Without wanting to go in depth on a massive 289-page report, a few themes jump out.
1) Buy on binary risk, not geological advantage:
In our view, the market is overly conservative in assessing companies with high levels of binary risk.
We are sceptical that it is possible to have a geological “edge” in predicting the possible outcomes of drilling campaigns and do not subscribe to the theory that buying before a drilling campaign is a robust method of generating alpha.
2) New basins are the gifts that keep on giving:
The two highest profile new plays in the European E&P universe in recent years have been Cairn’s discovery of Mangala, which opened up the Rajasthan play, and Tullow’s discoveries in Uganda and Ghana. In our view, it is noteworthy that although the initial discovery in each case resulted in a substantial outperformance relative to peers as the individual prospects were de-risked, even higher levels of outperformance were to come over the next 2-3 years as the potential of each basin became clearer.
3) GS thinks oil will hit $100/bl in 2011
4) The Falklands is not a busted flush. That “high binary risk leads it to “Buy” recommendations, perhaps counter-intuitively, on Rockhopper, Desire, Borders and Southern and Falklands Oil & Gas.