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The Niche Group – Independent evaluation of hydrocarbons in projects in Turkey begins to reveal some of the real upside potential: Speculative Buy at 4.25p with an 8.9p target price

The Niche Group has interests in onshore gas exploration and development activities in Turkey and through its investment in Oman Resources (Oman) now has both the potential for immediate cash generation as well as significant upside from further exploration on four blocks in that country. With the past two weeks the company has announced the independent evaluation of the recoverable hydrocarbons within Oman’s assets in Turkey, where Niche hold loan notes convertible into a 35.7% shareholding in that company.  This report showed that net to Oman, 2P reserves of 2.2 million barrels of oil equivalent (MMboe) and 2C contingent resources of 9.9MMboe with a best estimate for prospective resources of 15.9MMboe. For Oman’s interests in the Konya and Hatay licences, the independent consultants placed a net attributable NPV (10%) on 3P reserves of $117.0 million, on 3C resources of $341.8 million and with a range on the prospective resources ranging from $51.6 – $565.0 million (medium $259.0 million). With Niche having a 35.7% stake in all the above, it does seem that this report has begun to reveal some of the upside potential within this Turkish hydrocarbons play.

In early June, there was news from Konay (Block 4077) that testing on the Gulhanim-2 (G-2) was to commence imminently with the construction of a pipeline expected to begin in the fourth quarter of 2011. On completion of testing of the G-2 well the rig will move to Karapinar-2 for work-over operations. At Block 4396 (Hatay) the Hamam-1 well which has been drilled to 855 metres and has encountered three potential gas bearing sands with a net pay of 15 metres between 642 to 777 metres and the initial flow tested at up to 3.5 million cubic feet per day. Whilst at Block 4395 (Hatay), drilling operations in Kastal-1 are underway to reach a target depth of 650 metres to test shallow gas potential and already an additional gas potential zone has been encountered at 300 metres; with construction of pipeline tie-in to commence in the fourth quarter. Meanwhile at Block 4394 (Hatay) the well to test the Ayseler structure where the target is at 1,500 metres, which has previously been identified on seismic data, is planned for later this year.

In April, Niche raised £13 million at 7p in a placing which provides the funds for the Company to take a 5% interest in Arar Petrol ve Gaz AUPAS (ARAR) and also increase its stake in Oman. ARAR is Turkey’s second largest petroleum licence holder and Niche acquired this stake for £8 million from Faith Alpay ARAR’s Founder and Managing Director. ARAR was founded in 2002 and holds a total of 21 exploration licences which includes the Konya and Hatay Blocks, which offer an attractive combination of low risk development opportunities coupled with frontier exploration. Faith Alpay has subscribed for £1 million of stock in the placing which will give him a 2.1% stake in Niche. At the same time, the Company is advancing £3.5 million to Oman by way of a convertible loan agreement and this money will allow Oman to meet its payment obligation in respect of its farm in agreement on Hatay Block 4394; with Niche’s stake in Oman increasing to 35.7%. These moves further strengthen Niche’s position in Turkey considerable and also serve to more fully align the interests of Faith Aplay, ARAR, Oman and Niche.

Progress has been startling as it was only in March 2011 that the board announced a move that saw the Company farm in on three blocks in the Hatay District of Turkey which significantly boosts Niche’s interests in the country.  Once again Niche was backing Oman in a farm in and joint operating deal with ARAR on three more exploration licences which were: AR/ARR 4396, AR/ARR 4395 and AR/ARR 4394 situated in the Iskenderun Basin which is close to the Eastern Mediterranean Sea. The work on the Hatay Blocks over the next two years is expected to cost $34.4 million. The Hatay Blocks provide the opportunity of near term gas production. While Niche’s previously estimated recoverable gas reserves from Block 4077 were 80Bcf, Oman now estimates that the combined gross recoverable gas reserves across the portfolio are in the region of 300-500 Bcf. Such reserves would make it the largest domestic supplier in Turkey, with potential gross production of 15-25 MMcf per day when all the fields reach full production.

The Hatay Blocks agreement marked 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. The original deal concerned Block 4077 which seems to be shaping up rather well as in mid-March 2011; investors learnt that the G-2 well on Block 4077 had identified three attractive hydrocarbon-bearing zones and it seems fairly obvious that all these zones have near-term production capability and cash flow generation potential. 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.

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. John 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. 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. 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.

Taking Niche’s share of Oman’s net attributable NPV (10%) placed on the reserves and contingent resources at the Hatay and Konya licences on a risked basis has allowed us to calculate a target price of 8.9p for Niche and makes the stock a Speculative Buy.

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