In 2020 the oil and gas industry suffered through its most brutal year in modern history.
Oil prices went negative for the first time ever, global demand for crude and gasoline crashed through the floor, and a wave of bankruptcies saw an unprecedented number of job losses in the sector.
But with a new COVID vaccine on the horizon and the potential for a major oil supply deficit looming over the industry, there has arguably never been a better time for oil exploration.
Oil exploration companies have not been immune to COVID, and as the sector begins to bounce back, they will be the first to soar. And one company, in particular, is looking especially promising.
Reconnaissance Energy Africa (RECO-V; RECAF-OTCQX) is a small company that has secured the oil and gas rights to an entire sedimentary basin in Namibia and Botswana--both very friendly to oil exploration, with very low royalty fees (5%) and an estimated 18.2 billion barrels of oil in place.
As I noted previously (for very good reason as we have all seen by now), Recon Africa has one of the best risk/reward profiles of any deal I’ve come across in decades in this industry and it’s great to see that institutions are now coming on board as we have just seen a positive report from Haywoods Securities, which just recently started coverage on RECO with a short-term price target of $2.50.
Even better, I’m convinced this could be one of the last giant onshore oil discoveries we will ever see.
This is the third time I’ve written about this company because in my opinion it just keeps getting bigger and better. (See one of our previous letters here and the full-length Haywood report here.)
RECON Africa (RECO-V; RECAF-OTCQX) is not raising any more money, so this isn’t another private placement opportunity, but it’s definitely worth takin a look at the company through traditional means.
If you haven’t already seen the Haywood report, it’s a great write up that gives you a good idea of where a small oil explorer is headed as it sits on a potential supermajor-sized oil and gas basin.
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.
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”.
The key here is this: “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”.
There’s nothing that rings louder in an oil and gas investor’s ears than this.
So, let’s break down Haywood’s coverage in more detail:
“This Could Be Big”
Haywood emphasizes that, most recently, noted source rock expert Dan Jarvie, armed with the cores, has estimated RECO’s Kavango Basin was capable of generating over 100 billion barrels of oil (5 times larger than Sproules OOIP assessment). And in Haywood’s opinion, given the scale of the basin (we’re talking about 6.3MM acres in Namibia plus an additional 2.45MM in Botswana), a discovery success would present manifold opportunities for strategic joint ventures for further de-risking--without shareholder dilution.
“Early Stage, but All the Necessary Ingredients”
Haywood also highlights the fast-paced time frame in which this is all happening and a solid setup for establishing the existence of a working hydrocarbon system in Kavango, as well as for evaluating and exploiting it.
Haywood points out RECO’s fully funded three-well program, owned drill rig, stable government, committed and capable management, and straight forward land and water access--in addition to attractive fiscal terms. Coverage also emphasizes that the initial 400 km of 2D seismic will be acquired in the first quarter of 2021 for the first well.
Also from the Haywood report, “In our view, the most notable endorsement to date is from Bill Cathey, CEO of Earthfield Technology‘s, who completed the entire survey interpretation of the Kavango basin and stated, “Nowhere in the world is there a sedimentary basin this deep that does not produce commercial hydrocarbons.”
“All of these factors increase the chance of development should a commercial discovery be made.”
“High-Risk/High-Reward Opportunity”
Haywood takes pains to provide other examples of plays in which an initial oil discovery during the exploration phase delivered investors returns of 380% to 1,000%. That’s some serious upside, and Haywood sees a similar opportunity here, calling RECO stock (RECO-V; RECAF-OTCQX) an “attractive high-risk/high-reward investment opportunity” that could “experience “rapid value accretion” on success and/or anticipation of success.
In arriving at its 12-month target price of $2.50/share, Haywood has risked this upside potential by a 6% chance of commercialization, which is very conservative.
Is there a potential downside? Of course. This is a high-risk/high-reward play. But if the team, which Haywood describes as capable, committed, and expert, is successful in proving the presence of oil and economic viability of its resource, “the stock could be worth multiples of its current valuation”.
As Haywood points out, the news flow on this one is expected to be high-speed and high-impact:
And the catalysts are numerous--and incredibly significant--including:
- Mid-November 2020: Rig mobilization to Namibia
- Late December 2020: 6-2 well spud
- Q1/21: 2D seismic acquisition and interpretation
- Q1/21: 6-2 well (evaluation) and drilling/evaluation of two other back-to-back wells
- H2/21: Potential JV discussions
I haven’t seen a stock as exciting to watch as RECO (RECO-V; RECAF-OTCQX) in a long time, and I’ve been working in this industry for many years. Nothing is more exciting than watching a small-cap explorer do what a super-major used to do exclusively--buy up an entire sedimentary basin and put the first drill bit in the ground on a play that could be the world’s last ever onshore discovery if it pans out.
I’m already all-in on this one but wanted to share the news and congratulate those of you who jumped in on the earlier private placements. This is exactly what we’re trying to do--share opportunities that you would normally not get unless you're an insider.
For anyone who is interested in reading Haywood’s full report on RECO, it’s available here.
You might also be interested in a recent interview I did with one of the world’s foremost Geoscientists, Dan Jarvie who is the president of Worldwide Geochemistry LLC, who said the following about RECO’s assets, “Given the nature of the basin and the tremendous thickness, this is pretty much a no-brainer… It will be productive and I’m expecting high-quality oil.” – Click here for the full interview
In the meantime, keep an eye on this one, and look forward to more news following Haywood’s coverage and the upcoming list of catalysts!
Other companies worth keeping an eye on as oil prices bounce back:
Royal Dutch Shell (NYSE:RDS.A) is no stranger to Africa’s oil and gas game. The Dutch oil giant began drilling in the region over 70 years ago, and now has energy assets in over 20 countries across the sprawling continent. Though it has sold off a number of its prized plays in the region in recent years, it continues to maintain a strong presence, especially in South Africa.
Shell’s South African assets are important because the government has been significantly more stable than some of the other big bets on the continent. Moreover, the country has been very open to Shell in its projects. The company’s 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.
Though this year has been a particularly tough year for Royal Dutch Shell, with its share price dropping nearly 50% in value since January, oil prices are slowly beginning to stabilize. And now, with fresh vaccine hopes, demand is expected to return to pre-pandemic levels by the end of next year. There may not be a lot of time left to buy an experienced oil major (which pays dividends) at this level.
Exxon (NYSE:XOM) is another oil giant looking to cash in on Namibia’s upcoming crude oil boom. It recently bought up an additional 7 million net acres from the Namibian government for a block extending from the shoreline to about 135 miles offshore in water depths up to 13,000 feet, with exploration activities to begin by the end of this year.
ExxonMobil is also big 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. This has been in place since 1970, and the company claims to have captured more CO2 than any other company — more than 40 percent of cumulative CO2 captured.
Like Royal Dutch Shell, ExxonMobil has also shed nearly half of its value since the beginning of the year. 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.
Total (NYSE:TOT) is one of the few oil majors truly diving headfirst into the new energy reality It is not only aware of the needs that are not being met by a significant portion of the world’s growing population, but it is also hyper-aware of the looming climate crisis if changes are not made. In its push to create a better world for all, it 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. And that should pay off for the giant.
While Total’s share price slipped in March along with the wider market, Total’s pivot towards sustainability has helped it outperform some of its peers. Though it still maintains a major presence in the global oil and gas industry, it has made significant strides in the renewable realm, as well. As such, Total remains one of the top-performing oil-focused energy companies in the business this year. And as the world scrambles towards greener energy, Total is likely to emerge as one of the most prepared majors in the business.
From its natural gas expansion to its renewable and even electric vehicle plays, Total is winning over shareholders from every age group – a rarity when it comes to the market’s top stocks. This will be key as generation Z and millennials gain traction on the stock market.
BP (NYSE:BP) is another European energy giant slowly pivoting towards greener energy alternatives. BP, which has been criticized in the past as being slow and late to the environmental cause, could now leapfrog its peers. We are still a long way from Beyond Petroleum. But chief executive Bernard Looney believes that we are only 30 years from a net-zero BP. He has promised that in September the company will lay out a more detailed plan that shows the path to that destination. But he has shown already that there is more to his commitment to net-zero than there was to Beyond Petroleum 20 years ago.
“Renewables and natural gas together account for the great majority of the growth in primary energy. In our evolving transition scenario, 85% of new energy is lower carbon,” Spencer Dale, BP group chief economist, said, commenting on the outlook to 2040.
Like the rest of the heavily oil-focused supermajors, BP felt the full weight of the oil price collapse earlier this year and is still struggling to find its feet in the COVID-stricken marketplace. Despite this, however, BP’s renewable plans, in addition to its strong management decisions, put the company in a positive place going forward. Not to mention, it’s still paying dividends. While the oil giant may be down, it’s certainly not yet out for the count.
As one of the biggest names in energy, Suncor Energy (NYSE:SU, 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.
Suncor may be a long way from its all-time highs, but its low entry point and strong dividends make it a strong choice for investors still looking for exposure to oil. In fact, in its most recent earnings report, it surprised the market by beating estimates, sending its stock price soaring by as much as 5% in a single day.
By. James Stafford
**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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