TullowOil plc today announced that the Ngassa-2 exploration well in Uganda, has encountered 7 metres of oil pay in a 14 metre gross sand. Pressure data acquired through logging operations indicates the potential for a significant oil column down-dip, which could fill the entire 150 sq km closure.

Tullow said although evaluation is still at an early stage, with further appraisal drilling, Ngassa has the potential to be the largest oil field in the basin to date.

Tullow has interests in three licences in the Lake Albert Rift Basin in Uganda. Tullow operates Block 2 with a 100% interest and has a 50% interest in Blocks 1 and 3A which are operated by Heritage Oil (50%).

Commenting today, Angus McCoss, Exploration Director, said: “The discovery of a significant oil field at Ngassa, with the potential to be the largest in the basin, is a major achievement for Tullow. The follow-up potential in the overall Ngassa closure has been substantially de-risked by this find and we look forward to realising the upside through appraisal and further exploration drilling. We are now focusing on the considerable follow-up to the Buffalo-Giraffe discovery in Block 1, appraisal activities in Block 2 for development planning and timely production from the basin.”

Goodbody analyst Gerry Hennigan commented today: "The rise in the Tullow share price over the past two months (+37%) has some basis in macro trends. Yesterday’s surge (+9%), however, was due to company specific events. A steady rise in oil prices, dollar weakness and persistent M&A speculation has provided fuel, but the main driver is the level of expectation surrounding the new exploration campaigns in the Liberian and Ivorian basins (WATM). Those expectations are rooted in the track record of success in Ghana and commentary from both the CEOs of Tullow and Anadarko with regard to the potential in each campaign. Seismic surveys over both basins have identified as many as 30 - 40 prospects, some of which have “Jubilee-type potential”. Such comments have raised the expectation bar with the announcement yesterday of 45ft of net hydrocarbon pay discovered in the Venus prospect only serving to underpin market sentiment.

Understanding the rise in the Tullow share price is one thing, justifying it is another. The current share price of £11.87, suggests a premium to our Total NAV (£9.94) of 19% and an implied value for the WATM of £1.5bn ($2.5bn). Either our assumptions for the quantifiable discoveries to date are conservative, or the market perceives significant upside vale for the new WATM frontier. With our model assumptions for Ghana (34% of risked NAV, 4.4bn in gross reserves) and Uganda (29% of risked NAV, 2.6bn in gross reserves) in line and ahead respectively of guidance we suspect the latter. In essence, the ‘goalposts’ have shifted to the WATM and while understandable given the track record of success, the implied premium has heightened the risk / reward profile of the stock.

In terms of risk the most obvious is that expectations for the WATM fail to materialise. Uncertainties also persist in the shape of: (i) the trend in current production; and (ii) the timeline and options employed to bring the oil discovered in Uganda to full production. Against that, the perceived potential within the WATM may well deliver significant upside. The difficulty from an assessment point of view, however, is to quantify that potential given that little as yet has been discovered. That clearly will take time and though fully aware of the downside risk, we maintain our ADD recommendation with a price target of £12.0, a 20% premium to our Total NAV (net asset value), pending greater clarity on the value to emerge from the WATM, with the next relevant well due to spud in November."