Energy: Oil & Gas - Bahamas Petroleum Company Plc

November 5, 2010 Europe: Energy: Oil & Gas - E&P
Newly discovered basins provide a structural drilling advantage
We believe that the market also offers opportunities to invest in situations in which companies open up new exploration plays in
basins where they hold large and strategic acreage.
The two highest profile new plays in the European E&P universe in recent years have been Cairn’s discovery of Mangala, which
opened up the Rajasthan play, and Tullow’s discoveries in Uganda and Ghana. In our view, it is noteworthy that although the initial
discovery in each case resulted in a substantial outperformance relative to peers as the individual prospects were de-risked, even
higher levels of outperformance were to come over the next 2-3 years as the potential of each basin became clearer. In each case,
the drilling of additional exploration prospects in the vicinity of the original discovery that had been substantially de-risked drove
the share prices to significant levels of outperformance. In our view, this suggests that the market is uneasy with ascribing value to
additional prospectivity that has not been highlighted in drilling programmes. In order to capture this potential upside, in certain
situations, where we believe a new material play has been opened up, and in which the company holds significant strategic acreage
(>1000 square net kilometers), we extend our time horizon for rewarding exploration catalysts into the middle of 2013.
We note that risks remain in the early stages of a new play (as demonstrated by the disappointing results in Mauritania in the last
decade) but believe that buying a group of such stocks should go some way to mitigating these risks. Our Play Opener screen
contains Rockhopper, Desire, Cove, Tullow, Green Dragon and Hardy.
Exhibit 6: Cairn‘s share price rose 270% in the two years after the initial
reaction to the Mangala discovery; >100% outperformance relative to peers
Cairn performance vs. large cap E&Ps following Mangala discovery
180
160
140
120
100
80
60
40
20
0
Oil discovery in
Rajasthan
announced
Source: Datastream.
Cairn Energy performance Peer group performance (indexed to Cairn)
Exhibit 7: Tullow’s share price more than doubled after the initial reaction to
the Jubilee discovery; >100% outperformance relative to peers
Tullow performance vs. large cap E&Ps following Mangala discovery
Source: Datastream.
Goldman Sachs Global Investment Research 8
1600
1400
1200
1000
800
600
400
200
0
Oil discovery at
Jubilee
announced
25/04/2007
25/05/2007
25/06/2007
25/07/2007
25/08/2007
25/09/2007
25/10/2007
25/11/2007
25/12/2007
25/01/2008
25/02/2008
25/03/2008
25/04/2008
25/05/2008
25/06/2008
25/07/2008
25/08/2008
25/09/2008
25/10/2008
25/11/2008
25/12/2008
25/01/2009
25/02/2009
25/03/2009
25/04/2009
25/05/2009
25/06/2009
25/07/2009
25/08/2009
25/09/2009
25/10/2009
25/11/2009
25/12/2009
25/01/2010
25/02/2010
25/03/2010
25/04/2010
25/05/2010
25/06/2010
25/07/2010
Tullow performance Peer group performance (indexed to Tullow)