Oil and gas explorers turn to Cameroon

Oil and gas exploration in Africa has set the stage for several success stories, but while countries such as Nigeria and Angola fly the flag for the continent's activities, it is the other, less explored countries which are setting investor pulses racing.

Cameroon, nestled deep on the western coast between Nigeria and Gabon has hit headlines of late, as a host of companies look to exploit new and underdeveloped territory.

Indeed Cameroon's oil production tumbled further in the first quarter of the year to 5.26 million barrels from 5.58 million barrels in the last quarter of 2010, as a result of maturing oilfields and lack of new wells.

Chairman of Cameroon-focused Victoria Oil and Gas, Kevin Foo, told Interactive Investor that Cameroon remains an unexplored gem: "Cameroon has been massively overlooked and has traditionally been seen as a dropping off point for other parts of Central and Western Africa."

However, the improvement in technology ranging from deepwater drilling to 3D seismic, coupled with a surge in interest for new plays, has led some of the smaller, more nimble players with a higher risk appetite to enter the region.

While state oil company National Hydrocarbons Corporation sees production falling for the rest of this year, a rebound is expected in 2012 when new wells are expected to go into production and it is this opportunity for exploration that could pave the way for significant upside for those companies which lay claim to secure acreage positions.

Potential instability

But upside through exploration is somewhat offset by the potential fiscal and political stability the region faces.

Cameroon arguably carries with it the risk of violent protests and just earlier this month, US Secretary of State Hilary Clinton urged the country to hold a free and fair presidential election, expected this October.

President Paul Biya has ruled the small West African nation since 1982 and is one of Africa's longest-serving presidents. It is thought he will seek another term in the election after altering the constitution in 2008 to remove term limits.

The country's major port of Douala has also suffered recent attacks by gunmen on ships, highlighting the expanding hunting ground of pirates. Indeed, the country blamed piracy as one of the factors culminating in a 13% drop in oil output in 2009, with production expected to tumble even further to 2011, amid the insecurity in the main operation zone of Rio del Rey basin which accounts for 95% of oil exports.

But despite this, Kevin Foo says Cameroon has proved a "dream place to operate in".

"The people are very laid-back and well educated. All but one of our employees are locals and we've found it to be a very stable environment in which to operate," he said.

Indeed, analyst Melanie Savage at UBS, said that while Cameroon ranks very low on the Transparency International corruption index for upholding contracts, the country has a history of making contract terms more generous to attract oil industry participants, believing that the authorities are aware of the impact that a reversal of this could have.

Victoria Oil & Gas makes strides

Victoria Oil & Gas has certainly found favour with the government, with the announcement earlier this month that it received a decree signed by the President granting it a 25-year exploitation licence with an option to extend for an additional 10 years.

The milestone came ahead of first gas sales to industrial users from its Logbaba gas project by the beginning of the fourth quarter of this year.

Having lain dormant for over half a century, the return of Victoria to the area has reinvigorated onshore oil and gas exploration and production activity in the area.

Several wells were drilled in Logbaba in the 1950s, with gas encountered in each case, but the discovery of gas meant these wells were abandoned as local markets were not in existence. However, development in the country and growing energy needs have altered this dynamic, creating the opportunity for commercial development.

"The government of Cameroon intends to triple power generation in the next 10 years and much of that will be generated by gas. We intend to prove ourselves as a reliable energy supplier," Foo said.

The company has already signed 12 gas sales agreements and executed a further 10, with its eye firmly on attracting new customers.

Victoria Oil, which has a market capitalisation of £122 million, said it was fully funded through to first gas at the end of this year.

Admitting that it's been a company that has suffered too much dilution in the past in order to raise much-need capital, today the company is confident of its future prospects.

Since it acquired its interest in the concession two years ago, it has increased proved reserves five-fold and more than doubled proved and probable reserves and the company anticipates drilling more wells in the Logbaba gas field to meet future demand, although this remains one to two years off.

"Ultimately, gas supply to a large independent power producer or a third-party LNG facility, such as that being considered by GDF SUEZ, is most likely required for Victoria to capitalise on the full productive potential of Logbaba. However, contracts with industrial consumers, where higher sales prices are achievable, will continue to provide significant value," said oil and gas analyst David Hart at Westhouse Securities.

Looking further down the line, the company said it was eyeing up other opportunities in the region, noting that it couldn't afford to be "stagnant" as it anticipates an influx of company interest following its first gas sales.

Boon for Bowleven

Fellow UK-listed explorer Bowleven is another making a name for itself in the country. The company, whose shares have shot up 182% over the past year, recently thrilled investors with further progress in its drilling campaign.

Earlier this month, the AIM-listed group released encouraging drilling results from its Sapele-2 well in the Douala basin, which encountered 35 metres of net hydrocarbon-bearing pay in the Omicron objectives.

Bowleven, it would seem, is at the beginning of an exciting exploration stage in a basin that was historically written off by majors in the belief it was gas-prone.

Melanie Savage, analyst at UBS, said the Sapele discovery has significantly "extended the Cretaceous play fairway offshore and hints at further upside elsewhere in Bowleven's acreage and in other parts on the Douala basin."

Michael Alsford, analyst at Citigroup, hailed the results - which still require testing to confirm the potential - as "clearly encouraging" and said there remains significant potential in the Tertiary and Cretaceous plays.

"We have included 110p per share risked for the Lower and Deep Omicron at Sapele-1 in the base net asset value of 500p per share and 33p per share risked for the Sapele-2 well. However, further upside could be delivered from positive test results from Sapele-1 and Sapele-2. We believe Sapele-2 could be worth up to 13 1p per share if the discovery is up to 70 million barrels of oil equivalent," said Alsford.

While Bowleven refrained from giving further details on the forward programme following the testing of Sapele-2, Alsford believes the company could drill up to a further two wells this year to target the upside potential, believing there to be significant potential in the Tertiary and Cretaceous plays across licences MLHP 5,6 and 7.

At the close of the 2010, Bowleven had $189 million of cash and should receive proceeds of $35 million this year from the sale of its EOV asset in Gabon. These funds should be sufficient to cover an 18 month exploration campaign, the cost of which is estimated at $180-220 million, according to analysts.

"We remain positive on Bowleven's Cameroon drilling programme. With the pullback in the shares following the disappointing Sapele-1 results, we believe the pullback offers a good entry point into one of the highest impact drilling campaigns in 2011 in our coverage universe," Alsford added.

Moreover, the Cretaceous well planned for the third quarter of this year will allow the company to gain a broader understanding of the Cretaceous horizon and target follow-on prospects.

Based on a similar prospect size to the pre-drill P10 expectation in the Cretaceous of 3.7 billion barrels, UBS adopts a risked NAV of 620p, with 373% upside.

"We believe that while the basin had been written off as gas-prone by many of the majors exploring in the shallower waters, the play-opening Sapele well drilled by Bowleven has demonstrated the oil potential of the Cretaceous. Although little is known about the source rock at depth, we believe that the company has made what will be the first of some significant oil discoveries," said Melanie Savage, analyst at UBS.