Why Madagascar Oil rose 147%

It was a bright morning for Madagascar Oil, as its Tsimiroro Development Plan was given the go-ahead, the first in the region. Sitting on 1.7 billion barrels of oil and targeting production of 10,000 barrels of oil per day by 2018, the news caused the explorer's share price to rocket by as much as 147% to almost 13p. After 11 years of exploration and the drilling of 138 wells, this is exactly what management needed to hear.

The 25-year mining title covering Block 3104 includes the 1.7 billion barrels of oil contingent resource base in the Tsimiroro Main Field. The company will now be able to start developing the asset and will think about potential partners it can work with to lower the costs. It already has 100,000 barrels of oil in storage from its existing Steam Flood Project (SFP) facility - a technique to extract oil - the sale of which can now begin this quarter to the domestic Madagascar market.

The first phase of the development will target heavy oil between 14-15 API (lighter than water) for both the Madagascan and international markets, by developing the existing SFP facilities. Work will start in late 2015 and building an additional compartment should help boost sales volumes to up to 10,000 barrels of oil per day.

"Following the reinforcement of its management team in February with the appointment of a new experienced CEO [Robert Estill], the positive momentum continues for Madagascar Oil (MOIL) with the Tsimiroro Development Plan approved by the Malagasy government, the first to be validated on the Island," explained house broker VSA Capital.

"Having spent cUS$300 million over the past 11 years, this step is clearly a very important achievement for MOIL, which was able to convince the Malagasy community that this heavy oil project can be developed in a commercially viable way. This will clearly renew investor confidence in the stock.

"This approval will also make the company much more attractive to potential farm-in partners or outright acquirers, some of whom already have an interest on the island, given the strategic importance of the Tsimiroro asset," added the analysts. "We would expect to see developments here in the coming months."

Although VSA reckons the shares could be worth more than three times current levels (10p) at 35p, this is half its February target price of 70p. It's still a bullish stance and explains the 'buy' recommendation, however. Madagascar's market value has fallen in-line with the collapse in oil prices.

Madagascar is considering different options to fund the development of the block, which might include another equity fundraising, or working with strategic partners.

Steve Hope, one of Madagascar's non-executive directors, has done well out of the share price surge. Outrider Master Fund, run by the San Francisco-based company he set up in 2004, bought 960,000 Madagascar shares between late December and the end of January. The last 500,000 were snapped up at 4.5p and took Outrider's stake to 187.8 million shares, or 28.8% of the company.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.