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BG Group (BG)
Andrew Gibson, Head of Research

BG Group has been a roaring success since its formation in 1997. The oil and gas exploration arm of the old British Gas has been transformed into a world class company. What makes BG really stand-out among Londons blue-chip oil companies is that it offers exposure to three promising themes: 1. Growth of LNG 2. Brazilian deepwater oil 3. US shale gas

The project is already underpinned by longterm supply contracts with China, Chile and Singapore.

BG is very confident that their investment programme will lead to a big pay-off. Management believe the next decade could be a golden age of gas. One of the main reasons is China.
China is expected to rapidly increase its use of gas as it scales back its use of nuclear power and makes more use of natural gas in road transport. In fact, China is even helping BG to fund an expansion of its activities in the country. The Bank of China only recently signed a $1.5bn funding agreement with BG as part of the Chinese Premiers trip to the UK.

The Golden Age of Gas

Firstly, BG has long been known for its leading LNG division. Liquefied natural gas is a fast growing and lucrative market. Demand is growing strongly because LNG offers some key advantages over other energy sources: its easy to transport, its safe to store and its a far cleaner fossil fuel than the likes of oil or coal. Producers of LNG, such as BG, enjoy high profit margins. Thats because production facilities are expensive to develop, so the market is not very crowded. BG is pressing ahead with its next big LNG project based in Queensland Australia. The company will invest around $15 billion in the project over the next four years.

Brazil - the New Oil Superpower

Back in 2005 BG began its drilling programme in the Santos Basin, which lies off the coast of Rio de Janeiro and Sao Paulo in Brazil. The Santos Basin sits in waters more than 2,000 metres deep and beneath another 5,000 meters of rock and salt under the seabed.

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BG Group (BG)
BG holds licences in three blocks in the Santos Basin covering a total area of approximately 7,450 square kilometres. In October 2006, BG struck oil. Big time. The discovery, called Tupi, is simply enormous. Its the Americas largest oil discovery since Mexico's Cantarell in 1976. The Tupi field lies in a block called BM-S-11. BG holds a 25% stake in the block. The Brazilian state-run giant Petrobras holds a 65% stake and the remaining 10% stake is owned by the Portugese oil explorer Galp Energia. great honour for a President who enjoyed an approval rating above 70%. This was so rare that he was greeted by US President Obama at the G20 summit as "The most popular politician on earth." I digress. BG also has stakes in other blocks in the Santos Basin. Another major discovery known as Guara has been made in block BM-S-9, of which BG owns a 30% stake. The field is estimated to contain 1.1 to 2 billion barrels of recoverable oil. As exploration continues across the Santos Basin, there is every chance of more good news. In fact, as I write this BG has just announced a further upgrade to its resource estimate in the Santos Basin. It seems the closer they look, the better this thing gets. Brazil is expected to play a big part in BGs growth plans. The company is planning to invest $30 billion in Brazil over the next decade funded by cash flow from production. It October last year BG began shipping the first oil from the massive Tupi field. Production should really begin to take-off over the coming years as more fields come on stream and additional infrastructure increases capacity. The profit margins should be really juicy too. CEO, Frank Chapman, has confirmed that all

Since the discovery of Tupi, there has been a string of other major oil discoveries in the same block Tupi Sul, Iara and Iracema. BG is entitled to 25% of these finds too.
It is estimated that the total oil in these fields contains at least 5-8 billion barrels of recoverable oil. That is a staggering figure. To put that into context, these fields could increase Brazil's total oil reserves by 62%. It could propel Brazil into one of the world's major oil exporters. In honour of the outgoing Brazilian President Lula da Silva, the Tupi field was renamed Lula in December of last year. This was meant as a

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BG Group (BG)
the fields in the Santos Basin are economically viable at oil prices of $40. Thats a hell of a lot of headroom, given the oil price is sitting above $100 a barrel. BG has since expanded its joint venture arrangements with Exco by investing a further $950 million in return for Exco contributing 654,000 acres of land in the Appalachian Basin of Pennsylvania and West Virginia. The joint venture may not be a major contributor to profits right away, but it fits in nicely with BG's strategy of building a portfolio of global assets.

Shale Gas a potential gamechanger

Shale gas is being hailed as the potential saviour of the US economys addiction to imported OPEC oil. US oil reserves have been seriously depleted, but the country is blessed with an abundant supply of shale gas. The problem is its not easy to get hold of. Extracting shale gas tapping normal gas stored in organic rich shale gas has been technology improves, take off. is more complex than reservoirs, because its rocks. But production of steadily rising, and as it is expected to really

Best of the blue chips

BG is now much more than a leading LNG specialist. It offers a growth profile that BP and Shell can only dream of. But theres a lot more to the oil business than just exploration. To make real money you need to bring projects to market. And this is where BG excels even more. BG is also regarded as a perennial bid target. Royal Dutch Shell, ExxonMobil, Petrobas and China's CNOOC have all been mentioned in the past as possible buyers. You can see why. Who wouldnt want to get their hands on BGs impressive portfolio. The shares are never dirt cheap based on an earnings multiple, but in the stock market it is better to pay up for top quality than let it slip you buy.

BG doesnt want to miss out on a potential game changer, so made a $1.3 billion investment in a shale gas joint venture.
The joint venture is with Dallas-based Exco Resources. Exco contributed 120,000 acres of land in the Haynesville shale gas area in Texas and Louisiana, and associated gas infrastructure.

Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services And Markets Act 2000.

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Amerisur Resources (AMER)

One of the problems with investing in oil companies is that there are very few actual producers. Most of the sector is made up of are highly speculative explorers. Some will succeed, most will fail. But as an investor, if you wait until theyve become producers, there is far less potential upside. By the time theyve become producers, their valuation is typically between 500m and 1 billion. With such a chunky valuation, its then hard for the exploration side to add significant value. So its not everyday you can find a modestly valued oil company that has already made it through to the production phase. But one such company is Amerisur Resources. To cut a long story short, Chaco failed to deliver. So in 2007 the company got a new name, a new management team and a new focus. Amerisur Resources was born and the new focus became Colombia. Since then, things have been looking up.

Business meets science

The management team consists of an interesting mix of successful businessman and mining industry veterans. The Chairman, Giles Clarke, is an out-an-out entrepreneur and a really successful one at that. He founded Majestic Wine and built it into a national chain. He then co-founded Pet City, again turning it into a national chain and also co-founded Safestore, one of Europes leading self-storage companies. The CEO, John Wardle, is a Mining Engineering graduate with a PhD in Rock Mechanics and Geophysics. He reached senior management level at BP, eventually finding himself in their Colombian operations. From there he became the General Manager of Emerald Energy, a small UK oil explorer in Colombia.

A new name, a new team and a new focus

The history of Amerisur can be traced back to a company called Gold Mines of Sardinia. But when the gold mines were sold off in 2004, the company changed its name to Chaco Resources and moved into oil and gas exploration in the Chaco region of Paraguay.

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Amerisur Resources (AMER)

While at Emerald Energy, he was responsible for two large oil discoveries. The company was later bought out by the Chinese giant Sinochem in 2009 for 532 million. in the field. If drilling is successful, Reto can also receive an additional 10% interest in Felix in exchange for performing a seismic programme. The deal looks sensible for Amerisur. Farm-out deals make a lot of sense for smaller oil companies. They allow a company to preserve cash but retain a sizeable stake in their assets. A m e r i s u r h a s i t s h a n d s fu l l w i t h t h e development of the Platanillo well this year and wants to give it the focus it needs. And Reto has a good track record in Colombian oil exploration, so it looks to be a good win-win deal. Amerisurs two blocks in Paraguay are still in the early stages of development. The exploration permit covers a vast area of 800,000 hectares. The San Pedro block remains the main focal point of exploration at present. Mapping and geochemical work have shown plenty of potential but further data is needed before a drilling programme can begin. Work on the Curupayty block is partly dependent on how things progress at the San Pedro block.

Colombia the key

Amerisur operations are currently in Colombia and Paraguay. It has four main assets in total, two in each country. All four are currently 100% owned by Amerisur.

The most developed of its assets is the Platanillo well in Colombia. Amerisur is already generating positive operating cash flow through the well.
Production capacity at Platanillo is set to expand as additional infrastructure is added. Not only that, 4 to 6 new wells are be drilled this year. Production at its Fenix well in Colombia is modest at present but the company signed an important farm-out agreement with Reto Petroleum in April. Reto will fund the drilling of 10 new wells at Felix. In return Reto will receive a 20% interest

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Amerisur Resources (AMER)

Breakthrough year
2010 was a breakthrough year for Amerisur. Last year saw the company deliver its maiden profit always a key milestone for any oil company. Perhaps an even bigger achievement was that the proven and probable reserves increased by a massive 350%. Amerisur also has a healthy net cash position, standing at around 12 million. About 60% of this has been earmarked for the development of the Platanillo well in Colombia. The shares currently trade on a forward earnings multiple of 25 this year, but this is estimated to drop to only 5 times 2012 earnings. So if the management team can hit anything like these estimated earnings, the shares look very cheap.

The investment case

Amerisur offers a good blend of near-term production in Colombia and early-stage exploration in Paraguay. The current management team has brought a new energy and focus to the company. The maiden profit, positive operating cash flow and strong balance sheet make Amerisur stand out from the mid-tier pack.

Galvan Research and Trading, CMA House, Newham Road, Truro, Cornwall, TR1 2SU Risk Warning Notice: Galvan Research And Trading Ltd is authorised and regulated by the Financial Services Authority (FSA). Whilst every attempt is made to ensure the accuracy of the information provided, no responsibility can be accepted for any inaccuracy. The information provided cannot be relied upon as constituting a recommendation, nor construed as any offer to sell, or any solicitation of any offer to buy investments. No liability is accepted for any loss whether direct or indirect, incidental or consequential, arising out of any of the information being untrue and / or inaccurate, except to the extent caused by the wilful default or gross negligence of Galvan Research And Trading, its employees, or which arises under the Financial Services And Markets Act 2000.

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Chariot Oil and Gas (CHAR)

There is nothing quite as alluring as a pure oil explorer. The key attraction of oil exploration is that when it goes right, the payoff can be massive. But even with todays advanced technology, oil discovery is still part-luck, part-science. Lets face it, if finding oil was easy there wouldnt be any of it left to find. The London Stock Exchange is home to over 50 pure oil explorers, so theres plenty of choice on offer. One with enormous potential is Chariot Oil and Gas. Chariot is a relative newcomer, listing on AIM in 2008. The company owns four oil and gas licences (covering eight offshore blocks) that stretch across a huge acreage off the coast of Namibia. This bodes well given the string of giant discoveries announced over the last few years in the Santos Basin off the coast of Brazil see BG Group for the detail.

Its no coincidence giant Petrobas has Namibia. In fact, in farm-out agreement of block 2714A.

that the Brazilian oil been sniffing around 2009 Chariot signed a with Petrobas for 50%

Chariot owns 100% of its other 7 blocks, but the interest from Petrobras has given the company a lot of credibility. Petrobas also brings a wealth of experience and know-how to the table. This will come in handy as Chariot's prospects lie up to 2,500 metres beneath the seabed. Drilling for oil at that depth is not only expensive, but is technically challenging, so having a big-hitting partner on board is more of a need than a want. Over the last few years, Chariot has carried out the largest exploration programme in offshore Namibia to date. Things started to take-off for the company in 2010 as the exploration has produced some speculator resource data.

Namibia are you serious?

Offshore Namibia could be the next big thing. While the region remains relatively unexplored, it has generated plenty of excitement. Its salt basin shares the same, prolific geology as offshore Brazil. Geologists believe they were a single land mass millions of years ago.

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Chariot Oil and Gas (CHAR)

The estimated resource has been going up and up. After a series of upgrades, the total resource is estimated at 16.1 billion barrels of oil of which Chariot would be entitled to just over 70%. But before the campaign gets fully underway, C h a r i o t wa n t s t o s i g n m o re fa r m - o u t agreements to bring in deepwater drilling expertise. A deal has yet to be announced, but so far there has been keen interest from oil majors.

Nimrod the oil prospect not the military plane

Almost a third of the resource estimate has come from one megastructure prospect: Nimrod. Chariot's chief executive Paul Welch views Nimrod as a potential "game-changer" for the company. It spans 500 square kilometres and happens to lie in the block co-owned with Petrobas (perhaps Petrobas knew more than they let on). Chariot puts the chance of success at Nimrod at 25%. The next step for Chariot is to kick-off its drilling campaign. Nimrod is obviously the prime target, but there are 16 prospects in total. In April this year Chariot raised $140 million (about 90 million) from a share placing at 250p. The money was raised primarily to help fund the drilling campaign.

Drilling is expected to start in the fourth quarter of this year.

The investment case

As you would expect, Chariot is still loss making because it is currently an explorer not a producer. It does however have a strong cash position to fund its exciting exploration programme. Its massive resource potential in a particularly promising region makes it a speculative buy.

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