As the bigger and richer companies drive a new wave of exploration in Morocco, it will be the small cap explorers that provide the best gearing to any sector wide success, says GMP Securities.
In a 126 page tome focusing on Morocco as a new exploration frontier, the Canada-based broker initiated its coverage on a total of nine firms with exposure to the region.
Shining a light on what promises to be a busy period of exploration, with the number of wells reaching double figures over the next two years, GMP picks out high profile – or as it says ‘mainstream’ – players like Kosmos, Cairn (LON:CNE), Genel (LON:GENL) and Galp.
But, GMP also emphasises what it calls ‘lesser known’ explorers like Fastnet (LON:FAST), Longreach (CVE:LOI), Pura Vida (ASX:PVD) and Serica (LON:SQZ).
“With a lower base market capitalisation from which to re-rate, they are arguably more geared to success from this regional theme than their larger partners,” analyst Ritesh Gaggar said in the note.
Gagger stresses, however, that there are no stocks with ‘pure play’ exposure to Morocco and therefore its stock picks have to take into account the remainder of each company’s asset portfolio and the balance of risk/reward.
GMP sets out in the note a preferred basket of shares that it believes will allow investors to get the best exposure to the Morocco exploration play.
The ‘basket’ includes Longreach (rated as ‘buy’ with a C$1.40 target), Kosmos (‘buy’, target US$14.30), Pura Vida (‘speculative buy’, target A$2.60) and Cairn (‘buy’, target 400p).
It also initiates on Serica (‘buy’, target 50p), Genel (‘hold’, target £10.00), Chariot (‘hold’, target 24p) and Fastnet (‘reduce’, target 25p).
Two of the juniors, in particular, offer significant opportunities, according to GMP.
The broker says Longreach has a unique mix of low risk onshore and high-impact offshore exposure.
It will drill two of its own wells onshore later this year, as well as stakes in Cairn and Genel’s upcoming wells.
A success on either of the partner-led wells could add between 40-70% to the current share price, the broker said.
According to GMP, Pura Vida achieved the highest value farm-out in Morocco to date, with Plains Exploration taking 52% in the Mazagan Block in a deal worth US$230mln including two wells.
“This gives Pura Vida the highest carried exposure to drilling offshore Morocco of all the smaller players,” the broker said.
The first well will target the 1.5bn barrel Miocene Toubkal prospect and it is expected that drilling will start in the first quarter of next year.
A success here would be very significant. GMP’s ‘blue sky’ estimates point to upside of A$22 per share, which equates to a massive 4,500% of Pura Vida’s current price.
GMP says AIM quoted Serica has catalysts with interests in as many as nine wells in the next eighteen months; however, it points out that in the absence of another farm-out the company will need more capital by mid-2014.
Of Fastnet, which it rates as reduce, GMP says that the stock has already re-rated, driven by growing interest in its other assets, in offshore Ireland.
The company is geared to Kosmos’s drilling on the Foum Assaka block and a farm-out is expected.
GMP says Chariot is a high risk high reward proposition, but farm-outs are required before it can pay for drilling, which it believes would be next year at the earliest.
