Africa Hydrocarbons Solves International Risk/Reward Riddle

Tunisian Drill Program

Africa has become a mecca for junior international oil exploration.  The political risk and high costs are balanced out by the potential of modern technology testing virgin oilfields. But one junior explorer--Africa Hydrocarbons Inc. [NFK:CA]--has found a low-cost region while retaining the exponential upside that successful African plays are known for. And one of Africa’s biggest success stories is right beside them.

NFK spudded its first well on its 130,000 acre Bouhajla Permit last week, in northern Tunisia.  The BHN-1 well only costs $6 million, but the company’s target is to find a look-alike to the country’s prolific Sidi el Kilani field—a nearly 50 million barrel field—from only five wells.

Tunisia Play Map

Tunisia Play Map

Geological similarities between NFK’s Bouhajla and Sidi el Kilani are almost uncanny. The “closeology” is potentially there, as the two projects are a mere 25km away.

According to the team led by President and CEO of Africa Hydrocarbons John Nelson, the latter is repeatable.

Nelson is no stranger to success in East Africa. His confidence in the economic potential for NFK’s lands speaks volumes. As the former CEO of Lion Petroleum, Nelson was instrumental in acquiring a 20% WI on Kenya’s Block 10.

The block would eventually put Africa Oil [AOI:CA] firmly on the map with its Ngamia-1 well that transformed the company into an over $1 billion enterprise. Nelson was confident in what he saw in Block 10, and he’s confident again.

The Sidi el Kilani is a geological dead ringer for the oil target NFK is going after with the BHN-1. In both cases, the targets are Cretaceous Abiod oil target in nature.

Of the five wells at Sidi el Kilani, one produced at rate of 10,000 barrels a day for over 10 years.

Should Africa Hydrocarbons be able to mimic the Sidi el Kilani’s success, it could potentially see a $100 million value on the play, all while currently being housed within a company with a current market cap between $10-11 million.

The economics of this play is what makes NFK’s gameplan stand out from other East African oil play stories that are out there, is its economics. Instead of requiring upwards of $25-50 million for one well, drilling this play will be more like $6 million.

"It’s exciting to see our first high impact well in Tunisia moving forward,” says Nelson. “We believe this key well will give us the significant information we need regarding the true hydrocarbon potential. We believe we’re tapping into the geological equivalent of Sidi el Kilani.”

The well is expected to take four to six weeks in order to reach total depth. Should the well prove successful, the company will have the opportunity to probably truck out production during the application process for a development permit for the well’s location.

“In the event that we submit an application for a development permit, our intention would be to drill and second, and perhaps third, well to give us a number for scoping for the development,” says Nelson. “Cost wise we expect a pipeline to be between $6 to $8 million, making the cap-ex required to get this project into production really very small for the size of target.”

“We’re probably looking at any kind of improvements we might need to make to the facility in our own onsite facilities plus the pipeline maybe $20 million in maybe a little over a year.”

Compared to other junior African plays, the NFK strategy seems to be a lot more prudent, while retaining a healthy upside. At $6 million to drill a well, and possibly $20 million to get it into production, the total cost from spud to cash flow is in some cases cheaper than just drilling a well on its own in other areas of East Africa, such as Kenya.

“We still believe it’s a good shot at a 10-bagger. For $6-7 million for drilling, and with the low capital costs required, this is a very good model for a money maker, especially for a company of our size.” - John Nelson, President and CEO of Africa Hydrocarbons

“One major reason I like this project is that on our Bouhajla project, we think we can still be profitable at low threshold like 400 barrels a day,” says Nelson. “In much of Africa, you have to find at least 50 million barrels of oil, and have production rates of 2,000 to 5,000, 10,000 barrels a day to justify it.”

Even if NFK found somewhat lower numbers, like 5 million barrels, the operation could plausibly remain quite profitable. With nearby facilities, and low infrastructure costs. Nelson and his team believe they put together well thought out program, with potential to turn into something big.

“With an analog based on 3D seismic, I believe we have a good show at a potential 40 to 50 million barrel field,” says Nelson. “The drilling risk has been minimized, and our economic threshold is a lot lower than other parts of Africa.”

“We still believe it’s a good shot at a 10-bagger. For $6-7 million for drilling, and with the low capital costs required, this is a very good model for a money maker, especially for a company of our size.”

G. Joel Chury