Millionaires 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 small-caps on the oil price rebound.
And there are two stocks that tick these boxes right now.
One is an oil price rebound play on a cheap stock …
The second 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 ...
#1 The Rebound Play: Callon Petroleum(NYSE:CPE)
Callon is trading at around $5.19 right now, and it’s well-positioned to make investors money in the second half of this year if oil prices rebound at all, which is largely expected to happen.
Why? It’s easy to formulate an investment thesis in which Callon returns to its pre-COVID days with production restored and new capital spending underway.
And because of that, it’s also easy to imagine this stock making serious gains on news of a COVID-19 vaccine. It’s the first time in history that oil stocks are tied to biopharma stocks, but the big gains for investors will only come from the small corners of this patch.
Pre-COVID, Callon was trading as high as $48.80.
If oil prices rebound, the reward could be a significant 100% rise, or more from where this company is right now.
Zacks Equity Research lists four out of eight analysts as having upwardly revised their estimates for Callon’s 2020 earnings over the past 60 days. They’re eyeing an EPS surprise on this one.
And there’s a strong Permian Basin portfolio to back it up. Callon took on the Permian in 2009 and spent the next decade significantly expanding its holdings there, with the grand finale being the 2019 merger with Carrizo Oil & Gas, which left it with 200,000 net acres in the Permian and Eagle Ford. Callon now has an impressive inventory of low-risk premium oil wells in America’s most prolific basin. Now, 2020 production is expected to be nearly double that of 2019.
If oil prices rebound, there’s nowhere for this one to go but up--and fast.
The Kavango Basin isn’t just one of the last likely onshore oil discovery patches in the world. It’s not just a basin that’s bigger geographically than Eagle Ford and could be the best contender for a repeat of the American shale boom.
The even bigger story here is the company behind it: Reconnaissance Energy Africa (“Recon Africa”).
This small $50M 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 the junior play with big play characteristics.
And it just got even more exciting: One of the world’s most renowned geochemists, Dan Jarvie, the driving exploration force behind the Barnett source rock and former chief geochemist for EOG Resources, has just put out a report on Recon Africa’s oil potential and the numbers are astounding.
Jarvie sees potential for 120 billion barrels of petroleum potential on just 12% of Recon Africa’s holdings.
Even before this report from one of the biggest names in exploration, this was a narrative worth sinking your teeth into:
Under several long-term petroleum licenses, ReconAfrica has now acquired all the rights over the entire Kavango basin In Northeastern Namibia and Northwestern Botswana. That’s over 8.75 million acres as deep as the Permian and as wide as the Eagle Ford.
Reservoir engineering firm Sproule originally assessed the potential of the unconventional 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—considerably larger than the latest estimates for the entire Eagle Ford.
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 estimated 12 billion bbl estimate in Namibia. They don’t include Namibian conventional and both the conventional and unconventional in Botswana.
And now, new analysis finds there are over 18.2 billion barrels of unconventional OOIP (Original Oil in Place) in Namibia and Botswana.
What’s more, Sproule is gearing up to release its conventional estimates soon and that could potentially add many barrels more.
With all those numbers starting to line up, it’s now time to drill. Recon Africa has a single well planned in December and 2 more wells planned immediately after.
It’s a shocking number to start off with, and by next month, they look to have an independent estimate of this resource, possibly by Sproule again. That could likely push the reserve estimates further.
And it’s all sitting on the same depositional environment as giant Shell’s 390-trillion-cubic-feet “Recoverable” Permian shale in South Africa.
Not only has a nearby well already hit source rock, but in the case of Recon Africa, they’re working with world-class geologists and marketers. And the end game that investors will love is this: Successfully explore, build, and sell to a supermajor. And they’ve done it before.
One of the biggest de-risking factors on investor radar so far has been the statement of world-renowned geologist and geophysicist Bill Cathey, the president of Earthfield Technologies in Houston, and a geologist to the supermajors. When he studied Recon Africa’s Kavango Basin find, he said: “Nowhere in the world is there a sedimentary basin this deep that does not produce commercial hydrocarbons.”
Now, with Recon Africa already launching its 2020 drilling campaign with the acquisition of a 1,000 HP rig (Jarvie-1) to be delivered to the first well location in Namibia in October, this stock is being positioned to be the most exciting risk-reward discovery play in the oil patch.
But it won’t last long: Already, Bloomberg and Reuters have charted out the value per acre of RECO’s oil assets …so full exposure is looming as that acreage could become prime.
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. From workplace safety and diversity to societal progression and reducing its carbon footprint, Total is checking all of the boxes that the next generation of investors hold close to their hearts.
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.
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.
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.
Tourmaline Oil Corp (TSX:TOU) is another Canadian oil giant focusing on exploration, production, development and acquisition within Western Canadian Sedimentary Basin. The company is in possession of an extensive undeveloped land position with long-term growth opportunities and a large multi-year drilling inventory. Tourmaline’s strong leadership make the company a promising pick for investors looking to take advantage of the tremendous Canadian oil opportunities which are due for a strong rebound as oil prices inch higher.
Husky Energy Inc (TSX:HSE) is an oil and gas company out of Western Canada and it lives up to its name, fierce and driven for success. It’s already got a presence in some of the most well-known oil regions on the planet, but it hasn’t stopped there. It’s even positioned itself in Europe, Africa and as remote as the South China Sea.
Imperial Oil (TSX:IMO) still has some of the lowest cost producing oil sands in Canada and that is going to pay off as oil prices continue to rise and new tech breakthroughs bring breakeven prices even lower. The management is well known for being conservative, but that certainly shouldn’t put investors off in a time when recovery is the buzzword of the day and consistency is sure to be rewarded.
Gibson Energy (TSX:GEI) has a long history in Canada’s oil and gas game. Established in 1953, Gibson knows the industry inside and out. The company has a diverse portfolio which includes transportation, storage, processing, marketing and distribution of oil, condensates, oilfield waste, refined products and natural gas. With Gibson’s huge array of assets and its multi-platform sales strategies, investors look to Gibson with confidence.
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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