Energy: Oil & Gas - Bahamas Petroleum Company Plc

November 5, 2010 Europe: Energy: Oil & Gas - E&P
High risk binary stocks: A portfolio approach buys inexpensive diversified risk
We believe that companies levered to a concentrated number of high risk assets generally trade at a discount as the market also
applies a discount for the binary nature of the investment case. While we understand this approach (and to a degree apply this
ourselves) we also note that this tendency offers an opportunity to buy a group of such stocks – thereby exploiting the mis-pricing of
this risk while also buying sufficient diversity to mitigate the asset concentration risk. Although we would be buyers of some of
these stocks as independent entities, we believe that a group of such stocks is an effective way to purchase high impact, yet
diversified risk, thereby offering exceptional weighted average value.
We have isolated those companies within our universe which we define as having high levels of binary risk. We define high risk as
companies which have greater than 50% of their value in a single discovered asset/play where the combined risking (technical and
political) is greater than or equal to 50%
While we expect a number of these companies to be worth little to nothing in the medium term, we believe that the level of
mispriced risk in aggregate is sufficiently high and diversified that these stocks could outperform the overall universe substantially.
Exhibit 47: High risk binary stocks typically show high levels of potential upside and high re-rating potential
Company Asset Risk type Value in high risk asset * Weighted average risk of
high risk event
Source: Goldman Sachs Research estimates.
Potential upside in success
case
Potential upside to
12 month target
price
Norse Energy New York state shale gas Political 70% 33% 249% 47%
Desire Petroleum North Falkland Basin Exploration 102% 19% 632% 89%
Falkland Oil & Gas South Falkland Basin Exploration 89% 5% 1694% 96%
Borders and Southern South Falkland Basin Exploration 86% 6% 1347% 59%
Regal Ukraine gas B‐sands Development 78% 39% 253% 36%
Nighthawk Energy US Shale oil Execution and geological 45% 30% 145% 105%
Average 78% 22% 720% 72%
* Vs EV
Goldman Sachs Global Investment Research 40