Energy: Oil & Gas - Bahamas Petroleum Company Plc

November 5, 2010 Europe: Energy: Oil & Gas - E&P
The short-term explorers: Buying near-term activity unlikely to offer value
We believe that the market is more positive in valuing near-term, visible exploration than it is in valuing other exploration themes
(i.e. play openers and medium-term explorers discussed later). Given our scepticism regarding geological “edge” in determining the
probability of specific exploration catalysts being successful, we prefer to let value be our main guide in determining whether or not
an exploration programme is attractive. As a result, we generally consider companies about to embark on material drilling
campaigns to be relatively unattractive investments. Our “short term explorers” stocks fulfill the single criteria that they can
increase our valuation by greater than 75% in the next six months in the event of a total de-risking of the company’s exploration
assets.
Compared to other screens and the average upside of the universe as a whole, this screen trades at a lower premium to our
valuation than any apart from the strategic asset screen and offers significantly less upside vs. the sector average. Excluding stocks
which are in other screens and therefore have other structural advantages (mainly the play openers and the high binary risk stocks),
the upside offered by this screen would be even less (i.e. less than 30%).
Exhibit 36: Value of near-term drilling is more efficiently priced in by the market, showing unattractive relative risk/reward
Average upside/downside of screens on an equal weighted basis
Average upside to target price
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Unrealised potential
M&A
Source: Goldman Sachs Research estimates.
Unconventional
resource
High risk binary
plays
Goldman Sachs Global Investment Research 32
Medium term
exploration
Play openers
Balanced explorers
Oil price leverage
Strategic assets
Short term
exploration
Short term
exploration
(excluding
structural winners)