Fortunes aren’t only minted through secure investments over the long term. They’re also minted by riskier opportunities that carry huge rewards.
The pandemic has shaken up the investing world, and for more aggressive investors who know how to balance risk and reward for ultimate returns, there is no better time to find under-the-radar risk-reward equations that could favor the reward side.
And when it comes to the oil patch, there are two ways to play the risk-reward scenario: Junior discoveries and cheap oil infrastructure plays.
And there are two stocks that tick these boxes right now.
The first is probably one of the last giant onshore oil discoveries we will ever see--and it’s a junior explorer all the way, which means the pure-play upside is potentially huge ...
The second is a pipeline rebound play with a very cheap stock …
#1 The Ultimate Discovery Play: Recon Energy Africa (TSX.V: RECO, OTCMKTS:RECAF)
The newly discovered Kavango Basin, almost the size of Switzerland, is viewed as the only remaining undeveloped onshore sedimentary basin of this size and depth worldwide.
The even bigger story here is the company behind it: Reconnaissance Energy Africa (“Recon Africa”).
This small $128M market cap company has managed to do what is normally impossible for a company of this size: It has secured an entire sedimentary basin with an estimated 18.2 billion barrels of oil in place.
It’s a junior play with big play characteristics.
One of the world’s most renowned geochemists, Dan Jarvie, the driving exploration force behind the Barnett gas play and former chief geochemist for EOG Resources, revealed Recon Africa’s oil potential in an astounding report.
Jarvie sees 120 billion barrels of petroleum potential on just 12% of Recon Africa’s holdings.
ReconAfrica (TSX.V: RECO, OTCMKTS:RECAF) owns the entire Kavango basin In Northeastern Namibia and Northwestern Botswana. That’s over 8.75 million acres that is as deep as the prolific Texas Permian basin.
Reservoir engineering firm Sproule originally assessed the potential of the oil in the Namibian portion of the Kavango Basin as containing up to 12 billion barrels of oil (or) 119 trillion cubic feet of natural gas.
Source: Research Report - Mark Heim CFA
Those are great numbers on their own, but there are two things to consider: These numbers only include Sproule’s 12 billion bbl estimate in Namibia. They don’t include another 6 billion bbls in Botswana.
And things get even better. In its recent report, Haywood notes that it’s initiated coverage and put a short-term $2.50 price on RECO because the company is “set and funded to de-risk a potentially material resource play onshore Namibia and Botswana with 1,348 mmbbls/58.1 Tcf best estimate prospective recoverable resource (gross)”.
Haywood is recommending “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”.
With all the numbers starting to line up, it’s now time to drill. Recon Africa is currently in the process of moving its drill to the site, with the first well set to be drilled in late December.
According to world-renowned geologist and geophysicist Bill Cathey, the president of Earthfield Technologies in Houston, and a geologist to the supermajors, “Nowhere in the world is there a sedimentary basin this deep that does not produce commercial hydrocarbons.”
And he isn’t the only one watching this drill with interest, Bloomberg and Reuters have charted out the potential value per acre of RECO’s oil assets …so full exposure is looming as that acreage could become prime.
#2 The Pipeline Rebound: Energy Transfer LP
As oil prices have rebounded from record lows, small cap oil stocks have seen remarkable returns.
Callon Petroleum, for example, has climbed from $4.53 to $13.96 in the last two months.
But the real value play in the longer-term comes from what has traditionally been a less exciting corner of the oil market: pipelines.
Pipeline companies were under attack well before the pandemic, with every new project being met with massive protests and regulatory resistance.
Then the pandemic price crash hit and things went from bad to worse.
Energy Transfer LP has seen its value crumble from highs in 2015 of $34.33 to post-pandemic lows of $5.11.
But now these beaten down stocks represent some of the best value for investors in the entire sector.
And it’s a trend that is supported by Warren Buffett, with his company Berkshire Hathaway Energy buying all of Dominion Energy’s gas transmission and storage operating segement assets.
What Warren Buffett realized was that pipeline companies were being beaten down due to two major factors. Firstly, the resistance and bad publicity surrounding new pipeline projects. And secondly, the crash in oil demand and prices.
Oil prices and demand are already on the road to recovery, with the rollout of COVID-19 vaccines around the world leading to a growing sense of optimism in oil markets. But more importantly, the resistance that every new pipeline project meets is only adding value to existing pipeline infrastructure.
Berkshire Hathaway paid $10 billion for Dominion Energy, which left Warren Buffett with 5,500 miles of permitted pipeline – an asset that is only going to grow in value as oil markets rebound.
Now, let’s look at Energy Transfer, a company with 90,000 miles of oil and gas pipeline. If we use Warren Buffett’s valuation of roughly $2 million per mile, that is worth $180 billion.
Not bad for a company with a market cap of $18.6 billion.
Energy Transfer has already seen its stock value begin to climb, but the sky really is the limit here as oil markets return to normal and a major pipeline capacity shortage looms.
Other companies set to rise as oil bounces back:
Total (NYSE:TOT) is a giant in the energy game. It keeps a ‘big picture’ outlook throughout its endeavors. And thanks to that, it has outperformed other pure oil majors. It is not only acutely aware of the needs that are not being met by a significant portion of the world’s growing population, it is also staying ahead of the looming climate crisis by boosting its renewable assets. In its push to create a better world for all, Total has committed to contributing to each of the United Nations’ Sustainable Development Goals.
As such, Total is not only betting big on renewable energy, it is also doing its part in reducing emissions in its day-to-day activities. Patrick Pouyanné, Chairman and Chief Executive Officer at Total noted, “It’s our job to meet growing energy needs while reducing carbon emissions.”
It's also one of the most conscious companies in the business. Total checks every box in the ESG checklist. It is promoting diversity and safety, making massive changes in its operations to ensure that its business is environmentally sound, and has even committed to going carbon neutral by 2050 or sooner. It’s no surprise that shareholders are loving its forward-thinking approach.
Chevron (NYSE:CVX) is an oil supermajor with massive presence in Africa, particularly in Nigeria and Angola. In fact, the oil gaint ranks among the top 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.
Egypt has also captured the attention of the oil giant in recent years. Just this year, in fact, the country awarded Chevron and Shell key exploration blocks in the red-hot Red Sea. The blocks cover a total area of around 10,000 sq km and carry a combined minimum investment of $326 million, Egypt’s petroleum ministry said, adding that potential investment would rise to "several billion dollars" if discoveries were made.
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Though its interests are spread out among the continent, it’s all planned. With bets on both oil and natural gas, Chevron 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 is set to soar when oil returns to pre-pandemic prices.
Royal Dutch Shell (NYSE:RDS.A) has been in the African oil game for ages. In fact, the Dutch oil giant began drilling in the region over 70 years ago. While it has sold off a number of assets in the region in recent years, it continues to maintain a strong presence, particularly in South Africa.
Shell’s South African assets are important because the government has been significantly more stable than some of the other major plays on the continent. Moreover, it’s been very supportive of Shell in its endeavors in the country. Its operations in South Africa include retail and commercial fuel, lubricant, chemical and manufacturing. It’s also heavily invested in upstream exploration. It even holds the exploration rights to the Orange Basin Deep Water area, off the country’s west coast and has applications for shale gas exploration rights in the Karoo, in central South Africa.
Shell isn't ignoring Namibia, either.
“Namibia is one of the places where the geology is very interesting,” Shell Upstream’s VP of exploration for the Middle East and Africa, Colette Hirstius, recently told an African oil conference in Cape Town. “We recently acquired seismic data and are continuing to be encouraged by what we see,” she added.
Shell’s regional venture exploration manager, Menno de Ruig, described the entire Orange Basin as “based on the Aptian source rock, which has been proven in the basin” and remains “one of the main attractions”.
Suncor Energy (NYSE:SU, TSX:SU) has pioneered 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.
Better still, some analysts are already turning a bit more bullish on the oil sands, which is great news for Suncor.
“With improved cost structures and increased propensity to be capital disciplined, Canadian producers are emerging from the downturn stronger, with greater ability to generate free cash flow,” Morgan Stanley analysts Benny Wong and Adam J Gray
By. Steve Drew
**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, 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 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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