Simba Energy farm-out underpins share price

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    Simba Energy’s (CVE:SMB) deal with Ajax Exploration, announced Monday, definitively funds a projected well in Kenya next year, says research house Edison.
    And it provides the market with an independent valuation of block 2A, largely underpinning Simba’s current share price and provides valuable cash for ongoing activities, says analyst Will Forbes.

    Under the memorandum of understanding, Ajax, a private equity backed oil and gas explorer, will take a 66% stake in the block and commit to carrying the exploration costs, including one well, and it will pay Simba around US$3.1mln in back costs The deal, once confirmed, values the exploration carry at US$39.6 mln, implying Simba’s stake is worth US$20.4mln or C$0.90 a share (current price: C$0.080).

    “The farm-out removes the short-term risk of a substantial equity raise in the near term and should give Simba confidence in its negotiations on farm-ins in Chad and Guinea,” notes Forbes.

    He adds that drilling is forecast to begin in late 2014. In the meantime, Simba and Ajax will investigate two areas of interest to better identify drill locations.
    He highlights that many of the neighbouring blocks will first be drilled by Africa Oil, Afren  Taipan Resources and Vanoil, which has the potential to de-risk the plays in block 2A, which contains the Mandera-Lugh and Anza basins.

    “While a late 2014 well is later than we had expected, it gives Simba the luxury to allow others to demonstrate the prospectivity of the basins and to slim down the prospect inventory, giving Simba a better chance of success when it begins drilling,” says the analyst.

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