AFR.L / 91.95p / £818.5m / TP: 135p

Strong Buy

Afren announced yesterday that it had acquired the Canadian company Black Marlin which has significant assets in east Africa. Black Marlin shareholders will receive 0.3647 Afren shares (76.8m on aggregate) for each Black Marlin share. The transaction value is C$0.51 per share, a 35% premium to the company's share price on 1st June 2010. The deal is subject to shareholder approval and is expected to close in September.

Black Marlin has 12 exploration blocks located in Kenya, Ethiopia, Seychelles and Madagascar. The acreage is located in basins with proven petroleum systems and the company has already identified a number of leads and prospects which are being worked up as potential drill targets. Black Marlin owns a seismic company which will continue to undertake all future work in the acreage and several key members of the management team will remain with the company and assist Afren with its exploration objectives in the future.

Afren has stated that it will collect seismic and drill six wells over the course of 2011 and 2012 and is targeting 910mmboe of potential resources during this campaign. The Black Marlin portfolio is estimated to have 1,287mmboe of net prospective resources which effectively doubles Afren's prospective resources.

Strategically this is a very clever deal for Afren as it opens up several key areas in east Africa which balances out its position in the west. Afren's current portfolio is predominantly based on appraisal and development so the addition of extensive exploration acreage is an interesting move for the company. Exploration is not without it risks, but by getting into proven hydrocarbon regions it goes some way to de-risk the assets.

We will be updating our numbers to incorporate this transaction in due course, but for the interim we are happy with our Strong Buy recommendation and target price of 135p.