Exploration Insights

Hot on the heels of a major offshore Sierra Leone discovery, Tullow Oil has found yet more ‘black gold’ in Uganda, where drilling at its Ngassa-2 exploration well indicates ‘the potential for a significant oil column’. First recommended by Growth Company Investor at 73p six years ago, Tullow shares recently hit £12.45, but have eased to £11.76, where partial profit taking looks prudent, though they are likely to remain well supported.

Elsewhere, investors have given Cove Energy £42 million at 20p to buy promising oil and gas interests in Mozambique and Tanzania, while Dublin-based Petroceltic International, which recently raised £27.5 million at 7p, says the AT-1 well on its Isarene permit in Algeria has flowed at the rate of 11.4 million cubic feet of gas and 210 barrels of condensate a day.

Petroceltic has now made three discoveries so far on the permit and is testing another. Recommended by Growth Company Investor at 9p in May, the shares have hit 18.5p, where some should be retained.

CoAl into production

Coal of Africa Ltd (CoAl) expects the go-ahead on its Vele coking coal project this month after first sales from its Mooiplats project. The company has sold its first ‘lean’ coal from there in South Africa’s Mpumalanga province and should start shipping thermal coal between November and early next year.

Managing director Simon Farrell expects Mooiplats to produce at the rate of 200,000 tonnes a month from the second half of 2010. He suggests it could generate £70 million cash flow in its first full operating year, given appropriate off-take deals.

CoAl has an off-take agreement with steel giant Arcelor Mittal, a 16.3 per cent shareholder, for coking coal from Vele in northern South Africa, near the Limpopo river, and an option deal on more. This agreement depends on Pretoria’s Ministry of Mines and Energy approving the project to mine Vele, thereby allowing bulk sampling and enabling the steelmaker to test its quality.

CoAl’s volatile shares have swung between 10.5p and 223p since 2006 and were recommended by GCI at 93p in June. Now 108.5p, they should maintain their upward path if the South African government’s decision is favourable.

Profits beckon Volga Gas

Volga Gas is boosting production, moving fast towards profitability and hopes to double reserves in two years. Focused on the Volga region of Russia, the company saw first-half turnover soar 30-fold to $3.4 million (£2.1 million),
with continuous production from the Uzenskoye oil field in its Karpenskiy licence area helping to slash losses from $5 million to $215,000. Now, chief financial officer Tony Alves says he would be surprised if the company did not issue ‘a positive income statement’ for the full year.

Boss Mikhail Ivanov says he expects production, which averaged 1,050 barrels a day in the first half-year, to reach 2,000 barrels a day during the second half. He suggests Volga’s delayed Vostochny-Makarovskoye field could generate cash flow of between $25 million and $30 million next year.

Drilling began recently at Grafovskaya, also in the Karpenskiy licence, where Volga claims proven and probable reserves of 68.4 million barrels of oil equivalent and suggests ‘that could be doubled in two years’.

After raising $27 million (£16.6 million) at a fiercely discounted 61.4p a share in June, the company projects ‘more cash than we can consume’. Floated at £3 in 2005, Volga Gas shares crumbled to 32p when a Moscow oil trader challenged its company’s right to Vostochny-Makarovskoye, but have been rallying since this challenge failed.

Highlighted here last November at 90p and now 169p, they have scope, despite country and commodity risks, to go further.