Summer might be in full swing, but the steady drumbeat of worrying news has made it difficult for investors maintain a sunny outlook in recent months. With gloomy headlines about the EU’s ongoing sovereign-debt crisis, the potential that the US government might default on its debts and weakness in the US and other global economies, macro concerns continue to rule the day. All things considered, stocks have held up reasonably well; the S&P 500 is off roughly 5 percent from its 52-week high.

The current market environment isn’t as bad as the doomsayers would have you believe. Although US economic growth decelerated in the spring, temporary factors such as a short-lived spike in crude oil prices and the magnitude-9.0 earthquake that disrupted Japan’s manufacturing activity accounted for much of the slowdown. Both headwinds have abated, clearing the way for more robust growth.

The stock market could also receive a boost from the temporary resolution of two festering issues. Although negotiations over raising the US federal debt ceiling will likely go down to the wire–recall the brinksmanship during the partisan battle over the 2011 federal budget in April–the two sides should reach a compromise that would prevent the government from defaulting on its debt. Such an agreement would expand the government’s borrowing capacity within certain limits and include both significant spending cuts and the elimination of some tax loopholes to generate additional revenue.  

The recent spike in yields on Italian government bonds underscores the gravity of the EU’s sovereign-debt crisis. I’ve consistently argued that the fiscal challenges in Greece, Ireland Portugal and Spain wouldn’t threaten the EU economy, but even the fiscally prudent Germans couldn’t afford to bail out Italy.

Fortunately, Italy’s fiscal woes pale in comparison to those afflicting the rest of the PIIGS (Portugal, Italy, Ireland, Greece and Spain). The government’s annual deficit is among the EU’s lewest, and the nation should be able to balance its budget over the next three years without resorting to severe austerity measures that would send the economy into recession. Over time, these efforts should lower the ratio of Italy’s government debt to its gross domestic product (GDP).

Investors should regard the recent uptick in yields on Italian government bonds as a sign that the market has grown impatient with the inability of EU leaders to deal definitely with its members’ fiscal woes. But this dynamic should change as Europeans come to grips with the potential ramifications if Italy requires a bailout or defaults on its sovereign debt. Expect EU leaders to announce a plan to reassure the markets and prevent the credit contagion from spilling over to Spain and Italy.

Investors will welcome even a temporary resolution to US and EU credit woes, while economic growth should pick up in the back half of the year. All of this adds up to the potential for stock values and commodity prices to climb.

In This Issue

The Stories

Offshore Africa remains one of the final frontiers in which oil and gas companies can move the needle on production. Here’s a short survey of some of the continent’s most exciting offshore plays. See Into Africa.

Finding pure-play exposure to rising oil production offshore Africa’s West Coast is difficult. Here are a few of our favorite names. See Going Deep.

Want to know what to buy now? Check out the Fresh Money Buys list. See Fresh Money Buys.

The Stocks

Afren (LSE: AFR)–Buy<GBp175
Anadarko Petroleum Corp (NYSE: APC)–Buy in Energy Watch List
Kosmos Energy (NYSE: KOS)–Buy in Energy Watch List
BowLeven (LSE: BLVN)–Buy in Energy Watch List
Tullow Oil (LSE: TLW, OTC: TUWOY)–Buy in Energy Watch List
EOG Resources (NYSE: EOG)–Buy < 125
Oasis Petroleum (NYSE: OAS)–Buy < 36
Peabody Energy Corp (NYSE: BTU)–Buy < 72.50
BG Group (LSE: BG/, OTC: BRGYY)–Buy < GBp1,650
Core Laboratories (NYSE: CLB)–Buy < 115

Into Africa

Africa is home to some of the most exciting and largest oil and natural gas prospects in the world, and our Portfolio holdings with exposure to these emerging plays have paid off handsomely. We cashed out of Tullow Oil (LSE: TLW, OTC: TUWOY) for a roughly 167 percent gain on Nov. 18, 2009, while shares of current Gushers Portfolio holding Afren (LSE: AFR) are up 47 percent since we highlighted the stock in the April 7, 2010, issue, The Search for More Oil.

There’s more upside to come. In total, Africa produces around 10 million barrels of crude oil per day. Here’s a geographic breakdown of this output.

Source: BP Statistical Review of World Energy 2011

Nigeria, Angola, Algeria and Libya dominate African oil production, accounting for almost 80 percent of the continent’s total output in 2010. Of course, Libya’s internecine civil war has disrupted the country’s oil exports of 1.5 to 1.6 million barrels per day. Even if the Libyan conflict were to end tomorrow, critical infrastructure would require months to repair and foreign oil companies would need to relocate workers to the country. Don’t expect Libyan oil production to normalize until at least late 2012 or early 2013.

A resolution to the civil war won’t necessarily lead to a return of stability; relations between the countries dominant tribes have always been fractious. Foreign oil companies may never regain enough confidence to commit the billions of dollars needed to restore production to former levels.

To worsen matters, offsetting lost Libyan oil exports isn’t a simple matter. The country’s fields yield primarily light, sweet oil that’s easy to refine and contains little sulfur. However, the majority of Saudi Arabia’s spare productive capacity comes from Safaniya, an offshore oil field that produces a much heavier and sourer varietal.

Regardless of war-torn Libya’s well-publicized travails, other African nations are poised to grow their oil and natural gas production over the next two to five years. Hands down, the most exciting near-term drilling prospects are offshore West Africa, one leg of the Deepwater Golden Triangle, which also includes offshore Brazil and the deepwater Gulf of Mexico.

Although most investors are familiar with the massive oil and natural gas finds in the deepwaters off the cost of Brazil and in the Gulf of Mexico, discoveries made offshore Ghana and Sierra Leone receive less attention from US news agencies. But all three areas share similar geological characteristics.

The major deepwater oil and gas finds off the coast of West Africa were deposited 65 to 100 million years ago, during the Cretaceous Period. Although the continents had drifted apart at this point in the Earth’s history, these land masses were far closer back then than they are today.

Source: US Geological Survey 

About 225 million years ago, the coasts of South America, West Africa and the Gulf of Mexico were connected. With that in mind, it’s hardly surprising that the three legs of the Deepwater Golden Triangle boast similar geological characteristics and are prospective for oil and natural gas.

Now let’s fast-forward through the eons and survey some of the major oil and gas projects underway offshore West Africa. We’ll also analyze the political and security situations in each country–an important consideration, as any oil executive will tell you. But Despite security concerns in some nations, oil companies continue to invest in Africa, lured by the promise of production growth and attractive returns. China has also emerged as a major player in Africa as the central government seeks to secure resources to support its fast-growing domestic economy.

Nigeria

Home to more than 150 million people, Nigeria is Africa’s most populous country. The nation’s USd175 billion economy is roughly equivalent to Alabama’s GDP and slightly smaller than Ireland or Portugal’s GDP

Source: CIA World Factbook, Bloomberg, Energy Information Administration

An OPEC member since 1971, Nigeria accounts for roughly one-quarter of Africa’s oil output and is the continent’s leading producer. Nigeria’s main oil-producing fields are in the Niger Delta, a region located off the country’s southern coast.

Although Nigeria’s prolific oil fields have attracted substantial interest and investment from foreign oil and gas companies, internal unrest has limited the country’s hydrocarbon production. In recent years, the Movement for the Emancipation of the Niger Delta (MEND) has pushed for a more equitable redistribution of profits generated by Nigeria’s massive fields. MEND has attacked oil installations and kidnapped oil workers.

Without these violent disruptions, most analysts believe that Nigeria could produce almost 3 million barrels of oil per day.

The country’s national oil company (NOC), imaginatively named the Nigerian National Petroleum Company (NNPC), pursues joint ventures (JV) with major international oil companies to produce its oil and natural gas fields. These deals include a partnership with Royal Dutch Shell (NYSE: RDS.A) that produces 1.2 to 1.3 million barrels of oil per day; an operation with Proven Reserves Portfolio holding Chevron Corp (NYSE: CVX) that yields 600,000 to 700,000 barrels per day; and a deal with ExxonMobil Corp (NYSE: XOM) that flows another 700,000 barrels per day. 

Given the geographic breadth of the Super Oils’ downstream (exploration and production) portfolios, these mega-cap names are far from a pure play on rising output offshore Nigeria.

For investors seeking exposure to this growth story, Aggressive Portfolio holding Afren remains your best bet. The UK-based outfit acquired a handful of oil fields offshore Nigeria that weren’t big enough to attract investment from a major integrated oil company.

But the firm has generated impressive production growth from these plays and has expanded its operations to other promising fields offshore Africa. (See Refresher Course for a detailed and up-to-date review of the company’s business prospects) Afren rates a buy under GBp175.

Meanwhile, Nigeria’s President Goodluck Jonathan in May 2011 approved a bill that will create a sovereign wealth fund (SWF), a state-run investment fund that reinvests oil-generated wealth into national projects. The legislation created the Nigerian Sovereign Investment Authority, which will be split into the Nigeria Infrastructure Fund, the Future Generations Fund and the Stabilization Fund, each of which will hold at least 20 percent of the country’s assets under management.

This initiative should help Nigeria save more of its oil revenue, gird the country’s economy against volatile commodity prices and invest in much-needed projects to improve the nation’s woeful infrastructure.

The move is a step in the right direction, though it remains to be seen whether the SWF will fall prey to the corruption that has plagued Nigerian politics and business for decades.

Angola

With a population of 18.5 million and a GDP of USD75.5 billion, Angola can’t compete with Nigeria on size or economic might. But the nation’s GDP per capita amounts to more than USD4,000 because of its massive oil wealth. Economists estimate that oil accounts for about 90 percent of Angola’s export revenue and 80 percent of its GDP.

Angola joined OPEC in 2007 and in some years has surpassed Nigeria as Africa’s top oil producer–usually when attacks hamper production in the Niger Delta.

Angola also has a long, sad history of violence and civil strife. The country endured a 27-year civil war that ended in 2002 after claiming 1.5 million lives and displacing more than 4 million of the nation’s citizens. President Jose Eduardo Dos Santos has been in power since 1979 and won the country’s first multi-party elections in 1992. Elections slated for 2009 were postponed until September 2012. Dos Santos has suffered bouts of ill health, but should to stay in power through at least 2012. However, the search for Dos Santos’ successor could spur further instability.

Separatist agitators in Cabinda, an Angolan enclave divided from the rest of the country country by a sliver of the Democratic Republic of Congo, are another challenge to Angola’s peace and prosperity.

Source: Lonely Planet

Cabinda is surrounded by the Democratic Republic of Congo to the south and the Republic of the Congo to the north. The province signed a peace treaty with Angola’s national government in 2006, but pockets of resistance still exist. Much of the strife relates to the significant oil and gas deposits in the deepwater offshore Cabinda; residents would prefer for more of this wealth to stay in the province.

Despite these challenges, the oil-dependent Angolan economy continues to grow. The government’s credit position has also improved markedly, earning the nation a series of credit rating upgrades in 2010.

JVs between foreign oil companies and Angola’s NOC Sonangol have enabled the country to exploit the oil and gas fields off its coast. The NOC divides the country’s offshore blocks into three zones: blocks 0 to 13 are shallow-water fields; blocks 14 to 30 are deepwater fields; and blocks 31 to 40 are ultra-deepwater fields. Here’s a quick look at some of the major producing blocks.

Block 0 is a shallow-water play located immediately off the coast of Cabinda. Chevron has operated this block since the 1950s and owns a 39.2 percent interest in the play. Total (Paris: FP, NYSE: TOT) holds a 10 percent stake and Proven Reserves Portfolio holding Eni (Milan: ENI. NYSE: E) controls a 9.8 percent stake, while Sonangol owns a 40 percent share. This block produces about 350,000 barrels of oil per day, and Chevron is in the process of tying in new fields within Block 0 that could boost production by as much as 30,000 barrels of oil per day.

Located further offshore from Cabinda, Block 14 is also operated by Chevron, which holds a 31 percent interest in the field. Sonagol, Eni and Total each have a 20 percent stake in Block 14. Portugal’s GALP Energia (Lisbon: GALP) owns the remaining 9 percent interest. Production from this area amounts to between 350,000 and 400,000 barrels of oil per day. The concession contains additional fields that could enter production.

Block 17 is a deepwater block offshore mainland Angola that’s operated by Total. The French integrated oil company holds a 40 percent stake in the field, while ExxonMobil owns a 20 percent stake. The remaining interest of 40 percent is divided between BP (LSE: BP, NYSE: BP) and Norway’s Statoil (Oslo: STL, NYSE: STO). The concession currently yields about 250,000 barrels of oil per day, but two new developments in the block could boost production well above 500,000 barrels per day. Total has also announced a series of discoveries, including the potentially massive Gardenia find in the northwest corner of Block 17. Oil production from this prolific offshore concession should continue to grow.

ExxonMobil owns a 40 percent stake in Block 15, the largest deepwater block offshore Angola. BP, Eni and Statoil are also along for the ride. As the huge Kizomba development comes onstream, production should ramp up to 800,000 barrels of oil per day or perhaps even higher.

Angola’s offshore fields also produce a large amount of associated natural gas. With a limited domestic market for this resource and no export capacity, Angola has traditionally flared (or burned off) any coproduced natural gas. But a joint project led by Chevron will add capacity to export 5.2 million metric tons per year of liquefied natural gas (LNG). These liquefaction trains should be operational sometime in 2012.

Although the Super Oils lead the way in exploration and production offshore Angola, a handful of independent operators have amassed sizable stakes in the region, including UK-based Tullow Oil.

Congo-Brazzaville

The Republic of the Congo is of often referred to as Congo-Brazzaville to distinguish the country from its neighbor, the Democratic Republic of the Congo, or Congo-Kinshasa. Brazzaville is the capital of the Republic of the Congo.

Congo-Brazzaville is a former French colony that allied itself with the Soviet Union and pursued a socialist economic policy for more than two decades. In the early 1990s, the country sought to strengthen its political ties with the West, particularly France and the US.

A power struggle between current President Denis Sassou-Nguesso and various opposition groups has resulted in numerous armed conflicts over the years. This instability and widespread corruption have limited the resource-laden nation’s GDP to less than USD14 billion. With oil production of almost 300,000 barrels per day, the energy industry makes the biggest contribution to Cong-Brazzaville’s economy. The nation is also rich in diamonds, iron ore and potash.

French energy giant Total boasts the biggest operations in Congo-Brazzaville, though Italy’s Eni and US majors Chevron and ExxonMobil also have exposure to the country.

Murphy Oil Corp (NYSE: MUR) is an independent exploration and production firm that owns interests in two offshore blocks. The Azurite Marine #1 field in the company’s southernmost produced first oil in 2009, and the firm plans to drilling four exploration wells in prospective areas in its other concession.

Cameroon

Located just south of Nigeria, Cameroon is home to about 20 million people and boasts an annual GDP of USD22 billion. President Paul Biya has been in office since 1982 and effectively controls the government by appointing the Prime Minister. There are no term limits, though another election is scheduled for October 2011 and the government has implemented some democratic reforms.

Cameroon has produced oil since the late 1970s, and its output peaked at about 185,000 barrels per day in the mid-1980s. In 2010 the country’s oil fields yielded 62,700 barrels of crude per day. This steady decline in oil production will continue as the nation’s existing fields mature.

But Cameroon isn’t resigned to dwindling oil output. Exploration and development activity continues apace in the nation’s two major offshore basins, the Rio del Rey to the north and Douala to the south. The Rio del Rey, which borders Nigeria’s prolific Niger Delta region,  is thought to contain as much as 90 percent of Cameroon’s total oil reserves.

Like most other African nations, major projects are typically joint ventures between the NOC Société Nationale des Hydrocarbures (SNH) and major foreign oil companies. Not surprisingly, Total boasts the biggest operations in Cameroon, but Royal Dutch Shell is also active in the region and ExxonMobil has also stepped up its presence in the country.

Among the smaller independents with operations in Cameroon, BowLeven (LSE: BLVN) has announced some significant finds. Kosmos Energy (NYSE: KOS), which went public on May 11, 2011, also plans a major drilling campaign offshore Cameroon.

Ghana

With a population of about 24 million and a GDP of USD26.17 billion, Ghana is a poor country that’s rich in natural resources, including gold and oil. The agricultural industry employs more than half the nation’s workforce. Historically, cocoa is one of Ghana’s largest cash crops.

A former British colony, Ghana was among the first African countries to win independence in March 1957, though it has retained English as the official language and the legal system is still broadly based on English common law. For years following its independence, Ghana went through a series of constitutional changes and coups and was ruled by a string of de facto dictators.

But the political situation has stabilized since Ghana established a new constitution in 1992 and reinstated a multiparty political system. Since then, four democratic elections have occurred. Current President John Atta Mills won the 2008 election by a slim margin and is up for reelection in 2012. The current government has largely followed free-market principles in an effort to improve the country’s fiscal health. 

In 2009-10 Ghana produced roughly 500 barrels of oil per day, primarily from shallow-water offshore fields. Fast-forward to late November 2010, when the deepwater field Jubilee began producing oil. Production during the first phase of the play’s development should peak at 120,000 barrels of oil per day in the third quarter, while infill drilling will provide ample opportunity for additional growth.

Ghana’s political and fiscal stability, coupled with the discovery of Jubilee and a host of other major deepwater offshore finds, makes it perhaps the most exciting up-and-coming oil producer in West Africa. 

The country’s most prospective offshore region is the Tano Basin, an almost 600,000-acre area that’s divided into two broad exploration blocks: the Deepwater Tano and West Cape Three Points.

Better still, a handful of independent exploration and production firms operate offshore Ghana, providing investors with a number of pure plays on the nation’s world-class oil and gas reservoirs.

Sierra Leone

With a population of about 5.4 million and a GDP of less than USD2 billion, Sierra Leone is one of Africa’s poorest nations. Although the country endured a protracted civil war that displaced one-third of the population, the political situation has improved measurably since the civil war ended in 2002. The military has kept the peace since UN forces left Sierra Leone in 2005 and didn’t attempt to unduly influence the 2007 presidential elections.

Sierra Leone hasn’t produced meaningful quantities of oil or natural gas, but exploration blocks off the coast share some of the same geologic characteristics that make Ghana’s deepwater fields so prolific. Sierra Leone and Ghana can be considered the bookends of this West African deepwater play; all the countries located between these two are considered prospective for oil.

Source: Anadarko Petroleum Corp

In 2009 a consortium led by US-based Anadarko Petroleum Corp (NYSE: APC) announced that the Venus exploration well offshore Sierra Leone flowed both natural gas and light, sweet crude oil. Anadarko Petroleum owns a 40 percent stake in the well, while Australia’s Woodside Petroleum (ASX: WPL, OTC: WOPEY) and Spain’s Repsol (Madrid: REP, OTC: REPYY) each hold 25 percent non-operating interest. Tullow Oil owns the remaining 10 percent stake in the play.

In 2010 the firm announced that a second exploratory well near Sierra Leone’s maritime border with Liberia yielded a similar discovery.

Mercury is 65 percent owned by Anadarko, 25 percent by Repsol and 10 percent by Tullow. There are several prospects that are due to be drilled over the next few years.

Ivory Coast

Ivory Coast is a former French colony with a GDP of USD24 billion and a population of 21 million. After gaining its independence in 1960, the nation was among the wealthiest in West Africa, thanks to a booming trade in cocoa. To this day, Cote D’Ivoire remains the world’s largest cocoa producer.

But Ivory Coast has endured significant unrest in recent years. In late 2010 Alassane Dramane Ouattara won the presidential election, but the defeated incumbent Laurent Gbagbo refused to leave office. After a six-month standoff, Gbagbo was finally forced from office and replaced by Ouattara, though this transition required intervention from UK and French securities forces. Both nations maintain a significant military presence in the country to provide additional security. Ongoing violence between the government and rebel forces is a fact of life in Ivory Coast.

The country’s oil fields currently flow about 60,000 barrels of oil per day, but this figure could increase substantially if producers continue to develop promising offshore blocks. Tullow Oil already produces about 4,000 barrels of oil per day from the Espoir field.

However, both Tullow Oil and Anadarko Petroleum in February 2011 suspended exploration work in Ivory Coast, citing ongoing violence and political instability on the mainland. Given these uncertainties and a dry hole that Anadarko Petroleum drilled in 2009, producers will likely focus on drilling offshore Ghana and Sierra Leone instead.

Liberia

Liberia has a population of 4 million and a GDP of less than USD900 million. The nation has also endured its fair share of unrest and violence, including a prolonged civil war that finally concluded when former President Charles Taylor stepped down in August 2003. Taylor was tried at The Hague on war crimes related to his involvement in the war in Sierra Leone–a verdict is due Charles Taylor later this year. Although the current President Ellen Johnson Sirleaf was elected democratically in 2005, security issues remain a concern. Sirleaf will be up for reelection in October 2011.

Liberia isn’t a major oil producer yet, but producers such as Chevron and Anadarko Petroleum are drilling exploratory wells in several promising offshore blocks and concessions.

Going Deep

Anadarko Petroleum Corp (NYSE: APC)

With a market capitalization of more than $41 billion, US-based Anadarko Petroleum is one of the largest independent oil and gas companies on the planet. Although the firm holds 7 million gross acres in exploratory blocks offshore Ghana and Sierra Leone, a geographically diverse asset base means that the stock isn’t a pure play on rising oil production in West Africa.

Anadarko Petroleum will drill 12 to 15 exploration and appraisal wells in the region in 2011, providing the stock with plenty of potential upside catalysts.

The Jubilee oil field that straddles the Deepwater Tano and West Cape Three Points Block offshore Ghana in 2010 became the first of Anadarko Petroleum’s major West African plays to enter production. The company transitioned the field from discovery to production in only 3.5 years, a remarkable feat for a deepwater project of this complexity. The field produces light, sweet crude oil that typically fetches a premium price relative to Brent crude.

Management expects Jubilee’s production to hit 120,000 barrels per day this year. Meanwhile, the consortium involved in the field is in discussions with the Ghanaian government about the timetable for the next phase of production. Tullow Oil operates Jubilee and estimates the field contains reserves of 1.5 billion barrels of oil. Anadarko Petroleum holds a 23.49 percent stake in the play.

The firm has exposure to four other major discoveries in Ghana: Mahogany East, Tweneboa, Enyenra and Teak. Kosmos Energy operates Mahogany East–located to the southeast of Jubilee in the West Cape Three Points Bloc–but Anadarko has a roughly 30 percent stake in the field. Tweneboa, Teak and Enyenra are all in the well appraisal process, though early results are highly encouraging. Anadarko Petroleum’s interest in these fields ranges from 18 and 30 percent percent. In 2011 the company plans to drill a total at least four exploration and at least four appraisal wells in Ghana.

In Sierra Leone and Liberia, Anadarko has secured more than 5 million acres of offshore concessions. In 2011 the company plans to drill a second appraisal well to test its Mercury find in Sierra Leone and drill as many as two additional exploration wells. Anadarko is the operator and has a 65 percent working interest in the Mercury play.

Historically, Anadarko Petroleum has focused on natural gas, the commodity that still accounts for the majority of its production. But the firm has invested heavily in beefing up its liquids exposure and aims to grow its oil output at an annualized rate of 7 to 9 percent, from 2010 to 2014. If the company meets this objective, its production will reach about 900,000 barrels of oil equivalent per day by the end of 2014. At that juncture, oil and natural gas liquids (NGL) will account for 47 percent of the company’s hydrocarbon output, compared to 42 percent in 2010.

Outside West Africa, Anadarko Petroleum has solid positions in a number of exciting oil- and gas-producing regions, including the Marcellus Shale of Appalachia, the Haynesville Shale of Louisiana and the liquids-rich Eagle Ford Shale of South Texas. In the latter play, oil accounts for 46 percent of the company’s output and high-value NGLs represent 27 percent of production.

Anadarko Petroleum was also involved in the discovery of 32 oilfields in the Gulf of Mexico. The firm believes its gross reserves (not adjusted by Anadarko’s working interest in the field) could top 10 billion barrels eventually.

But the company also held a 25 percent stake in the Macondo oil and gas well that blew out in spring 2010 and spewed gas into the Gulf of Mexico. If we assume that the spill will ultimately cost BP about 40 billion, Anadarko Petroleum would be on the hook for about $10 billion–a hefty price to pay. Uncertainty surrounding the ultimate amount of this liability continues to weigh on the stock.

Mitsui & Co (Tokyo: 8031, OTC: MITSY), a Japanese conglomerate with a 10 percent stake in the field settled with BP for USD1.065 billion. If Anadarko Petroleum settles for a proportionate amount, its total liability would be $2.5 to $3 billion–a manageable payout. The two sides reportedly remain far apart on a settlement, but Anadarko Petroleum’s stock would likely receive a lift once an agreement is announced. Even in the worst-case scenario, any payout Anadarko would make to settle its Macondo liability wouldn’t sink the firm.

Anadarko Petroleum Corp rates a buy in the Energy Watch List.

Kosmos Energy (NYSE: KOS)

A leading player in West Africa and a pure play on the region’s rising oil production, US-based Kosmos Energy priced its initial public offering (IPO) on May 11. Private-equity outfits Blackstone Group LP (NYSE: BX) and Warburg Pincus LLC formed the firm in 2004 and still own about three-quarters of the stock. Expect both shareholders to sell off their stake over time to generate a return on their initial investment. Don’t be surprised to see some insider selling when the post-IPO lock-up period–a period when insiders are prohibited from selling–expires on Nov. 6, 2011.

The quality of an exploration and production company’s reserve base is essential to evaluating its future prospects. Here’s a rundown of Kosmos’ major fields and discoveries in Ghana:

Source: Kosmos Energy

As you can see, Kosmos Energy has a major stake in Ghana’s most exciting oil finds and operates Jubilee and some of the other largest fields.

In coming quarters, we should have more clarity on when Kosmos Energy will begin the next phase of infill drilling in Jubilee and when developmental work will get underway Mahogany East and Odum fields. Once the government approves the company’s plans, Kosmos Energy’s stock could take off.

Meanwhile, the company and its partners will continue to drill new wells in their other Ghanaian plays to delineate these finds and assess their productivity–another source of potential catalysts. Investors should also note that this table includes only established oil discoveries and omits plans to drill additional exploratory wells in 2011 and another half-dozen wells in 2012.

Kosmos Energy in 2009 tried to sell its stake in the Jubilee field to ExxonMobil for $4 billion, but the Ghanaian government blocked the transaction and objected to the company cutting the state-owned national oil company out of discussions. That ExxonMobil was willing to pay such a significant amount of cash when oil prices were much lower speaks volumes about the quality of the Jubilee discovery. 

Kosmos Energy also has two licenses in Cameroon, a 100 percent working interest in the Ndian River Block of the Rio del Rey Basin and a 35 percent interest in the Kombe-N’sepe Block of the Douala Basin. The company has collected substantial seismic data offshore Cameroon and drilled a single well in the Kombe-N’sepe block that failed to produce sufficient amounts of oil to be commercially viable. Early this year, Kosmos spudded its N’gata-1 exploratory well in the Douala Basin; results should be available later this year.

The company plans to drill in nine potential plays offshore Cameroon. One disappointing exploratory well isn’t a major disappointment; these wildcat wells are prone to failure even with the best seismic data. A successful exploratory well in Cameroonian waters would be a huge catalyst for the stock because it would force investors to revalue the company’s concessions in the area.

The firm also has exposure to some interesting plays in Morocco through its 75 percent working interest in the Boujdour offshore block. The company has identified a number of prospects and has shot extensive three-dimensional seismic data of its offshore, block but it’s a bit early to assign much value to Morocco. At this point, Kosmos doesn’t plan to sink exploratory wells in Boujdour until after 2012.

Kosmos Energy’s enterprise value–the value of all shares and debt, net of cash–is a little over $7.2 billion. That appears to be a reasonable valuation when you consider that ExxonMobil was willing to pay $4 billion for Kosmos’ stake in Jubilee two years ago. The stock has lagged since its IPO, reflecting weakness in the broader market and the temporary pullback in oil prices.

With supply-demand conditions pointing to higher oil prices in the final months of 2011, Kosmos Energy’s stock could take off. 

Shares of newly listed companies are often volatile while the market comes to grips with the company’s business. We’ll wait for signs that the stock has bottomed before adding the shares to our model Portfolios. Kosmos Energy rates a buy in the Energy Watch List, but we will issue a Flash Alert when we feel confident enough to graduate the stock to the Gushes Portfolio.

BowLeven PLC (LSE: BLVN, OTC: BWLVF)

Scotland-based BowLeven is a small oil and gas exploration company with strong exposure to Cameroon. The company has permits granting it a 75 percent working interest in the shallow-water Etinde play and a 100 percent working interest in the onshore Bomono project, each of which encompasses about 2,300 square kilometers of territory.

The Etinde permit consists of three blocks: MLHP-5, MLHP-6 and MLHP-7. The first two blocks are in the Douala Basin; the third is in the Rio del Rey Basin just south of Nigeria.

The company’s Sapele-1 well in the MLHP-5 struck oil, and subesequent well in the same region proved successful. It’s in the process of drilling the Sapele-2 well, and the results of this test should be released later this month. Management believes this discovery will prove commercially viable; an encouraging well test would be a welcome upside catalyst for the stock. BowLeven also plans exploratory drilling in its MLHP-6 offshore block as well as in the onshore field. The firm has several proven fields in the MLHP-7 block, and this concession is likely to enter the appraisal phase in 2011.

In addition to its Cameroonian assets, BowLeven also has two blocks offshore Gabon to the south. These blocks are being operated by Addax Petroleum Corp (TSX: AXC), which expects to begin drilling in early 2012.

Like all exploration phase oil and gas companies, BowLeven’s stock is appropriate only for aggressive investors. The upside could be dramatic if the company proves out its reserves: It’s not out of the question for this stock to double or even triple in a year–that is, if the firm’s well results beat expectations. Of course, a disappointing drilling result can send the shares for a tumble. For example, on April 20 the firm announced it had discovered hydrocarbons in an exploration well, but the size of the pay zone wasn’t quite as big as some analysts had expected. The result: The stock dropped 13 percent in one trading session.

BowLeven is a high-risk, high-return bet that’s suitable for aggressive investors who have the stomach for speculative fare. BowLeven rates a buy in the Energy Watch List.

Tullow (LSE: TLW; OTC: TUWOY)

Many readers are familiar with UK-based Tullow Oil, a former Gushers Portfolio holding that has pulled back to attractive levels in recent months.

In 2011 company plans capital expenditures of USD1.5 billion, about 60 percent of which will be plowed into developing and producing fields its already discovered. The remaining 40 percent is destined for exploration. In addition, USD800 million of its budget is slated to be spent in two countries: Ghana and Uganda. Another USD460 million is earmarked for projects in other parts of Africa, bringing Africa’s share of Tullow Oil’s total budget to well over 80 percent.

Tullow is a leading player in offshore Ghana, including the Jubilee discovery. In fact, Tullow Oil is the operator or co-operator of five of the eight largest discoveries in the region. As with Kosmos Energy, the primary upside catalyst Tullow’s shares will be the approval of its plans to further develop Jubilee and begin work on its other major oil discoveries.

Uganda is a land-locked country in East Africa. The country’s major oilfields are located around Lake Albert, and Tullow Oil and other firms have conducted extensive drilling in this region. The company plans to operate five rigs in Uganda by the end of this year and has a long-term plan to initiate significant oil production–commercial quantities of oil rather than just well tests–by 2015.

Outside its two main areas of operation, Tullow Oil also has assets in Congo-Brazzaville, Ivory Coast, Gabon, Equatorial Guinea, Kenya and Madagascar. In 2010 the firm posted an astounding 83 percent success rate on all new wells it drilled. The firm plans to announce well results in several of these countries in the second half of 2011 and into early 2012; given its track record, another round of successful results could keep Tullow Oil’s stock moving higher.

Tullow Oil rates a buy recommendation in the Energy Watch List and is a candidate to join the model Portfolios in a future issue or Flash Alert.

Fresh Money Buys

The stocks recommended in the three model Portfolios represent my favorite picks. The three Portfolios are designed to target different levels of risk: Proven Reserves is the most conservative; the Wildcatters names entail a bit more volatility; and Gushers are the riskier plays but have the most potential upside.

I realize that this long list of stocks can be confusing; subscribers often ask what they should buy now or where they should start. To answer that question, I’ve compiled a list of 18 Fresh Money Buys that includes 16 stocks and two hedges.

I’ve classified each recommendation by risk level–high, low or moderate. Conservative investors should focus the majority of their assets in low- and moderate-risk plays, while aggressive investors should layer in exposure to my riskier and higher-potential plays. Hedges are appropriate for investors looking to offset exposure to energy stocks.

Also note that stocks that exceed my buy target for more than two consecutive issues will either be removed from the list or the buy target will be increased.

Source: The Energy Strategist

Fresh News

Australian mining giant BHP Billiton’s (ASX: BHP, NYSE: BHP) takeover of Petrohawk Energy Corp (NYSE: HK) enabled us to book a 92 percent gain on the stock (see Take the Money and Run) and has bolstered the share price of oil-focused producers EOG Resources (NYSE: EOG) and Oasis Petroleum (NYSE: OAS).

Both EOG Resources and Oasis Petroleum are potential acquisition targets as major energy firms appear increasingly desperate to establish a beachhead in the US shale oil plays. EOG Resources rates a buy up to 125; Oasis Petroleum is a buy up to 36.

Coal giant Peabody Energy Corp (NYSE: BTU) announced a new bid to acquire Australia’s MacArthur Coal (ASX: MCC), a producer of metallurgical (met) coal. Peabody has tried to acquire MacArthur in the past and already holds a 16 percent stake in the miner. The deal makes sense strategically, as there’s a global shortage of met coal amid strong demand in China and other emerging markets.

The mining giant also reported yet another blowout quarter after its Australian mining output surged. Met coal prices remain near record levels, and management was generally upbeat on the conference call. Coal is emerging as one of my favorite plays for the back half of this year and Peabody is one of my top picks. Buy Peabody Energy Corp under 72.50.

Shares of LNG giant BG Group (LSE: BG; OTC: BRGYY) surged in late June after the firm boosted its estimates of the size of reserves in Brazil. Although BG is best-known for owning and operating assets throughout the LNG supply chain–gas-producing fields, liquefaction plants, LNG tankers and import facilities–it also has significant stakes in several of the most exciting oil and gas finds in deepwater Brazil. The midpoint of the firm’s reserve estimates now stands at 6 billion barrels, up from 3 billion barrels. Buy BG Group under GBp1,650 on the London Stock Exchange.

Finally, shares of oil services pick Core Laboratories (NYSE: CLB) recently surged to a new 52-week high, blasting well above our prior buy target. The company’s core business involves taking and analyzing core samples for oil and gas fields. Core samples help companies to understand how to most efficiently produce a particular field. Demand for this service has surged with commodity prices.

Core Labs is also a heavily shorted stock; presumably, some traders are shorting the company due to its relatively high valuation (25 times forward earnings) or as a general bet against energy prices. At any rate, Core Labs’ strong performance has killed these shorts; some of the sharp upside in the stock lately is due to a short squeeze higher. Core Laboratories now rates a buy under 115.