Update on Africa Oil Investment

Since my last post on Africa Oil the stock has done pretty well (up approx 45%). The main reason for this was Casey's Research(very respected) recommending the stock as their top pick for 2010. This was enough to move the stock from 88-90 cents to 1.35 in only two days. Even though this benefits my position I don't like this kind of action. What you have is a bunch of hot money speculators moving into the stock hoping for a quick profit. This will undoubtedly lead to more volatility (both to the upside and downside). This is unfortunately part of investing in small cap resource companies.

Regarding Africa Oil's fundamentals little has changed since the last post. The company finished drilling their exploratory well in Kenya and failed to find any oil. However they did find 4 natural gas pay zones which is positive. In the next month the company should announce whether the find is commercially viable. I am not terribly optimistic-- Kenya has a long history of finding natural gas which was not economically viable but Africa Oil has a better chance because they found gas in 4 zones. If the find is economically viable it should be positive for the stock. Outside of this there is not much to move the stock until they spudd the Somalia well in the 4 quarter of 2010.

The only other piece of news regarding Africa Oil is their farm-out agreement with Red Emperor Resources. In exchange for paying a large amount of drilling expenses, Africa Oil will give Red Emperor a working interest in the Somalia blocks. I do not like this transaction because I would have thought Africa Oil could find a larger and more respected company to partner with. Look up Red Emperor Resources and you will see that it is a small cap nothing shell company listed in Australia. Also the company had to pay a finder's fee to commence the transaction (CDN $250,000). Could the company not find a larger company for the farm-out transaction? Overall this is a small issue but is peculiar considering the excellent prospects of the Somalia blocks. In the future I would hope the company could partner with an oil major which would increase the legitimacy of the company's prospects.

Original Article on Africa Oil

Black Swan Insights

FD: 3% of my portfolio is in Africa Oil. This is not a recommendation to buy or sell this stock. I am not an investment advisor.


No comments:

Post a Comment