I’ve never been able to put together much of a valuation argument for Africa Oil other than one based on the de-risked reserves and the comparables of the fairly recent Uganda asset sales — which means it’s all very up in the air, since the question of how much to pay for a barrel in the ground varies widely depending on reservoir size, government policy, transportation options, etc., and, of course, though we have a much higher certainty of commercial production capacity now with the excellent updated results (100 meters of “pay dirt” versus the prior very good 20 meters, and they still haven’t hit some of their primary targets at depth), I think we have to revise the “risked” percentage we apply.

Using the chart from AOI’s own presentations as a guideline, we could say that now perhaps the chance of AOI finding reserves of a billion barrels (their pre-drilling “best estimate”) in the current block 10BB in Kenya (that’s where the Ngamla well is) maybe has now moved to … what, 50%? If it’s a 50% derisking now, then we can estimate that the value of this one block to Africa Oil might be a bit north of $2 billion (AOI’s share is 50%, the estimates were based on value of oil in the ground being a little more than $4/bbl from the Uganda “best comparable” sale).

AOI now carries a market cap of about $1.5 billion, following the 30%+ jump this morning on the excellent drilling update. So you can probably make a valuation argument that you’re buying the one discovery now and getting the rest for “free” … but I’m not a petroleum geologist and I’m just guessing at the risk valuation metrics that might be reasonable.

My guess is that the next thing that moves the shares, beyond these results and the analysis of the first discovery for commercial potential, will be the potential farm-out of another block as these systems are proven and their value increases (perhaps Tullow will be interested in Block 9? AOI still owns 100% of that one), but other than that it will be a little while before we hear news from any of their other key blocks — they’re looking for a rig for a well on Block 10A now, and the rig currently in use on Block 10BB will move to Block 13T for an exploratory well after it’s done with the current site.

And yes, it’s certainly possible that the imminent news from Somalia drilling, which is still underway with no real news released yet, could impact the share price — but as I’ve made clear many times, I don’t care much about Somalia. It will probably take years for Kenya to be ready to produce meaningful amounts of oil, it may take decades for Somalia, so you can consider that a little cherry on top if it’s successful but I am much more excited about Kenyan prospects. If bad news in Somalia brings the shares down, that might be a buying opportunity if you think the valuation of the Kenya prospects is still good.

As I noted a week or two ago, I sold a third of my AOI holdings to recoup my initial investment and am letting the rest ride — my own variety of “derisking” since it had grown to become a huge portion of my portfolio. Thanks to today’s move, it’s again my largest individual equity holding (though my Sandstorm Gold warrants position is larger), but I will continue to “let it ride” as we see what the future brings — news continues to be shockingly good, and this is still a stock that almost no one has ever heard of.