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The Niche Group 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 his investor consortium 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 GBP200 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 wells have already discovered gas. This is not a one shot situation, as the block has two more structures where at least one of 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 across several African and Middle Eastern countries.

Investors should not be disappointed with the deal that John McKeon has put into Niche. The investment made in Oman Resources has provided the chance for Niche to get involved in what Donal Boylan believes could be the largest gas discovery in Turkey. Boylan was introduced as an Executive Director at the time of Niche fund raising in May 2010, and brings a complementary set of relationships with Ultra High Net Worth Individuals and Sovereign Wealth Funds in China, Russia and several other African and Middle Eastern states. Given the strong relationship between Oman Resources and Arar Petrol ve Gaz AUPAS (ARAR), which is the second largest oil and gas licences holder in Turkey, after Turkiye Petrolleri Anomi Ortakligi (TPAO), the country’s national oil and gas company, there are real reasons for confidence. Oman Resources 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 Resources by bankrolling that company to advance this joint venture gas project.

Indirectly Niche now has a 9.35% 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 at least 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. Drilling is well advanced beyond 2000 metres depth in one new appraisal well and work-over operations are ready to commence on one of the existing legacy wells. These two wells, if successful, should allow a Competent Persons Report to be pub lished which should 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. The Oman Resources geologist Enzo Zappaterra has prepared initial evaluations and recommendations on about 5 of these blocks, in readiness to extend the co-operation between Oman Resources and ARAR.

Our research is initiated with a speculative buy recommendation and our analysis of the opportunities at Block 4077 has allowed us to calculate a target price of 9.5p. However, there is substantial a lack of knowledge of the gas reservoirs, no Competent Person Report yet and so there is probable scope for a higher target price if the drilling work that begins shortly proves to be successful.

Year to 30th June	Sales (GBP million)	Pre-Tax Profit (GBP million)	Earnings Per Share (p)	Price Earnings Ratio	Dividends Per Share (p)	Dividend Yield (%)
2007A	0	(0.02)	(0.02)	NA	0	0.0
2008A	0	(0.20)	(0.19)	NA	0	0.0
2009A	0	(0.23)	(0.22)	NA	0	0.0
2010E	0	(0.90)	(0.30)	NA	0	0.0

Background

The Niche Group joined AIM in 2004 as an investor in start-ups and pre-IPO businesses. This strategy was derailed by difficult market conditions which led to far fewer IPOs and lack of suitable investment opportunities; and with no evidence made of any progress being made saw the share price steadily eroded. In July 2009 the Company looked set to move into the management of student accommodation with the reverse takeover of Ely Management Operations Limited, but that deal failed to complete.

On 22nd April 2010, it was revealed that the well-respected Irish entrepreneur John McKeon had become a consultant. This announcement was accompanied by the news that he and his associates had acquired a then 26.64% interest in Niche. McKeon was one of the founders of Circle Oil and given the prevailing excitement in the sector this move to turn a bombed out stock into an oil and gas play sent the share price shooting up from 0.8p to 6p in a matter of days.

On 20th May 2010, a placing which raised GBP5.435 million at 5p was announced. After costs, GBP4.95 million was invested into Oman Resources Ltd (OR) in the form of a convertible loan and the remaining GBP145,000 was earmarked by the Company as working capital. OR is an Irish company that was established to do an oil deal in Oman which has yet to be concluded. On 13 September 2010, an additional GBP850,000 was raised at 5p per share to allow Niche to advance to OR a further loan of GBP660,000. OR is a private Irish company that was established for carry out an oil deal In Oman but instead gained a joint venture agreement with ARAR to farm in on a highly prospective gas block onshore in Turkey.

Overview of operations

Niche is seeking to acquire a substantial shareholding in OR and has invested in this company by way of a convertible loan. The initial GBP4.95 million loan plus the additional GBP0.66 million provided a strategic investment in OR which on conversion will make Niche an 18.7% shareholder. This investment allowed OR to make payments to ARAR and its partner under a farm-in deal whereby OR has an option to acquire a 50% interest in exploration licence AR/ARR/4077 (4077 Block). This block covers an area of 49,821 hectares in the Tuz Golu basin which lies in south central Turkey and is known to contain a major onshore gas discovery. ARAR has agreed to act as operator of this exploration programme.

The farm-in terms of the joint venture agreement between OR and the initial licensee and operator ARAR are that OR has the right to acquire a 50% interest in 4077 Block with the consideration paid in 2 phases. Phase 1 is discussed above and was in exchange for a 50% interest in two wells and a bottling plant to which Niche funded a total of GBP5.61 million for its participation coupled with OR’s own investment to meet the payments required under Phase 1 of the agreement.

Phase 2 concerns a full 50% interest in the full block licence rights. Costs and production are to be shared on a 50:50 basis. To transfer the Participating Agreement to OR will require an additional payment of USD14.75 million (GBP9.46 million) in stages through to the end of Q1 2011 under an amendment to the OR and ARAR Farm-In Agreement, and the approval of the transfer by the General Directorate of Petroleum Affairs ( GPDA ) of the Turkish government. The GPDA has indicated their support for the ARAR and OR co-operation during two recent visits to Turkey, the most recent this month.

Location of 4077 Block at Tuz Golu, Turkey
AR/ARR/4077 farm-in

The AR/ARR/4077 farm-in opportunity is located at Konya Basin. The licence was awarded on 11th September 2005, the end of the 4th year exploration period was 11th September 2009 and end of 8th year exploitation period is 11th September 2013. The target is the Kirkkavak and Caldag formations which date from the Palaeocene period. This whole area has seen little exploration effort. The state oil company TPAO drilled a total of 28 exploration wells in the area before the 1980s with six out of sixteen deep wells testing gas. In 1978 -1980, TPAO was exploring for oil in the region and found gas in 4077 Block but no oil. At that time three wells namely Karapinar-1, Karapinar -1A and Karapinar- 2/2A were drilled and apparently gas kicks were encountered. Subsequently, the wells were plugged and abandoned. At that time oil was the target and so any gas encountered was ignored.

The potential here is for sweet gas along with condensate/oil with a second potential of salt caverns for storing gas. 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. This figure is actually an average between the estimates determined by three sets of independent experts. To the East and West, lie two more exploration areas and ARAR’s management estimates that combined all these three areas contain 330bcf with an upside of 750bcf of recoverable gas. The plan is that ARAR and OM will develop the 4077 Block which conveniently lies just eight miles away from an existing pipeline. Three discovery wells that were drilled in the past form a line from North to South and the estimates have been made based on the drill logs from these wells which have allowed an estimate of at least 80bcf of recoverable gas to be calculated for the appraisal and d evelopment project on the central zone of this block. The current programme of work involves the drilling of two appraisal wells to help pinpoint the size of the reservoir which will be infill holes on the existing North South lines of wells as well re-entering the three existing wells.

The placing announcement of 13 September 2010 also brought news that ARAR had acquired a 186 line-kilometre 2D seismic programme on the West Area Prospect of the 4077 Block. This new data will give the team a better understanding of the structural geology of the West Area Prospect ahead of drilling a well to test the structure. The information has been processed at ARAR’s offices in Ankara, Turkey and Houston, Texas. Early work has shown that the data is of a very satisfactory quality but definitive results will have to wait until this information can be mapped and correlated with data from the coming drilling programme.

This seismic data will help to verify the structure underground and gain a better understanding of the prospectivity of this area that has been defined by three gas wells, Karapinar-1 (K-1) and two full depth wells including the Gulhanim-2 (G-2) which at that time were soon to be drilled. Part of the funding provided by OR will pay for a work-over of the K-1 well which is scheduled to start this month. The G-2 well had been drilled to a depth of 503 metres but work had been temporarily suspended so as not to interfere with the seismic programme. On 16 September 2010, investors learnt that drilling rigs and logging equipment were being mobilised to allow both the work over operation at K-1 and the re-entry of G-2 well to begin with both wells expected to be spudded in October. The Niche annual report issued 26 November 2010 further updated that the K-1 well work-over operations have been delayed awaiting a final component ( coiled tubing unit ) clearing customs following s hipment by the rig owner; whilst the G-2 well had reached a depth of over 1800 metres following installation of an intermediate casing at 1121 metres. The next couple of technical updates should provide a greater degree of clarity on this Phase 1 activity in Block 4077.

Turkey

Turkey is a large country which has an immense wealth of energy and mineral resources; which occupies an important strategic location lying on the cross roads between East and West. The country’s oil and gas sector seems open to foreign companies with multinationals such as Amity Oil, BP, Chevron, ConocoPhillips, Eni, ExxonMobil, OMV, Royal Dutch Shell, Toreador and Total active in the country.

The prospective hydrocarbon basins in Turkey are as follows: Tuz Golu Basin, Black Sea offshore basin, Adana Basin, Anatolian Basin and Thrace Basin, which are discussed below.

Tuz Golu Basin – Located in Central Anatolia Turkey, this is the largest interior basin in Central Anatoila. Tuz Golu means salt lake in the local language and is the name given to the second largest inland lake in Turkey. Although no deeper than two metres, the lake is 1,500 square kilometres in size and lies 100 kilometres North East of Konya. This basin is a tectonically very complex area with heavy oil and minor gas deposits and although oil and gas exploration began in 1959, as yet there no commercial discoveries have been reported. The problem here may be that the seismic quality is not that good which makes interpretation of the structure difficult. So the basin has been modelled 3D using gravity methods.

Black Sea offshore basin – The basin is largely unexplored although since 1997 there has been increased interest in area. Certainly, the Black Sea remains Turkey’s greatest hope to become a self-sufficient oil producer in the future. It does seem that TPAO has too much on its plate as in this potentially lucrative oil bearing region, the state oil company has licences which cover close on 180,000 square kilometres. Progress so far in this area has been rather slow as only one well over 1,000 metres deep drilled in what is a 300,000 square kilometre basin.

Adana Basin – Oil deposits have been found in this basin as well as several oil seepages; however only one field called Bulgurdag has been discovered to date and that was found by Mobile in 1960 and oil is still being produced today.

Anatolian Basin – oil rich area located on the northern extension of the Arabian plate. The main discoveries here have been made by TPAO, Mobile and Shell
Thrace Basin – A gas rich area with daily gas production 60mmscf/d.

Oil

Since 1934, more than 3,700 wells have been drilled in Turkey with the bulk of these in the South East of the country. The split is roughly as follows: South East Turkey 77%, Thrace Basin 15% and other onshore areas 7%. A total of 35 wells have been drilled offshore with 13 of those in the Black Sea. The level of success looks reasonably high as last year 143 wells were drilled which resulted in the discovery of oil in 53 wells, natural gas in 30, 33 dry wells and 27 where the work continued at the year-end. TPAO has been exploring since 1955 and today accounts for 70% of the country’s oil production and has an interest in 40% of Turkish licences. In all, Turkey has more than one hundred oil fields which are largely located in the Anatolia region in the South East. Many of the commercially producing fields are getting quite old and hence enhanced oil recovery techniques are necessary to extend the lifetime of production. In 2009 Turkey produced 16.65 million barre ls (equivalent to 46,000 barrels of oil per day (bopd)) from around 75 small oil fields with estimated proven reserves of 290mmbbls. But it seems that production is on the decline as peak production was reached back in 1991 at 90,400bopd.

Gas

The country has a large natural gas requirement as it meets 29% of Turkey’s total energy consumption in 2006 of 3.5 Quadrillion Btus. Gas consumption has grown dramatically over the past two decades, from around 123bcf per year in 1990 to hit a peak of 1,100bcf in 2006.

Turkey produces gas from 49 fields with the majority of these discoveries in the Thrace Basin and in 2009 total production was 729.4 million cubic metres (26bcf). The largest is the Marmara Kuzey gas field which is an onshore field that lies in the Thrace-Gallipoli Basin. The three big gas producers are TPAO, BP and Shell; with most of this home produced gas used as part of enhanced oil recovery projects where the gas is injected into oilfields to improve oil recovery. The country has gas reserves but is a big importer as 64% of gas consumed is imported from Russia although there are also pipelines running into the country from Iran and Azerbaijan. Turkey’s gas reserves have been estimated at 300bcf and annual natural gas production was 32bcf in 2006 which does show that the Konya could be a substantial contributor towards helping Turkey meet its domestic energy requirements.

Energy hub

Turkey acts an important conduit between East and West as the BTC oil pipelines connects the Caspian to the Mediterranean without needing to cross Russia. Whilst the TGI or the Turkey-Greece Interconnector transports natural gas from the Shah Deniz field in Azerbaijan. One infrastructure project that looks vital for the EU’s long term strategy to boost supply security is the Nabucco Project which is conceived to link gas production in Iraq to South-Eastern and central Europe consumer markets. Turkey seems to have seized on this opportunity which would ensure that the country is not only a just transit corridor but also an energy hub. Along with major pipeline systems and projects, Turkey has a domestic pipeline network and there are four projects for the storage of natural gas underground which includes the Konya Block included.

Strategy for growth

Niche is aiming at immediate value creation through investment in OR, which seems to have big opportunities for potential growth and expansion. Certainly ARAR’s shortage of capital has presented this opportunity to OR where Niche is gaining an interest by funding the exploration on some highly prospective areas in Turkey at what looks like a knock down price. Added to that Niche will also benefit from its holding in OR which has the strategic aim of establishing a joint venture exploration and production business with ARAR in the onshore natural gas industry in Turkey. Certainly, there is scope to place an immediate value on Niche’s stake in OR based on that company’s farm-in into the 4077 Block which provides three major opportunities namely: Konya Development Project, Konya Exploration Project (East) and Konya Exploration Project (West). The Konya Development Project would seem to offer immediate value creation as a photograph dated August 2009 and used in presentati ons shows the Karapinar-1 Well (K-1) flaring gas off into the night sky. So it is already known that the gas is in place, and it is purely a question of the quantity.

If exploration proves to be successful then the team will be seeking to production of 1.1bcf per annum per well which means that the five wells in the Konya Development Project could produce a combined 5,500bcf per year. The construction of the bottling plant, which will be built in a modular fashion to allow for future expansion, has already begun and in the early days the gas will be bottled and sold which will allow for early cash flow. Only once sufficient reserves have been identified to justify the USD2.5m projected cost of an 8 inch pipeline be built to take the gas 15 kilometres to the main pipeline.

The schedule suggested is that the Exploration on the Konya Exploration Project (East) and Konya Exploration Project (West) will commence once the Konya Development Project is in production. Depending on exploration results consultant Enzo Zappaterra has outlined a plan or 15-20 wells with a similar level of production as projected for the Konya Development Project.

It might be early days for Niche in Turkey, but it would seem that the managements’ plans go a lot further than 4077 Block. The relationship between OR and ARAR provides plenty of scope for future growth and expansion. It would seem that there is the chance of farm-in or acquisition of other ARAR assets as this group is the second largest licence holder in Turkey, after TPAO, holding a total of nineteen licences. There is an obvious opportunity here as ARAR has a substantial work requirement to maintain these many licence areas and may be seeking further help in exploration and development in Turkey and probably elsewhere as ARAR has oil interests in some nearby countries. So along with the current farm in opportunity in the little understood Tuz Golu Basin is a real chance to develop the relationship with ARAR and perhaps farm in into opportunities in the Middle East and Central Asia due to the proximity.

At present there seems to be rather a complicated ownership structure between Niche and OM and the joint venture company which might put off some institutional investors. There is clearly scope a bit further down the line for some corporate reshuffling which would align the interests of both Niche and OM. It’s not beyond the realms of possibility that Niche could become a 50:50 partner in the joint venture company at 4077 Block via some deal with OM.

Risks and opportunities

Risks

No Competent Persons Report – At this stage there are a lot of uncertainties as this project is at quite an early stage although the presence of gas has already been observed. The G-1 well was drilled in 2008 to satisfy the work requirements to retain the licence and the all-important flow rate was not tested; which is due to ARAR’s lack of exploration funds.

The project has no all-important Competent Persons Report which would allow investors a proper understanding of the potential and thus at this stage share in Niche represent a highly speculative investment. That said, the drilling of two wells that begins in October 2010 could provide sufficient data to allow a resource figure to be calculated for inclusion in the Competent Persons Report.

Geological risk – Within the 4077 Block it is already known that gas exists; however there are a number of main sources of uncertainty which include the effective thickness of the productive strata, the current strata pressure and oil saturation.

The 50% joint venture partner and operator ARAR which has a 26 year history of operating in the sector provides some comfort as this company such a better insight into assets.

Operational risk – Going forward the operator in 4077 Block, is ARAR which is well-established and respected in the oil and gas industry both in Turkey and internationally which probably lowers this type of risk. Niche has gained a powerful partner and the operator is the form of ARAR is a the second largest oil and gas licence holder in Turkey outside the country’s national oil company; that works as a international contractor and is drilling wells for Gulf Keystone in Kurdistan and has also worked for the US government.

Geopolitical risk – Turkey links Europe and Asia; and is seen as a potentially important future member of the EU. The Aon annual Political Risk Map for 2010 shows country as being medium risk shares the same level of geopolitical risk as India, China and a number of the North African countries.

Opportunities

Turkey – The country has a wealth of mineral and energy resources. Turkey has seen large and rising demand for natural gas over the last decade of which almost two thirds is supplied by Russia; and so there is a big market for domestically produced gas. It does look as though Konya could be a substantial contributor towards Turkey meeting its domestic energy requirements.

Immediate value proposition – Niche’s investment in OR gives the Company a stake in a joint venture exploration project in the Konya Block. Certainly this stake in OR allows Niche to rather neatly short cut on a couple of stages of a traditional oil and gas exploration company and takes out some of the waiting.

Strategic relationship – The investment in OR gives Niche a strategic partnership with ARAR. In all, ARAR has a total of nineteen licences in Turkey which makes it the second only to TPAO. Licence areas in Turkey come with a work commitment of something like USD1 million during three years and so that there may be the chance of farm in or acquisition of some of ARAR other licences in Turkey and elsewhere.

Under explored – The Konya area looks to have historically been under explored. The state-owned oil company, TPAO drilled a total of 28 exploration wells in the area before the 1980s with six out of 16 deep wells testing gas. At that time oil was the target and so any gas encountered was ignored.

Low tax and royalty rates – Prevailing rates of tax and royalty at 20% and 12.5% respectively in Turkey today would seem to be highly attractive to investors.

Management

Non-Executive Chairman – Christopher Stainforth. Stainforth has been a Director of more than a dozen quoted companies as well as being actively involved in more than five hundred corporate finance transactions. He trained as a Chartered Accountant in the 1970s with Peat, Marwick, Mitchell in London (now KPMG). In 1980, he moved into corporate finance working at J. Henry Schroder Wagg & Co and Phillips & Drew. By 1989, Stainforth was MD of Corporate Finance at UBS Phillips & Drew which had grown over the previous seven years from eight corporate clients to over two hundred. In 1992, he joined Guinness Mahon where he became Head of Corporate Finance and then merged it with Henderson Crossthwaite which was subsequently acquired by Investech in 1998. The following year, Stainforth joined corporate finance boutique Ermgassen as a Partner and in 2002 was appointed CEO of Durlacher which was acquired by Panmure Gordon in 2005. In 2005, he joined a nother corporate finance boutique Saphire as a Partner.

Chief Executive Officer – Rakesh Patel – Patel has been involved in more than thirty AIM transactions; and is a Chartered Certified Accountant who qualified in 1991 whilst working for the London-based accountancy practice Gerald Edelman. In 1992, he formed the corporate fiancé division which looked after the dealing with acquisitions, disposals, mergers, private placings and stock market flotations. Patel was involved in the acquisitions of Ryman the Stationer and left the firm in 1996 to become Group Financial Controller of Chancerealm Limited, a group u=including Ryman Limited and Contessa Ladiesweare Limited and was involved in the acquisition and integration of Contessa Ladieswear Limited. Patel returned to Gerald Edelman as a partner in 1997 but left in 2003 to join accountants Adler Shine LLP, where he heads up the corporate finance division.

Executive Director – Donal Boylan – Boylan is the recent Chief Operating Officer and a Director of the USD2.3 billion aircraft lessor Hong Kong Aviation Capital, and the co-founder of a mainland China private jet charter business Red Diamond. After graduating as a Mechanical Engineer, he worked for General Electric Technical Services as a Power Generation field engineer around the world. After over twenty years in the aerospace and defence sector with Aer Lingus, GE Capital and Royal Bank of Scotland (RBS), Boylan moved up the corporate ladder from senior engineering positions to board level management and commercial roles in their aviation finance divisions. He has an extensive network of realtionships within the investment community in Russia, the Middle East and mainland China which stem from his working in business development in these regions from the mid-1980s to his time at RBS from 2001 – 2009.

Consultant – John McKeon – McKeon is well-connected at both government and ministerial level with most oil and gas ministries in North Africa and the Middle East. He was a founding shareholder and former Executive Director of Circle Oil plc, where he helped create an international oil and gas exploration and production company with assets spanning Egypt, Morocco, Tunisia, Oman and Namibia. Circle Oil has grown to become a prominent =gas producer in Morocco and counts Libya Oil Holdings amongst its substantial shareholders. McKeon is also a founding shareholder of IM Minerals, an exploration company with licenses over titanium dioxide prospects in Mozambique.

Consultant – Enzo Zappaterra – Zappaterra used to be a staff geologist and exploration manager with Chevron who has experience of working on a number of the world’s largest hydrocarbon basins. His specific expertise lies within the Eastern Mediterranean Margin which covers the area of Israel, Lebanon to Cyprus and Turkey. Zappaterra retired from Chevron in 2000 and has since worked as a consultant to Stat Oil, East Africa Oil, Rocksource, Harrods (Metro) Energy, Orca Exploration, Delta Oil, Senergy, Fugro, Zeta Petroleum, New Age and PetroMed. He is on the management team at Oman Resources.

Significant shareholders

Source: Company

Financial results

In the year to 30th June 2009, the Company generated no revenue and made a loss of GBP898,883, which was a big increase on the loss in the previous year of GBP249,809. However these results relate to the Company’s previous incarnation as pre-IPO investor where the downturn in financial markets meant that there were far fewer IPOs and so there were less decent investment opportunities. The losses essentially precede the company opportunity with Oman Resources and the associated May 2010 fund raising, and include costs of GBP202,840 in respect of the aborted acquisition of Ely Management Operations Ltd. ( EMO ) , GBP324,557 loss on its investment in EMO and the Complete Leisure Group Ltd. as well as GBP120,311 in respect of the premium paid on redemption of loan notes. Net of these 3 items, losses would have been similar to 2009 at GBP251,175. Coupled with that was the limited liquidity in the shares of smaller quoted companies meant that the Company was unable to dispos e of any of its quoted investments during that year.

Valuation and Conclusion

There is scope to place an immediate value on Niche’s stake in Oman based on that company’s farm-in into the 4077 Block which provides three major opportunities namely: Konya Development Project, Konya Exploration Project (East) and Konya Exploration Project (West).

As yet there is no Competent Persons Report (CPR) on the 4077 Block and so the valuation of Niche’s interest the project has to be valued on the basis of the independent analysis of the central part of the block as well as using the ARAR’s in- house estimate for the Konya Exploration Project (East). On the back of independent analysis, ARAR estimates that the central part of the 4077 Block contains at least 80 bcf of recoverable gas in the Konya Development Project. For the two more exploration areas which lie to the East and the West, ARAR’s management have estimated that these contain 330bcf with an upside of 750bcf of recoverable gas. The plan is that ARAR and OM will develop the 4077 Block which conveniently lies just eight miles away from an existing pipeline.

Our analysis of the Konya Development Project uses the 80bcf of recoverable gas which was estimated by independent analysis. A flat topped gas production profile is used in the analysis and it has been assumed that production begins in 2011 and that each well is able to produce rate at an annual rate of 1.1bcf for the first three years and then 0.73bcf for the next ten years. The drilling programme consists of two new wells being drilled plus a workover on three existing well with annual production of 5.5bcf achieved in 2011. Cost of drilling wells to 2,300 metres deep has been estimated at USD4.2m a figure for the cost of a workovers of an existing well assumed to be USD1.1 million with a total capital expenditure for development of USD18.5 million. As gas price of USD9 per mmcf is used in 2010 and 2011 climbing steadily to USD13 in 2019 has been forecast, but this does not represent any premium price that the JV company might gain by selling part of the gas production as bottled gas. The royalty rate used is 12.5% and a taxation charge of 20%; which are the current rates being charged today in Turkey. Production costs can be very low in Turkey and we have been guided by the consultants that a figure of 30 cents per mmcf would be a good ball park figure. There are not that many AIM-quoted gas producers operating in Europe for comparison. However Aurelian Oil and Gas PLC which is active in appraising and developing natural gas projects in Poland, Slovakia, Romania and Bulgaria seems to have had production costs around USD1.06 per mmscf in 2009 but that was on much lower gas production than has been assumed for 4077 Block. A Discounted Cash Flow model gave the Konya Development Project an unrisked Net Present Value of USD204 million and a risked value of USD184 million using a Chance of Success (COS) figure of 90%.

Looking at the Konya Exploration Project (West), the in-house estimate of 250bcf has been used as the basis for the valuation of this area. Many of the assumptions for the Konya Development project have also been used in the valuation for the exploration project in the West. Using the 250bcf resource figure a project has been modelled that has a project life of 20 years. It has been assumed that production begins in 2012 and full annual peak production is reached of 18.7bcf is reached in 2014. Once again, a flat topped gas production profile is used in the analysis with each well each producing 1.1bcf per year for the first three years of their life and then at a rate of 0.73bcf for the next ten years

Capital expenditure has been put at GBP25.2 million for years 2011 to 2013 which reflects the cost of drilling six wells a year at USD4.2 million apiece. The Discounted Cash Flow model gave the Konya Exploration Project (West) an unrisked Net Present Value of USD608 million. Given the more risky scenario here, a COS figure of 50% has been employed which results in a risked value of USD304 million.

The total risked Net Present Value is therefore USD488 million and using the current dollar/sterling exchange rate of USD/GBP 1.60 that equates to GBP305 million. On conversion of their loans, the Company has an 18.7% stake in OM which in turn has a 50% in the JV company, which equates to an indirect stake of 9.35% in Block 4077. This makes Niche’s holding worth GBP28.5 million and dividing by the issued share capital of 300.39 million shares allows us to calculate a target price of 9.5p.

Given the lack of knowledge of the reservoirs, the analysis at this stage is rudimentary and it must be pointed out that there is scope for a higher upside potential and a significant increase in the target price for the future for three main reasons. Firstly, at present the partners are carrying out more exploration work on 4077 Block which will result in drilling in the coming months and provide far better data than already exists which probably could increase the reserves not just in the Konya Development Project, Konya Exploration Project (East) and Konya Exploration Project (West). Secondly, despite the prospectivity of the Konya Exploration Project (East), there is no independent or in-house estimation of the resource in this area and so this part of the block has been assigned no value; but obviously could offer considerable upside potential to the valuation given the Exploration Project (East) at 27.9 square kilometres is almost twice as large as Exploration Are ( West) at 14.9 square kilometres. Thirdly, natural gas prices in Turkey are high due to demand and the lack of local supply; but plans are being advanced to sell bottled gas as wholesaler which should allow the partners to get a premium price on a portion of the gas production. Certainly Phase 1 of the agreement included rights or a bottling plant which would allow part of the production to be compressed and sold as bottled gas. No premium price for selling gas as bottled gas has been incorporated into the above analysis. We initiate our coverage at 5.425p with a target price of 9.5p and a stance of speculative buy.

Forecast table

Year to 30th June	Sales (GBP million)	Pre-Tax Profit (GBP million)	Earnings Per Share (p)	Price Earnings Ratio	Dividends Per Share (p)	Dividend Yield (%)
2007A	0	(0.02)	(0.02)	NA	0	0.0
2008A	0	(0.25)	(0.19)	NA	0	0.0
2009A	0	(0.89)	(0.29)	NA	0	0.0
2010E	0	(0.90)	(0.30)	NA	0	0.0

Key Data
EPIC	NGP
Share Price	5.425p
NMS	50,000
Spread	5.35p – 5.5p
Total no of Shares	300.39 million
Market Cap	GBP16.3 million
12 Month Range	0.2p – 6.2p
Market	AIM
Website	www.nichegroupplc.co.uk
Sector	Oil & Gas
Contact	John McKeon +44 (0) 7702 602288 or Donal Boylan +353 87 2769655