LONDON (ShareCast) - UBS says that Chariot Oil and Gas is one of its top picks in the exploration and production sector following the 'significant' rig contract signed yesterday.

The Africa-focused energy explorer secured a drilling rig for its offshore Namibia operations, it said on Tuesday. The Maersk Deliverer rig is expected to arrive on location at the end of March 2012 and drilling of the Tapir South prospect will start shortly afterwards. Chariot reckons the prospect has a 25% chance of success and “un-risked” prospective resources of 604 million barrels of oil.

"This is a significant positive as it further de-risks the investment case, and we expect the shares to continue to re-rate," the broker said.

UBS thinks that the well will cost around $75m and predicts that Chariot's cash at the end of 2011 (including payments from BP) was $155m. The Tapir South prospect represents over a 400% upside to Chariot's current share price in a success case assuming a farm-out to 50% working interest, the broker said.

Meanwhile, the group is expecting to drill the Kabeljou (formally Nimrod) prospect in its Petrobas-operated southern block in the second half of 2012, which offers a 1,500% upside to the current price in a success case, UBS predicts.

With the new rig contract de-risking the investment case, the broker now sets it price target at a 40% discount to the 608p net asset value per share, compared with a 50% discount previously. As such, the target is raised from 300p to 365p. A buy rating is maintained.

BC

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