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The Niche Group – Farms in to 3 more blocks in Turkey: Speculative Buy at 7.275p with a 9.9p target price

The Niche Group has interests in onshore gas exploration and development activities in Turkey. The board has today announced a move that will see the company farm in on three blocks in the Hatay District of Turkey which significantly boost Niche’s interests in the country.  This deal requires the advancement of a further £5.5 million convertible loan agreement with Oman Resources Limited. In turn Oman Resources has agreed with Arar Petrol ve Gaz AUPAS (ARAR) that it will enter into farm in agreements and joint operating agreements covering the following three licences: AR/ARR 4396, AR/ARR 4395 and AR/ARR 4394 which are situated in the Iskenderun Basin which is close to the Eastern Mediterranean Sea. Under the terms of this deal Oman will advance $10 million to ARA and gain a 50% participating interest. In return for providing the funding Niche’s stake in Oman Resources will rise a further 5.5% to 32.2%.

The latest move marks the second deal to be struck with ARAR which is well respected within the industry as it is a well-establish international contractor and is involved in drilling wells for Gulf Keystone in Kurdistan and has also worked for the US government. ARAR is the second largest oil and gas licences holder in Turkey, after TPAO, the country’s national oil and gas company. ARAR’s portfolio of licences covers a total of 19 blocks in Turkey which obviously Oman Resources and Niche have been talking a close look at. The initial deal with ARAR concerned Block 4077 and in January 2011, Niche raised  £11 million placing at 6p of which £4 million was to be spent funding further work on Block 4077 including the workover of the G-1 and K-2 wells and for the completion of the G-2 well leaving £7 million of working capital.

Less than a fortnight ago, investors learnt that the G-2 well on Block 4077 had identified three attractive hydrocarbon-bearing zones. At that time on top of the two discoveries that had previously been announced at Shallow (post-salt) and Intermediate (pre-salt) depth; the Directors were able to report the discovery a third Deeper (pre-salt) pay zone encountered which comprised of a 38 metres gross interval of porous and permeable carbonates. Crucially a combination of oil and gas was encountered in each of the pay zones of the deeper discovery. Certainly its all good news as Nigel Little, the Chairman, was quick to point out that all these three hydrocarbon-bearing zones all have near-term production capability and cash flow generation potential.

Niche shot to prominence as the shares quadrupled in price in late April 2010. This excitement surrounded the arrival of John McKeon as a consultant, a move that was accompanied him taking a substantial stake in the Company. McKeon is best known for Circle Oil which he co-founded and which has developed into a business capitalised at close on £200 million with good geographical spread of oil and gas interests. Niche is gaining a significant interest in an onshore Block 4077 in Turkey where three existing well have already discovered gas. This is not a one shot situation, as the block has two more structures which seem more prospective than the first. The interpretation of recent seismic work and the current drilling programme should allow a better determination of the value that can be unlocked from this block.

With Niche at an early stage in its development, it is worth looking at Circle Oil, to see what John McKeon helped create. Circle Oil is an international oil and gas company that has assembled a portfolio of attractive assets in Egypt, Morocco, Namibia, Oman and Tunisia. Its strategy of seeking out fields that are too small to interest the majors has set Circle Oil on a definite path of growth. Certainly McKeon’s involvement with Circle Oil does underline the wealth of his business network within both the governments and the oil and gas ministries in the North Africa and the Middle East countries.

Indirectly Niche now has a 16.1% interest in Phase 1 for 4077 Block. The plan is for ARAR to explore and potentially develop the 4077 Block which is 8 miles from existing pipeline infrastructure. On the back of independent analysis, ARAR estimates that the central part of the 4077 Block contains 80 billion cubic feet (bcf) of recoverable gas in one development project. To the East and West, lie two more exploration areas and ARAR’s management estimates that the three areas combined could contain 330bcf with an upside of 750bcf of recoverable gas. Investors should gain some comfort that gas has already been found in Block 4077 and that a drilling programme will help in assessing the quantities of recoverable gas available. Success in drilling to date and the planned Competent Persons Report could substantially reduce the risk profile of the Company as it will allow the calculation of a valuation with far fewer uncertainties.

With little information so far available on AR/ARR 4396, AR/ARR 4395 and AR/ARR 4394, our valuation is only based on the analysis of the opportunities at Block 4077 which has allowed us to calculate a target price of 9.9p for Niche and make the stock a Speculative Buy. There is substantial a lack of knowledge of the gas reservoirs however a blockwide Competent Person Report is to be carried out based on the results of the on-going drilling programme at Block 4077 which could allow the target price to be further improved.