Shares in East African oil and gas explorer Cove Energy (LON:COV) gained over 10 per cent today as the firm put itself up for sale.
Last month, Cove confirmed that it was setting up a data-room for the potential sale of its 8.5 per cent stake in a large liquefied natural gas project that is being developed in Mozambique.
Today, however, Cove acknowledged that as this minority interest in the Mozambique Offshore Area 1 block, which hosts the LNG project, represents a substantial portion of the company’s asset value it makes more sense to sell the whole company.
A formal sale process will now run alongside the previously announced plan. According to analysts at Investec, potential buyers are likely to come from the Far East due to the asset’s strategic position on Africa’s eastern seaboard.
“We have always thought that Indian/Far East LNG buyers were the logical buyers in the same way that the Japanese/Chinese have been buying up non-operated stakes in Australian LNG projects,” analyst Stuart Joyner said.
The analyst says his 144p price target may prove to be conservative. He reckons there is an increasing possibility that a higher offer will emerge.
Westhouse Securities also believes that Cove has an enviable position offshore Mozambique.
The broker believes the sale process will generate significant interest from Cove’s existing partners such as Anadarko and Mitsui, as well as Asian LNG consumers and major oil companies with operations in the area.
Westhouse did warn however that Cove’s 8.5 per cent stake in Rovuma offshore area 1 may be too small to tempt a major without existing operations though the group’s Kenyan exploration assets and Tanzanian assets add extra value.
“Cove’s management clearly believes that, through exploration and appraisal (EA), the group has created sufficient value that a sale is preferable to further investment in EA activity, or the prolonged, capital intensive LNG development phase,” said Westhouse’s head of oil gas Andrew Matharu.
“In general, we agree with this approach. However, we had believed that oil prospects in the southern area of the block would be explored prior to a major transaction, due to the high-value nature of oil discoveries.”
Westhouse expects that interest in Cove will be high and it says that will be reflected in a substantial takeover premium in the event of a successful bid.
“Between now and a formal announcement regarding a bid, which could be some time, we expect speculation regarding a buyer to be active,” it added.
Westhouse repeated a ‘buy’ recommendation and upped its target price from 124p to 177p, which includes a 30 per cent takeover premium.
In this morning’s statement Cove confirmed that the sale process is being overseen by Cove’s advisor Standard Chartered Bank.
Cove says the formal sales process will involve a due diligence phase, whereby potential bidders will be given access to the data room and they will be invited to submit their proposals to the company.
It then plans to advance discussions with one or more parties with a view to agreeing a recommended offer with one party.
In the meantime investors will look on keenly for potential developments. Indeed, whatever offers are put on the table could provide a significant insight on the value that industry players put on such an asset in East Africa.
The terms of any deal may be particularly enlightening for investors in newly listed Wentworth Resources (LON:WRL).
Wentworth is born out of the same business that sold the Mozambique assets to Cove back in 2009. It partners Cove, and other companies, in the Mnazi Bay project and it owns a royalty over Cove’s share of future production from the offshore licence.
Cove’s decision is the latest sign of consolidation in this emerging oil and gas region. It follows Ophir Energy’s £118 million share-based offer to acquire Dominion Petroleum (LON:DPL) and subsequent press reports that BP (LON:BP.) was in talks over a farm-in deal with Ophir.
Up until now much of the activity in East Africa has focussed on deep water target off the coast of Mozambique and Tanzania. But currently a group of London-listed explorers are drilling similar targets on dry land.
The Ntorya-1 well is currently being drilled in the Rovuma basin from an onshore location in Tanzania. The well is being drilled by Aminex (LON:AEX), alongside its partners Tullow Oil (LON:TLW) and Solo Oil (LON:SOLO).
It was spudded in mid-December and it is expected to reach its target later this month. The well is believed to have a one-in-four chance of success. If successful, a discovery is likely to be in the order of 100 million barrels of oil, or 600 million cubic feet of gas.
So from either an operational or corporate perspective it appears that the nascent East Africa oil region will continue to provide plenty of intrigue and excitement for investors in the coming weeks and months.