The oil market has come through some tough sledding the last 6-8 weeks as doubts about the commitment of OPEC+ to the newly agreed output limits, and the surging Delta variant of the Covid virus became manifest. Last week the market tacked on some gains as those fears abated somewhat, and an unexpected inventory draw in the U.S. poured a shot of courage into investor’s “cups.” The oil and derivatives markets rallied strongly repairing much of the damage. We are all familiar with the influx of International Oil Companies-IOCs, into Guyana. Years of one major discovery after another by ExxonMobil, (NYSE:XOM), and partners have pasted this Latin American formerly backwater country, squarely into the exploration headlines. The success has also spread to Suriname with TotalEnergies, (NYSE:TTE) and partner, APA Corp’s, (NYSE:APA) success in Block-58, offshore. In many cases the stocks of these companies has responded strongly to news of these discoveries, leaving less room for continued upside as the oil rally matures.
That being the case, I went looking for an undiscovered bargain in this play and think that perhaps I might have found one. CGX Exploration, (OTCPK: CGXEF) is a Toronto, Canada-based E&P Company, with significant Petroleum Production Licenses – PPLs, on and offshore, Guyana. Given its assets and the extreme sell-off in its shares over the last month, for no particular reason other than a shift in sentiment in the overall market toward oil, I am suggesting that CGX makes a compelling risk/reward proposition at today's price.
CGX assets in Guyana
As noted above, there is no hotter exploration play in the world right now with the success Exxon Mobil has had proving up the petroleum system with its track record of 18 commercial discoveries and 8-billion bbl of oil booked into reserves over the last 5 years. APA Corp and TotalEnergies have done the same on a smaller scale offshore, Suriname.
The company with its partner Frontera Energy (OTCPK: FECCF) has commenced drilling on the Kawa-1, in the Corentyne PPL. A contract has been let to Maersk Drilling for the Maersk Discoverer to drill a 6,500 M exploration well-Kawa-1 in this block in 370 M of water. As noted in the linked press release CGX has exercised its option to drill a second well with the Maersk rig.
Worth noting as well is the company's hiring of top-flight talent to run operations. Kevin Lacy, ex-Chevron (NYSE:CVX) VP of Drilling and Completions, was named Drilling Director for the wells to be drilled at Corentyne and Demara. The company has staffed up with other highly qualified individuals as well for on-rig and off-rig assignments. This lends credibility to the overall effort and it’s plus for the company to get folks of this caliber. Unexpected events in deepwater can burn capital at a horrendous rate, leading to poor decision-making. Having someone with Lacy's credentials makes it feasible over the short run. I'll put forth my idea of the next steps assuming a discovery is made, a little further down the page.
Something that should be mentioned is that a tiny company like CGX has absolutely no business doing deepwater exploration. Remember even Apache-no slouch organization, went running for a “Big Daddy” when the first Block-58 well showed commercial. Without the guidance of a world-class operator, like TTE, the Suriname development in Block-58 would just be water cooler-talk, instead of heading for an FID later this year.
The map above from Frontera Energy's site does a pretty good job of laying out the prospective potential of this well. The graphic below from a CGX presentation shows the target, believed to be a sandstone reservoir with properties similar to those reported by Apache in their wells listed below, offshore Suriname.
CGX made the following commentary in the press release regarding the type of structure they expect to test when the Kawa-1 reaches total depth-TD.
“Additionally, the Kawa-1 well is expected to de-risk multiple other prospects on the block which also have stacked reservoirs and similar structural geometries. Proximity of the Corentyne block to the Cretaceous Berbice Canyon sediment source is interpreted to have concentrated sandstone reservoirs in the North Corentyne area. Channelized, stacked internal fan geometries evident on 3D seismic are indicative of thick, stacked, coarser-grained sand reservoirs.”
A future exploration well is planned in the Demarara prospect, but it is still in the seismic data processing stage. According to the Q-1 financial document, this was to be completed last May. The deadline for spudding this well is February 11, 2022. It's not a huge leap to think the Discoverer will move to that location when it finishes with Shell. Or it could any one of a number of idle floaters in the vicinity.
Now, let's understand, the Kawa-1 is a wildcat well looking to extend the play established by XOM and others. That said, the success of these exploration wells and sanctioned Liza-1 (producing), Liza-2, (startup 2022), and the Payara (underway with first oil in 2024), along with the associated infrastructure, substantially de-risks the Kawa-1. The same holds true for the work Apache and TTE have done in the last couple of years, offshore Suriname. When you look at the juxtaposition of the Kawa-1 to Haimara and Pluma on the Guyana side, and the Maka on the Suriname side, it's not too hard to imagine that when they run the log, folks on the rig will get pretty excited.
We won't know for a couple of months likely as the results will be "tight-holed" until the companies are ready to make an announcement about the success or failure of the test-DST.
Future work is also planned on the Berbice prospect with a seismic program planned for August of this year, and exploration well to spud by June 15, 2022.
Deepwater port in Guyana
Last year, the company secured a 50-year lease on-site at the mouth of the Berbice River. According to its Q-1 filing, work has begun on this resource.
“Starting in October 2020, Grand Canal Industrial Estates Inc. (“Grand Canal”), a wholly-owned subsidiary of the Company, entered into various contracts to recommence work on its Berbice deep water port project. Work has continued during the three month period ended March 31, 2021 and Grand Canal had expended $327,000 for this period. Additionally, the Company awarded contracts for $2,003,000 in April 2021.”
There is no surer path to riches than running a major port of entry in a growth area like Guyana. Regardless of how the oil exploration turns out, this factor alone is enough to consider buying into the company at current prices.
The thesis for CGX
Let's face it a tiny company with little or no revenue, like CGX, has absolutely no business doing deepwater exploration. Without Frontera fronting the cost for the Kawa-1 well, it wouldn't be happening. Frontera has advanced CGX $19 mm for its share of the cost of drilling Kawa-1, and has the option to convert this debt into shares of CGX at a rate of $0.71 per share. For that matter, Frontera, with an enterprise value of ~$900 mm, has no real business doing deepwater exploration either.
They are hoping for a "Big Daddy" to buy into their dreams, sort of like what happened with Apache and TotalEnergies. And, depending on the results of the Kawa-1, it could surely happen. Any number of companies like Hess (NYSE:HES), or Equinor (NYSE:EQNR) could farm in easily if the Kawa-1 shows pay in any measure close to what its potential suggests.
I am not going to make a big case about Guyana. If you follow oil and gas news, you are well aware of the splash the country has made in recent years, with the XOM discoveries. The country is past the tipping point and is going to become a major oil-producing state. The last time I checked XOM was producing 400K BOEPD from Stabroeck and expects to pump as much as ~2-mm BOEPD by 2024. Even though XOM has been operating for a few years in Guyana, the country is still in the early stages of a "Gold Rush" type state of development.
The point here is that the necessary onshore infrastructure is being built out by XOM and its partners, Hess, and China National Offshore Oil Company, (NYSE: CNOOC). The critical mass is in place or being built to allow these other developments to proceed.
I think CGX presents a compelling investment case at current prices. They have no real income at this point so usual financial metrics are unavailable. With 287 mm common shares outstanding, the company has a capitalization of roughly $355 mm.
The XOM Haimara well logged 207' of vertical pay, and Pluma logged 127' of high perm sandstone reservoir. XOM hiked its reserve estimate for Stabroeck by a billion barrels when the Haimara and Tilapia-1 discoveries were announced.
If even a tiny fraction of those metrics are announced when the results of the DST are released, my expectation is that CGX will move sharply higher from current levels. Just for fun, since we are speculating, let's assume the log shows 100 mm boe recoverable from this reservoir, or 1/10th the amount XOM booked. That works out to $6.5 bn at current prices and would completely change the story for CGX. For reference, when Apache announced the results of the Mako #1 in 2019 and then the Block-58 farm in from Total, their stock doubled "overnight" to $32ish per share.
I’ll close by emphasizing this is a risky play. History is littered with the "corpses" of companies with game-changer wells that didn't live up to their billing. That said, there are then the Liza-type wells that help overcome a lot of dry-hole disappointment. Patient investors could be in for a nice treat a few months hence or a case of the blues. That’s the exploration business.
By David Messler for Oilprice.com
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