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The Niche Group – Additional gas discovery in Turkey: Speculative Buy at 6.625p with a 9.9p target price

The Niche Group (Niche) has interests in onshore gas exploration and development activities in Turkey where the most recent news, out this morning, is that two potential hydrocarbon bearing zones have been encountered during the current drilling of the G-2 well. The first zone (1,275 – 1,285 metres) in the shallow, post salt, had not been expected whereas the second zone (2,571 – 2,580 metres) within upper part of the pre-salt section came as little surprise as it had been discovered by earlier work. The team is gaining an improved understanding of 4077 Block where recently acquired seismic data has not only improved the resolution in the North East of the Development Area but also identified a new lead to the North East of the Development Area where up until now very little has been known. Currently advanced preparations are underway for workover to be carried out on three wells.

A £11 million placing at 6p accompanied the latest announcement. Of this total £4 million will be used fund 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. These funds will be advanced to the Oman Resources (Oman) to help fund investment in its joint venture with Arar Petrol ve Gaz AUPAS (ARAR). Once again the money will be advanced to Oman as a loan which can be converted at the company’s option into a further 8% stake in Oman taking Niche’s stake to 26.7%. The remaining of the funds will be used by Niche as working capital; but the statement makes it clear that this new money could pay for evaluating further opportunities with Oman to farm in on additional licences that ARAR has in Turkey. ARAR is the second largest oil and gas licences holder in Turkey, after TPAO, the country’s nation al oil and gas company. It does seem that Oman’s joint venture deal with ARAR could mark the beginning of the creation of a sizeable exploration and production partnership not only in onshore Turkey but also conceivably across the Middle East.  This is a future that Niche will be involved in as it has gained substantial stake in Oman by bankrolling that company to advance this joint venture gas project.

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 by 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. 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 13.35% 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.

There is little doubt that Niche has gained a powerful partner in the form of ARAR which will be the operator of Block 4077. ARAR 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. There would seem to be other potential opportunities within ARAR’s portfolio of licences covering 19 blocks in Turkey for Oman Resources and Niche to develop further exploration and production interests.

Our analysis of the opportunities at Block 4077 has allowed us to calculate a target price of 9.9p on 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 which could allow the target price to be further increased.