad dash on development. There are a lot of regions – both onshore and offshore – that are booming.

With oil prices securely above $100 per barrel at the moment, there’s still a mad dash on development. There are a lot of regions – both onshore and offshore – that are booming.

And one of the parts of the world piquing considerable interest is Africa. Africa is truly a rough and tumble frontier market. There are plenty of resources to develop, but also plenty of political and social instability in some regions.

Northern Africa was the spark of the sweeping Arab Spring movement last year. And we’re all well aware that the governments of Tunisia, Egypt and Libya were overthrown, while Sudan officially separated into two countries. Those northern African countries are continuing to rebuild. And there are a host of ongoing ailments.

On the E&P side, East Africa is home to one of the jewel discoveries in 2011. Mozambique’s Rovuma Basin natural gas finds by Eni (NYSE: E) followed on the heels of huge hits by Anadarko .

East Africa oil and natural gas development is still in its infancy really. But Somalia is off limits, Ethiopia’s situation is rocky and Mozambique continues to mend.

On the West Coast of Africa, the situation isn’t necessarily more stable. But the oil and gas industry is more mature. At the moment, western African countries – namely Nigeria – produce three million barrels of oil per day.

But here’s the kicker: By 2015, countries along of the Gulf of Guinea are expected to supply one-quarter of the United States’ oil imports.

Early last year, while at lunch with a few other editors and our publisher, the discussion turned to Kosmos Energy (NYSE: KOS).

The question was, do you buy Kosmos on its initial public offering (IPO) or wait. I was in the camp of the latter. And it goes to show it sometimes pays to be patient. The company’s shares are down nearly 30% since its IPO in May.

Kosmos is an independent E&P company, primarily focusing on under-developed areas in West Africa, and it just recently moved into South America with acreage in Suriname.

With the buzz over North American onshore finds, potential in the North Sea and the return of Iraq, Kosmos fell through the cracks. Because of that, shares are now at a discount.

The average analyst consensus on the price target for Kosmos is $18.94 – 44% above what it’s trading at now. The high water mark in analyst consensuses is Credit Suisse, which has a price target of $25 on Kosmos – practically double what it’s currently trading at.

Let’s just stay with the 44% gap between its current price and the average analyst estimate. If we compared that to the S&P 500 stocks with the largest gaps between their current price and analyst estimates, Kosmos would rank fifth.

Kosmos’ main moneymaker is the Jubilee field, off of Ghana’s coast, where it holds a 25.8% stake. This field is in production, netting the company almost six million barrels of oil last year.

And finally, there’s Morocco – where Kosmos is the largest deepwater acreage holder with 14 million acres. There are 19 prospects offshore Morocco. The company plans to release pre-drilling estimates for these holdings by the end of the year as it crunches the numbers.

So, there’s a lot of potential here. And we’re sitting at the lower end of the range shares have traded in.

For 2012, Kosmos’ capital expenditure budget is $600 million, with more than 90% of that going to its Ghana assets.

The first drilling in Morocco is being eyed for early 2013 while drilling in Suriname will begin in 2014. By the time development in Suriname begins, Kosmos’ revenue is projected to have increased more than 73% over 2011.


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