Simba Energy Extends Its Range

With so much interest in onshore Kenya, it is worth taking a look at Simba Energy (SMB.V). Activities in its Kenyan Block 2A are progressing, with the passive seismic capture now complete. In parallel, the company has opened its data room and engaged Ernst & Young in the farm-out process in July. However, Kenya is not Simba’s only asset; it has recently picked up three blocks in Chad that look promising in our view. We do not expect the addition of these blocks to be the last – Simba is still hungry to extend its range, but currently has limited cash.

Kenya remains the focus
The majority of Block 2A in Kenya is in the Mandera-Lugh Basin, though parts also encroach into the Anza basin. While two unsuccessful wells were drilled by a previous operator, no wells have been drilled recently in the Anza basin and, as a result, it is frontier. However, considerable resources have so far been put towards exploration, with Afren commissioning 1,900km2 seismic in Block 1 (completion due in Q412) while seeps and other indicators have indicated a working hydrocarbon system. The company has initiated a farm-out process, which we believe has attracted significant interest. Onshore Kenya has already attracted Marathon, Tullow and Africa Oil.

Chad adds to a diversified portfolio
Although the Kenyan block stands pride of place in the portfolio, Simba has collected a portfolio of nine blocks in six countries (Mali, Guinea, Ghana, Liberia), all on a 100% basis. The three blocks recently added in Chad further increase its geographical exposure. These are close to existing discoveries (and production) and we believe could provide further upside in the longer term. We note that Glencore recently paid US$331m to farm-in to proximate Chad production and development blocks in September, giving an indication of potential long-term value.

Valuation: Substantial upside potential, cash required
Simba’s early stage positions mean valuations are highly speculative in nature, although with recent successful drilling in Kenya, we can apply a number of valuation techniques. Equity dilution is likely and required to progress the acreage. However, even assuming a 44% dilution in shares to raise US$10m, our risked NAV lies at C$0.20/share (assuming a one well carry farm-in) which would rise to C$0.36/share assuming a two well carry and C$0.59/share assuming a pre-drill estimate). In a success case of one well, the value could exceed C$1.4/share. For investors hunting for a new “Africa Oil” story, Simba could be worth tracking.

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