By now, those of you who read about my top New Year’s stock pick, Recon Africa, will have learned that this small-cap explorer may have just moved one giant step forward in Namibia’s Kavango Basin.
Beyond my wildest imagination, this small-cap explorer set out to drill three wells to prove up the existence of indicators of petroleum systems in Namibia.
They may have proved it in the first drill.
Some results are just in and this play may have just been hugely de-risked.
But it looks like they did much more than that. They encountered oil and gas indicators, too.
If you didn’t, don’t worry. It’s not too late. Drill #2 is just about to start...
The press release went out Thursday, and the stock forums began lighting up as investors evaluated the results.
Retail investors may be waking up to the opportunity and word may soon start to spread.
Spencer Hohan, a petroleum engineer, commented on Yahoo:
“As a Petroleum Engineer of 40 years now, having spent a career with major oil companies, and smaller independents, it's hard to emphasize how rare it is for something like this to be a ‘hit’ on the first penetration well drilled based primarily on a geomagnetic survey. This is astounding. If the second well shows anywhere near similar geophysical properties, and further confirms the basin structure, this could easily be worth more than a hundred times its current price. Sorry, shorts. You'd best cover today, or you are bankrupt. And it may be too late already.”
This was a completely speculative play I wrote about last year. But I believed in this story. I believed in it when its enterprise value was much lower and before these drill results were announced.
Now, of course, there will be a lot of true believers, but Oilprice readers got there first for what may be the big rewards that some say only come around a few times in your investing career.
The results of the first drill are far beyond what I anticipated:
- The well sample log provides over 200 meters of oil and natural gas indicators over three discrete intervals in a stacked sequence of reservoir and source rock.
- Extraction of oil from these samples “supports an active petroleum system with multiple source intervals”.
Dan Jarvie, Recon Africa’s geochemist and board member, confirmed the existence of components and processes indicating a working petroleum system, stating: “These shows are indicative of migrated, thermogenic petroleum and occur over three different intervals in the 6-2 test well. The intervals penetrated include highly porous, permeable sediments and marine source rocks as predicted, and extensive marine carbonate lithofacies. Mud gas results indicate a high BTU gas with the presence of light oil in numerous cutting samples. Based on these initial results, the components and processes for a working petroleum system are all present.”
This could put Namibia on the world’s oil map in a very big way.
Hon. Tom Alweendo, Namibian Minister of Mines and Energy, stated: “This is great news for the people of Namibia, with the results of the well confirming a big potential for a very valuable energy resource for our country and therefore a significant development for Namibia onshore exploration efforts. The positive results of this well have provided us with the critical information required to unlock the country’s petroleum prospectivity and is the first step in the process of locating significant accumulations, we can now confidently confirm Namibia is endowed with an active onshore petroleum basin.”
This story keeps getting better and better. It’s still a risk, but now that they’ve proven indicators of a petroleum system, I think it’s becoming far less risky.
And they did that on their first well, when I was simply optimistic they would do it in 3 drills.
So, what now? Now, the enterprise value looks a lot more secure.
And my excitement is hard to contain over what they might uncover in well #2. If the first well found these indicators, the results of the second could be … (I’m not even sure how to express it as I am still so excited over the results from the first well.)
The rig--owned by Recon Africa (TSXV:RECO, OTC:RECAF) is reportedly being mobilized to the second well (6-1), 16km from the first well (6-2). With this second drill, they plan to evaluate the indicators of the petroleum systems revealed in the first well in an area of maximum thickness.
This is where it would be good to revisit Dan Jarvie’s numbers that we shared with you in the previous RECO newsletter.
Now that indicators for a petroleum system have been found, that possible 120-billion-barrel estimate from Jarvie may be pinging some serious radar.
Jarvie’s estimate of a possible 120 billion barrels of oil equivalent was based only on 12% of Recon’s holdings.
Jarvie estimated Recon Africa’s Kavango Basin may be capable of generating over 100 billion barrels of oil. And in Haywood’s opinion, given the scale of the basin (we’re talking about 6.3MM acres in Namibia plus an additional 2.2mm in Botswana), a discovery success may present opportunities for strategic joint ventures for further de-risking--without additional shareholder dilution.
When Haywood initiated coverage in November and then adjusted their target valuation in December, they noted that “On a successful discovery, attractive fiscal terms should help to facilitate the development of the basin, thereby increasing the chance of commercialization and shareholder value”.
At that time, Haywood recommended “accumulating a position ahead of drilling/evaluation news flow in H1/21 aimed at proving up the presence of a working hydrocarbons system, which if confirmed, should provide abundant opportunities for further exploration and appraisal drilling”. Well Haywood have just increased their price target to $10 and if you are an investor I think you should take a look at their latest report they put out yesterday afternoon: Haywood Recon Africa Update.
Even without this week’s exciting first drill results proving indicators of a petroleum system, Haywood seemed to see material upside as Kavango may be de-risked:
Haywood’s adjustment also coincided with a huge boost of confidence from Wood Mackenzie, comparing Recon Africa’s Kavango basin to the Midland Basin in Texas and estimating that the total development potential of Kavango could be a possible $540 billion.
I’m very excited about this. In my experience, this almost never happens. I expect to see something like this only a couple of times in my lifetime, and I’m thrilled that I was able to share it with you at this stage.
Small-cap explorers may always have big upside potential. If you find the right one you may see excellent returns. But in my view they’re almost impossible to find in a sea of bad managers and ill-thought-out plays. I think Recon Africa may be an extremely rare exception, sitting on a deep basin that might normally be expected to have been scooped up by a supermajor.
I anticipated a fast ride on this one, and progress has been even faster than I imagined. I’m going to watch what may happen next when they finish drilling their second well. I am very excited about this one.
Latest Press Release: https://finance.yahoo.com/news/reconafricas-first-three-wells-confirms-040100822.html
Updated Haywoods Research Report: https://reconafrica.com/wp-content/uploads/Haywood-Report-Apr-15-2021.pdf
Company Website: http://www.reconafrica.com/
Canadian ticker: https://finance.yahoo.com/quote/RECO.V/?p=RECO.V
U.S. ticker: https://finance.yahoo.com/quote/RECAF/?p=RECAF
Other resource companies to watch:
Occidental Petroleum (NYSE:OXY) had a particularly turbulent 2020. Like all other oil firms everywhere in the world, Occidental struggled with the weak oil and gas prices, which impact the value of its proved and unproved oil and gas reserves.
“The impairment estimate is primarily attributable to the expected prolonged period of lower commodity prices brought on by lower oil demand as a result of the impacts of the COVID-19 pandemic to the worldwide economy,” the company said.
The crisis even lead to the collapse of a key deal in which Total was to buy Occidental’s assets in Ghana. The collapsed deal was another blow to Occidental, which was relying on the sale of Anadarko’s African assets to receive a total of US$8.8 billion that could partially reduce the huge debt it had accumulated to buy Anadarko in what analysts now see as an ill-timed decision to pursue such a huge and leveraged transaction.
After being battered down on practically every front, Occidental ranked as one of the S&P 500’s worst performing stocks of the year. But 2021 is a brand new start for Occidental. With the troubles of 2020 in its rear-view mirror, the company is looking to capitalize on the inevitable rebound in oil. And it’s already beginning to materialize. Since November, Occidental stock has already risen by 100%, and this rally could kick into high gear in the coming months.
Exxon (NYSE:XOM) has been desperately pulling on all the levers in a bid to get through the oil slump with its dividend intact but could be running out of options. Exxon has announced that it will cut 15% of its workforce in order to protect its fat dividend (10.6% yield) and also slash capital expenditure--again.
Exxon is also pondering something else unExxon-like: A major asset writeoff. The company is currently reassessing its North American natural gas holdings and could impair a staggering $25B-$30B. Wall Street has been hard on Exxon for the company's earlier refusal to lower its capital spending and reluctance to adjust the book value of its assets to reflect the current reality.
ExxonMobil isn’t ignoring the reality of the market, however. It has made major moves in its commitment to reduce its emissions. It claims to have about one-fifth of the world’s total carbon capture capacity. The company captures about 7 million tons per year of carbon.
Like many of its peers, ExxonMobil has also shed nearly half of its value since the beginning of 2020. Despite this, Exxon has been making big moves in the energy realm, and is positioning itself perfectly to capitalize on the rebound in oil prices, as well as the global pivot to natural gas, in the coming years.
Chevron (NYSE:CVX) comes in just above Shell as the world’s second-largest oil and gas company by market cap. Chevron is also betting big on Africa, particularly Nigeria and Angola. The supermajor ranks among the top oil producers in the two African nations. Other areas on the continent where the company holds interests include Benin, Ghana, the Republic of Congo and Togo. Chevron also holds a 36.7 percent interest in the West African Gas Pipeline Company Limited, which supplies Nigerian natural gas to customers in the region.
Though its assets are spread out across the region, it’s all strategic. With bets on both oil and natural gas, the company is looking to take advantage of both of the fossil fuels. Though prices are still depressed at the moment, as fuel demand returns to normal, Chevron could be a big winner in as prices climb back up to pre-pandemic levels.
Though Chevron still has not bounced back from the massive hit it took back in March 2020, where it dropped to a 5-year low of just $59, the oil giant has made some progress thanks to recovering oil prices. Sitting at $102 at the time of writing, Chevron is slowly recuperating some of its losses and is positioned well to benefit in the mid to long-term.
Schlumberger (NYSE:SLB) is transforming itself to survive and thrive in an oilfield a fraction of the size it was only a few years ago. The emphasis is shifting from throwing big chunks of iron and a schoolyard full people at a project to minimizing capital intensity of operations through the digital PSO transformation we have discussed here. The digitalization of the global oilfield will prove to be very sticky and begin to deliver subscription-type returns to both companies.
SLB is ahead of the rest of the oilfield pack with their New Energy Genvia venture, which aims to produce carbon free blue hydrogen through a hydrogen-production technology venture in partnership with the French Alternative Energies and Atomic Energy Commission (CEA), and with Vinci Construction. This new venture will accelerate the development and first industrial deployment of the CEA high-temperature reversible solid oxide electrolyzer (SOE) technology.
SOE can potentially be a game-changing technology in the medium term because it offers a unique and efficient method to produce clean hydrogen by water electrolysis using a renewable source of electricity. Genvia’s mission is to deliver differentiated system efficiency when producing hydrogen from water, compared to current commercial electrolyzer technology, and as such, enabling clean hydrogen production at highly competitive price.
Growing demand for the sweet crude oil grades produced by Brazil’s pre-salt oilfields sees Petrobras (NYSE:PBR) focused on developing its pre-salt operations. Brazil’s national oil company has budgeted capital spending for exploration and production activities of $46.5 billion from 2021 to 2025. Those upstream projects being approved for development must have a breakeven price of $35 per Brent or less.
Clearly, while the pandemic has hit Brazil’s oil industry causing production to fall because of savage budget cuts and well shut-ins, it appears to have done no material long-term damage. Demand for Petrobras’ low sulfur content fuel is firm and will grow because of the global push to significantly reduce sulfur emissions.
For these reasons Brazil’s oil production will grow significantly with Petrobras, which for October was responsible for 73% of the country’s oil output, targeting oil production of 2.7 million barrels daily by 2025. And with such surprising numbers, it’s no shock that Petrobras is one of the only oil and gas producers on the planet that is currently trading above its January 2020 numbers.
CNOOC Limited (TSX:CNU) is one of China’s oil majors. It’s the country’s most significant producer of offshore crude oil and natural gas, and may well be one of the most controversial oil stocks for investors on the market. A label that has nothing to do with its operations, however.
Recently, U.S. regulators announced their intention to de-list Chinese companies from the New York Stock Exchange, going back on their announcement just a few days later. The sustained negative press surrounding Chinese companies, however, has put CNOOC in an uncomfortable position for investors. While many analysts see the company as significantly undervalued, it is still struggling to gain traction in U.S. markets.
It's only natural to wonder why CNOOC was targeted and not CNPC or Sinopec. Lin Boqiang, dean of the China Energy Policy Research Institute at Xiamen University in southern ChinaSo, suspects CNOOC's drilling activity in the South China Sea area is responsible for putting it at loggerheads with U.S. authorities.
While Canada’s oil sector was one of the hardest hit by the oil price crisis, Canadian Natural Resources (TSX:CNQ) kept its dividend intact after swinging to a loss for the first half of the year, while Canada's producers are scaling back production by around 1 million bpd amid low oil prices and demand. Though Canadian Natural Resources kept its dividend, it withdrew its production guidance for 2020, however. It also said it would curtail some production at high-cost conventional projects in North America and oil sands operations and carry out planned turnaround activities at oil sands projects in the second half of 2020.
Despite the negative stigma surrounding the the oil sands, the sector is starting to clean up its act a bit. And Canadian Natural Resources is leading the charge. And if analysts are right about Canada’s comeback, Canadian Natural Resources could be in for a big year.
Though the Canadian energy giant has seen its stock price slump this year, it could provide a potentially opportunity for investors as oil prices rebound. It is already up over 170% from its March lows, and it could still have some more room to run.
As one of the biggest names in energy, Suncor Energy (TSX:SU) has adopted a number of high-tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, however, it is a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta.
When the rebound in crude prices finally materializes, giants like Suncor are sure to do well out of it. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook. And that upside is further amplified by the fact that it is currently looking particularly under-valued compared to its peers.
**IMPORTANT! BY READING OUR CONTENT YOU EXPLICITLY AGREE TO THE FOLLOWING. PLEASE READ CAREFULLY**
Forward-Looking Statements. Statements contained in this document that are not historical facts are forward-looking statements that involve various risks and uncertainty affecting the business of Recon. All estimates and statements with respect to Recon’s operations, its plans and projections, size of potential oil reserves, comparisons to other oil producing fields, oil prices, recoverable oil, production targets, production and other operating costs and likelihood of oil recoverability are forward-looking statements under applicable securities laws and necessarily involve risks and uncertainties including, without limitation: risks associated with oil and gas exploration, including drilling and other exploration activities, timing of reports, development, exploitation and production, geological risks, marketing and transportation, availability of adequate funding, volatility of commodity prices, imprecision of reserve and resource estimates, environmental risks, competition from other producers, government regulation, dates of commencement of production and changes in the regulatory and taxation environment. Actual results may vary materially from the information provided in this document, and there is no representation that the actual results realized in the future will be the same in whole or in part as those presented herein. Other factors that could cause actual results to differ from those contained in the forward-looking statements are also set forth in filings that Recon and its technical analysts have made. We undertake no obligation, except as otherwise required by law, to update these forward-looking statements except as required by law.
Exploration for hydrocarbons is a highly speculative venture necessarily involving substantial risk. Recon's future success will depend on its ability to develop its current properties and on its ability to discover resources that are capable of commercial production. However, there is no assurance that Recon's future exploration and development efforts will result in the discovery or development of commercial accumulations of oil and natural gas. In addition, even if hydrocarbons are discovered, the costs of extracting and delivering the hydrocarbons to market and variations in the market price may render uneconomic any discovered deposit. Geological conditions are variable and unpredictable. Even if production is commenced from a well, the quantity of hydrocarbons produced inevitably will decline over time, and production may be adversely affected or may have to be terminated altogether if Recon encounters unforeseen geological conditions. Adverse climatic conditions at such properties may also hinder Recon's ability to carry on exploration or production activities continuously throughout any given year.
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