Oil and gas explorer Melrose Resources is leading the risers in the FTSE 250 mid-cap index after it announced a gas discovery in Egypt.
The company's shares climbed 15.5p to 307p as it reported that the South Damas well had encountered a good quality gas reservoir in the Sidi Salim formation in the south east Mansosura concession. Melrose holds a 100% working interest in this concession. The company said the preliminary estimate of the discovered reserves was 30bn cubic feet of gas equivalent, and production using existing facilities should be underway within six months. The rig from South Damas will be now used to drill another prospect in the concession, Tall Rak, and the company said if this was successful it could be "highly material" to Melrose.
Analyst Nick Copeman at Oriel Securities issued a buy note on the company, saying:
The discovery was in line with pre-drill expectations. The well will be tied back to existing facilities, either at Damas or South Mansoura, both of which have spare capacity. The development is expected to cost $3.3mn and to be completed within six months delivering an initial rate in excess of 12m cubic feet of gas equivalent per day. As a result of this discovery we have increased our risked to net asset value to 471p a share (from 463p a share).
In addition this success helps validate Tall Rak, the next prospect on the drilling sequence, which exhibits similar seismic attributes. Tall Rak is expected to be completed by the end of March and will target 190bn cubic feet of gas equivalent spread across three fault blocks which could be worth up to 67p a share if successful. In addition Tall Rak may have an oil rim which could double the value of any discovery. Melrose's shares currently stand well below our risked net asset value which looks unjustified given the low risk upside offered by the exploration portfolio and the expected developments in Romania and Bulgaria.
We retain our buy recommendation and look forward to the initial results of the 2D seismic programme on the Mesaha block, which offers frontier exploration potential.
