Back in June you sold Africa Oil (Vancouver: AOI) for 247.50% gains. The stock has spent the past five months consolidating and now it's time to buy it back.

The company, along with partner Tullow Oil (London: TLW/ Pinksheets: TUWLF), has drilled its third well.

“Kenya of the Paipai-1 exploration well located in onshore Block 10A, on September 29, 2012. The well is planned to drill to a total depth of 4,112 meters and will test Cretaceous and Jurassic sandstone targets. The well is operated by Tullow Oil plc ("Tullow") who hold a 50% working interest. Africa Oil holds a 30% working interest in the Block. The Paipai-1 will be drilled using the Sakson PR-5 rig and is targeting gross best estimated prospective resources of 121 million barrels by the Company''s independent resource evaluator.”

Africa Oil ended the second quarter in a strong financial position with cash of $85.0 million and working capital of $56.1 million, compared to cash of $109.6 million and working capital of $90.2 million on December 31, 2011. The company has a market cap of $2.31 billion and zero earnings.

The plan for the company is to drill a “string of pearls” across the main basin's bounding fault. It now has two new drilling rigs, and it will see if the Tertiary trend extends into southern Ethiopia.

Dry Holes

The company drilled two dry holes in Somalia and is looking to drill more after obtaining approval from the Puntland government.

Africa Oil is an exploration company. Its partner Tullow is the best in the business with a number of big African finds under their belt.

If the geologists are right...if there is a mother-lode of oil in Kenya...there's a good chance Africa Oil and Tullow will find it, and this stock will launch to become another mid-major like Tullow ($20 billion market cap).

There's a risk that the company will hit too many dry holes, burn though that $85 million, and have to roll out a secondary stock offering, in which case this stock is going back to $1 (not that we will follow it down). News of a dry hole is an immediate sell. Always.

That said, the geography looks solid. Kenya is unexplored virgin territory. There should be oil there.

Buy Africa Oil (AOI.V) at $10.43. Stop-loss $8.23. Price target $47.

More Risk/More Reward

For those of you who want to leverage your bet: Buy Vanoil (Vancouver: VEL) under $0.75. Current price $0.71. Market cap $30 million.

Vanoil holds the adjacent ground to Africa Oil in Kenya, but it is not an active driller. The company is simply sitting on its lease in the hopes that its neighbor hits oil. At that point it will sell to the highest bidder.

Christian DeHaemer