Echelon Corporation HOLD

Target $ 4.50

Echelon is a leading provider of networking control and
utility technology solutions, specializing in advanced
metering infrastructure (AMI) and distributed control
products for the electric utility market.
All amounts in US$ unless otherwise noted.


Sustainability — Energy & Power Technologies
Investment recommendation
While the near term remains in transition, we continue to be impressed by
the fiscal discipline, a modest improvement in utility prospects and the
launch of the more pointed Internet of Things platform later. We are
clearly looking for tangible signs of traction (design wins, JV’s, M+A) to
become constructive on shares. Maintain HOLD.
Investment highlights
 The strategic plan continues to move forward, as Echelon embraces
the emerging IoT/M2M market, leveraging its sizable installed base,
brand recognition, and history of innovation. We look for new
products to emerge this year, while aggressive balance sheet control
keeps the opportunity firmly intact.
 Q1 sales are targeted at ~$16-18M (vs. our $17.25M), with non-GAAP
margins at ~46.5-48.5%. Non-GAAP LPS is forecast at ~$0.08-0.13.
Importantly, cash stays firm (~$57M), supporting potential M&A
(Internet of Things) and working capital needs.
 Our 2014 rev/GAAP/pro-forma estimates go to $72.8M/$(0.53)/$(0.34)
from $72.8M/$(0.47)/$(0.29). We introduce 2015E at
Our $4.50 price target (from $3) is derived using an EV/sales multiple of
1.5x (consistent with peak/trough in the legacy smart grid market) off our
2015 sales estimate of $90M.
Risks: Near-term financial losses, long and lumpy utility sales, nonresidential
building/leasing trends.



Caracal Energy Inc.

Ελληνικά: Chad coat of arms
Ελληνικά: Chad coat of arms (Photo credit: Wikipedia)

CRCL : LSE : £4.00
Target: £6.60

Caracal Energy Inc. is a Calgary-based E&P focused on the Republic of Chad. By leveraging existing discoveries in the Doba and Doseo basins of southern Chad, the company has built a strong reserve base with a large inventory of prospective locations. The company holds a large contiguous land position, consisting of 6.45 million gross acres spanning three production sharing contracts (PSCs).
All amounts in £ unless otherwise noted.

Investment recommendation
Caracal released a positive operational update highlighting results from Badila-3 and Mangara-4 and 5. The company confirmed that production facilities are in place and that the system has been loaded with oil in advance of first oil; production is expected to commence later this month once transportation agreements have been finalized and signed. With a projected return of 65% to our target, we reiterate our BUY
recommendation and £6.60 target price.
Investment highlights
 A day after Caracal provided updated net 2P volumes of 50.6 million barrels (NPV $1.4 billion), the company announced a new discovery
that should add incremental reserves at Mangara in 2013.
 Two high-impact exploration wells are planned over the coming quarter; Krim (offsetting Mangara) will spud in August and Bitanda
(offsetting Badila) will spud in September 2013.
 A second rig has arrived and Badila-4 will spud at the end of July.
We used a DCF model to initially estimate 3P NAV of $12.05/share  which we discounted in assessing our $10/share (£6.60/share) target
price. From a valuation perspective, the company’s recently published 2P reserve value now aligns with our target.
Execution in Chad remains the company’s primary risk in unlocking its value. As well, there is no assurance that any of the identified resources
will mature into a reserve classification. Current development scenarios are a “best estimate” and could change with new information.

Africa Oil : Results / Update

Satellite image of Africa, showing the ecologi...
Satellite image of Africa, showing the ecological break that defines the sub-Saharan area (Photo credit: Wikipedia)

Nov. 27

Africa Oil

(AOI : TSX-V : $8.50)

Africa Oil released results from its Twiga South-1 exploration location on Block 13T in Kenya.

The well encountered 30 metres of net oil pay in the primary Tertiary sandstone reservoirs, versus 143 total metres at Ngamia-1. With seismic showing a potential sedimentary-basin thickening versus the Ngamia-1 discovery, there were expectations of significantly higher pay. The market responded negatively to the news, despite the announcement of a new fractured play below 2,272 metres, where oil and wet gas was encountered over a gross interval of 796 meters. Over the next 4-8 weeks, a series of flow tests will be conducted at Twiga before the rig returns to Ngamia-1 for testing.

It will be difficult to analyze the fractured section unless the company is setup for longer-term production testing, and with such a large gross interval, results will depend on what is isolated over the test period, as well as equipment limitations on volumes. The Paipai-1 well on Block- 10A is drilling, with results expected by year-end.

This higher-risk Cretaceous/Jurassic prospect spudded on September 29, 2012 and TD is expected at 4,112 metres. The company estimates a 10% chance of success and gross prospective oil resources ranging 45-315 mmbl. However, Canaccord Analyst Brown believes faulting may have aterswept the zone. The Sabisa-1 well on the South Omo Block will commence drilling in Ethiopia by year end. Sabisa is testing the “North String of Pearls” concept.

Africa Oil has identified over 100 significant prospects and leads and will have three rigs active throughout 2013. Brown believes financing will be required by Q1/13 to keep pace with drilling.

Tullow Oil update ( Morgan Stanley )

Tullow oil camp, Uganda
Tullow oil camp, Uganda (Photo credit: Conservation Concepts)

Nov. 16

Shares in Tullow Oil (LON:TLW) were higher in early deals after what Morgan Stanley called a re-assuring update.

The broker pointed to upcoming drill results as offering a real and significant near-term kicker to the share price.

In all there are four wells underway, including the eagerly anticipated Zaedyus Deep, which has major implications for Northern Petroleum (LON:NOP) and  Wessex Exploration (LON:WSX), which have a combined 2.5 per cent.

Morgan Stanley reckons the Guiana project is worth an additional 96 pence on the Tullow share price.

Overall value from the current drilling campaign is worth over 15 per cent of the current share price, it added.

Significantly, Tullow is reviewing offers for its Asia business unit, which could also unlock value and has implications as the explorer moves forward.

“While relatively small, we think more significant and greater value disposals are conceivable as management has discussed focussing on assets where it can add significant value via the drill bit,” Morgan Stanley said in a note to clients.

It remains ‘overweight’ on the stock, which it reckons is worth 1,780 pence a share.

At 10am the stock was changing hands for 1,391 pence, up 6 pence on the day.

Earlier, Tullow said its financial performance was in line with City forecasts and it remains on target to deliver average net production of 80,000 to 84,000 barrels of oil equivalent per day (boepd) for the full year.

The group’s interim management statement covering the second half of the year said operational and financial performance has remained strong.

In Ghana, the production capacity of the Jubilee field has been ramped up and is expected to exceed 90,000 bopd (gross) by the end of the year, while in Kenya, the second exploration well in the Lockichar Basin has successfully encountered oil, which has further de-risked the exploration prospec

ts in the basin. Additional exploration drilling and testing results across Tullow’s Kenyan and Ehtiopian assets are expected before the end of the year.

Forecast capital expenditure for 2012 remains in the region of $2.0bn. As of October 31st, net debt is around $0.9bn and unused debt capacity is in the region of $2.2 billion.

“Growing production and cash flow from the Jubilee field continues to strengthen Tullow’s financial base as we look forward to further significant exploration and development programmes in 2013,” the group said.

Africa Oil – Kenya Raises Risk Profile

The Coat of arms of Kenya
The Coat of arms of Kenya (Photo credit: Wikipedia)


Nov 15

Africa Oil (AOI : TSX-V : $10.01)
Kenya became the latest country to raise its country risk, announcing plans to boost profits from natural resources exploration.

According to a Reuters article, Kenya is seeking a 25% stake in the production activities of oil & gas companies operating in the east African nation. The proposal, announced by Kenya’s energy minister, i s one of several the government has put forward in the past month to increase the state’s take from oil and gas resources, including new capital gains tax rules, a more competitive licensing process and higher fees for petroleum explorers.

Currently, most of Kenya’s contracts with oil explorers give state-owned National Oil Corporation of Kenya (NOCK) a 10% stake in the production business once commercial quantities of oil or gas are found. Under the current structure, this means that NOCK contributes 10% of production costs and receives 10% of profit. However, according to the article, Energy Minister Kiraitu Murungi told reporters that the government now wants companies to give NOCK an initial 10% stake, increasing to 25% once production has started.

An oil & gas expert at PricewaterhouseCoopers, commented that it is unclear whether the rule would scare off potential producers because contracts are based on one-on-one negotiations with companies and the Ministry of Energy. He believes that “It depends on how it’s structured and how it’s sorted out” and that he thinks “people will get wary if it’s getting something for nothing. If there’s a fair share of whatever somebody has spent…I think people will be pragmatic and see it as something reasonable. Kenya’s oil and exploration boom has been fuelled by gas discoveries in Tanzania and Mozambique and oil discoveries in Uganda. Notably Tullow Oil and Africa Oil discovered oil in the Ngamia-1 well in Kenya in March. The Ngamia-1 exploration well in Kenya encountered an initial 20 metres of net oil pay, followed by another 80 meters in deeper zones.

Canaccord believes successful flow testing on Ngamia-1 may open up a “string of pearls” of look-a-like geological anomalies that could exceed the 2.5 billion barrels discovered in Uganda.

In October, Tullow and Africa Oil encountered oil in a wildcat well known as Twiga-1 on onshore Block 13T, about 30km west of the Ngamia-1 well. The commercial viability of both finds has yet to be ascertained. Also in Kenya, Tullow and Pancontinental Oil & Gas announced in September that their license consortium’s operator Apache (APC) had found gas in the shallow offshore well Mbawa-1.

Africa Oil Confirms Discovery

Twende Twiga!
Twende Twiga! (Photo credit: rogiro)

Nov . 1

Africa Oil  (AOI : TSX-V : $9.92)

 The company and Tullow confirmed that the Twiga South-1 well on Block 13T encountered oil. Results are expected in early to mid-November once target depth has been reached and necessary sampling and analysis have been completed.

The African news source stated that Twiga South encountered 30 m of net pay. Africa Oil and Tullow have not confirmed any net pay figures. However, Canaccord  Analyst Christopher Brown believes the oil encountered to date is most likely from intervals within the Upper Lokhone sand section, versus the primary-target lower zone. Twiga South is a follow-up prospect to Ngamia-1, which encountered 100 m of net pay over several intervals in the Upper Lokhone Sand section, as well as an additional 43 m in the lower zone (although the company stated that net pay in the lower zone was interrupted by faulting).

Thus, Brown believes the market is anticipating results from Twiga South that are as good as, if not better than, Ngamia-1. He also notes that the target formations at Twiga South-1 are deeper than those encountered at Ngamia-1. Brown expects that the company is currently drilling through the Lokhone Shale and should penetrate the deep zone shortly. Twiga South-1 is a key prospect in demonstrating the repeatability of the Ngamia- 

Estimates are  at 59 mmbbl. Once net pay has been assessed and publically released, Brown expects Africa Oil to announce a secondary equity issuance. He believes the company will issue a minimum of $200 million. Flow-test results from Twiga South- 1 or Ngamia-1 will likely follow the equity issuance. The higher-risk Paipai-1 Cretaceous and Jurassic prospect is currently drilling. Paipai-1 spudded on September 29, 2012, and TD is expected at 4,112 m. The company estimates a 10% chance of success.

Tag Oil :Interview With CEO Update

New Zealand 2007
New Zealand 2007 (Photo credit: Szymon Stoma)

 (received from Cannacord  August 31 )


Tag CEO Garth Johnson

DP: Production numbers are currently a lot less than some people had expected. Some of that has to do with wells not being on stream. But if you could give us an update on production numbers and what you foresee for the future…


We were actually quite close to meeting what analysts had projected for Q1 2013 production. We had some delays bringing Sidewinder compression online and this was combined with the need to get the planned artificial lift installation project completed for our Cheal-B5 and B7 wells. In the oil business, sometimes these things do take a little bit longer than anticipated, however if these projects had been completed when first thought we likely would have met or exceeded analyst production estimates in Q1. We have made some personnel changes on the ground recently to oversee these projects and I feel we have upgraded significantly in that regard. Over the past few days, we have produced anywhere from 1500 boepd to 2300 boepd including some flaring that is occurring at Cheal

DP: The reason many people are involved in TAG Oil is still the potential for the shale play. You have found an interesting ally in Apache who works everywhere around the world from Argentina to the United States to wherever, but they don’t expect to start that until next year. Any details about how soon next year?

GJ: We expect to be drilling in Q1 of the 2013 calendar year and we can’t wait. Some investors have asked “Why the delays?” but when you have an exploration play contained within our JV permits with Apache that is comprised of the most prospective lands in the East Coast Basin, a few months “delay” is not significant and the majority of our shareholders have been very supportive and encouraging. A large amount of work is ongoing to prepare for the JV’s activities in 2013 and I feel great about the results I am seeing from those efforts. I feel the work we have done as a JV in recent months will benefit us and all stakeholders for many once we prove the concept of the play in 2013.

DP: Any other items we should know about New Zealand…we know there are environmentalists that are everywhere these days, asking hard questions, but some people joke that the dairy farms create more of a mess than oil and gas ever would…

GJ: Environmentalists are everywhere and that is good as it helps get people engaged in the discussion, to ask questions and to get involved to make sure companies operate to best industry practices. The most vocal opponents of industry in New Zealand are a small group that are not willing to accept the available information related to our industry in order to have a balanced discussion nor are they readily willing to accept that we can’t just turn off the oil and gas taps tomorrow. We are all fully dependent on hydrocarbons in our society and that is not going to change overnight.

DP: It’s a different world out there these days with Europe looking like it’s falling apart, a weaker Chinese economy, etc. What do you see for oil prices in New Zealand over the next while?


We are still enjoying Brent prices over $110 per barrel which is great as we have more oil production coming soon that will have the added benefit of being produced essentially with brand new, efficient infrastructure at Cheal and Sidewinder. We are all confident that oil prices will remain over $100 per barrel being so close to the Chinese economy, even if it’s looking a little weaker.

DP: If you could suggest one stock to watch or be nibbling at these days (other than your own) what would it be?

GJ: In our last interview I believe I picked Africa Oil when it was in or around the $2.00 range that now trades around $9.00 so this time it will have to be Coronado Resources as we wouldn’t have invested in the company if we didn’t think it would have some great growth potential.