By Tom Kool
Onshore oil discoveries are pretty much a thing of the past. The last time anyone got remotely excited about one was in 2017, when giant Repsol discovered 1.2 billion barrels in Alaska’s North Slope.
But a giant E&P company making a discovery doesn’t really move the needle for investors…
But the potential multi-billion-boe potential in Namibia’s Kavango Basin could be a whole different story.
It could be the last major onshore discovery the world ever sees – and a multi billion boe potential is worth repeating.
And for us the most exciting part? The entire Kavango Basin is licensed to a small-cap explorer called Reconnaissance Energy Africa (TSX.V: RECO, OTCMKTS:RECAF) with an experienced team of geologists working with some of the industry’s premier service companies, Schlumberger and Halliburton.
And they just finished an extensive 450-square-kilometer seismic acquisition aimed to determine the details of a much-anticipated multi-well drilling program starting in Q1 of next year.
There’s a reason when insiders are buying even if short sellers are trouncing the share price. If they weren’t excited about the potential results from their 450-sq km of seismic and the Company’s future prospects, they probably wouldn’t be buying up more and more.
In our view this is a patience play, and the most exciting part may be still to come. Seismic results will help guide Recon Africa where to drill, and Netherland Sewell are expected to then give us a resource estimate, which is what we have been waiting for.
We think it’s worth the wait.
And here are 3 key reasons why:
#1 The Namibian government is fully on board
There has been a fair amount of misinformation about Recon Africa’s (TSX.V: RECO, OTCMKTS:RECAF) relationship with state and local governments and community stakeholders, but in our view it is exactly that—misinformation, spread by short sellers to manipulate the share price.
Misinformation also ignores the fact that Recon Africa’s partner in Kavango exploration is state-run National Petroleum of Namibia (NAMCOR), which has a 10% stake.
Speaking to a mid-October Parliamentary Standing Committee, Namibia’s Petroleum Commissioner, Maggy Shino, clarified Recon Africa’s standing, noting that not only does RECAF have an Exclusive Prospecting License, but that more than 40 consultative meetings with the local communities and other key stakeholders, including all relevant ministries, have already taken place to get to this point.
She also noted that Recon Africa already employed over 250 Namibians and spent N$14 million on services, while the government has generated nearly N$8 million in revenue so far as a result of the company’s activities in Kavango.
Namibia’s Traditional Authorities of East and West Kavango made their stance clear as well on October 29th, expressing confidence in the ongoing exploration program, which has already identified evidence of a conventional oil and gas system in the Kavango Sedimentary Basin and could lead to profound socio-economic wealth for the country.
“Everyone is happy with the way ReconAfrica is doing the exploration. This is what we want – the liberation struggle is gone, it is now time for economic freedom. We want exploration, to know what is under the ground,” Hompa Eugene Siwombe, Chairperson of the Kavango Traditional Authority Committee, said.
The residents of Kavango are benefitting, says Siwombe, because of Recon Africa’s ESG commitments to communities. So far, that’s included drilling 22 potable, solar-powered water wells, 14 of which have already been completed and turned over to communities making “the lives of our people in the Kavango regions better”.
And that’s the whole point in our view: A conventional oil play the size of Kavango means nothing if it doesn’t benefit the people of Kavango and the people of Namibia as a whole.
Recon Africa went in knowing this and adopting this as part of its strategy. Recon African has dedicated NAD$112 million (CAD $9.46 million) towards its ESG initiatives in Namibia, which has included drilling water wells for local residents and funding a COVID-19 vaccination program, among other things.
Traditional Authority King Hambukushu Fumu Erwin Munika Mbambo echoed the chairman’s statements, suggesting that any outside opposition to Recon Africa’s oil project is unwarranted and not reflective of what Namibians want.
“We are expressing our support because we, as Traditional Leaders, are the ones on the ground and see what is really happening, not people sitting in their distant offices trying to decide what should be done,” the King said.
A play like this can bring out the short sellers who then scramble to cover in time, resorting to what looks to us like share price manipulation, organized social media campaigns, paid articles that talk about “fracking” that doesn’t exist in a conventional play, and irrelevant lawsuits where the lead plaintiff has only 150 shares…
Not only is this a conventional play that does not involve fracking, but Recon Africa reports it has also established a carbon neutral strategy and is currently analyzing greenhouse gas containment approaches and reforestation—not just of their operational area, but of the wider area.
#2 Good things come to those who wait
Oil exploration projects of this size aren’t explored and delineated overnight. We think these are the plays of patience that, if proven successful, have the potential to mint millionaires.
Some investors chiming in on the RECAF Reddit channel say they are there for the long haul, and are viewing this as their retirement fund. They say they’re not scared away by short selling tactics and are using the recent share price drop as a buy opportunity …
And it looks like so are insiders.
Recon Africa (TSX.V: RECO, OTCMKTS:RECAF) founder Craig Steinke boosted his shares by $50,000, in our view most likely because he is confident in the upcoming seismic results (early December) and planned drilling program based on the seismic acquisition.
But also because we think he’s signaling to investors that now—on the cusp of what some believe might be the world’s last major onshore oil exploration—is not the time to be bowing to pressure from short sellers to sell.
#3 What happens next could be truly seismic
Anyone who’s been following this company knows that Recon Africa drilled two stratigraphic text wells earlier this year and established the existence of a working petroleum system. Now, seismic has been completed, and a multi-well drill plan is the next step.
On October 21st, Recon Africa reported it concluded its acquisition of 450 linear kilometers of 2D seismic data, on time and on budget. It was a massive project that took 150,000 man-hours, led by lead geophysicist Shiraz Dhanani, who has conducted seismic operations around the world for giants such as ExxonMobil and BP.
Processing of the seismic data is being done by Down Under Geophysical in Houston, Texas, and Absolute Imaging in Calgary, Alberta. Both companies follow industry best-practices, and results are expected to be finalized by early December.
While investors are anxiously awaiting seismic results, the big day will come with the multi-well drill campaign, and those results.
Recon Africa plans to start that drill campaign in early Q1 2022 “targeting seismically defined traps and conventional reservoirs already encountered in the stratigraphic wells”.
The market is extremely impatient, hoping RECAF will rush to drill before the end of this year. But it will be early next quarter, and that is the art of sound exploration: It is in investor interests for Recon Africa to integrate all possible data as opposed to doing a quick interpretation and drilling a single well immediately. This is a wider, more holistic approach that should benefit investors more in the long run and possibly set the stage for a potential JV deal. The more data, the better, in this complicated exploration game.
That requires a great deal of patience on the part of investors who we believe will have to deal with a short selling campaign until new data is released to the public. Again, we think it’s worth the wait.
Discoveries are few and far between these days, and almost never onshore anymore. We’ve tapped everything already. A major onshore discovery would be good in any oil price climate—especially if it’s a conventional play and not an expensive and environmentally questionable fracking play. When oil prices are out of this world, even better—and they may have longevity.
And a small-cap company that plays its cards right on a giant basin with potential of billions of boe generated could be the best chance of giving investors a once-in-a-lifetime adventure.
Exxon Mobil (NYSE:XOM) is one of the largest oil and gas companies in the world. It was founded by John D. Rockefeller Sr. in 1870, with a goal to produce kerosene for lamps, which led to it becoming an integrated oil company that would go on to be one of the most powerful corporations ever built, shaping global events from WWII onward. Today, over 80 different subsidiaries are owned by ExxonMobil Corporation alone.
ExxonMobil is one of the few Western energy companies to invest in developing Guyana’s burgeoning oil industry. By the end of 2020, when global oil companies were tightening their belts and learning to live in a sub-$50 per barrel world Exxon announced it was focusing capital spending on offshore Guyana. That decision is paying off in spades for Exxon.
Aside from the considerable drilling success and exploration upside to be unlocked in the Stabroek Block, operations are proving to be highly profitable. And it hasn’t stopped there. Exxon is also developing the Payara oilfield in the Stabroek Block, located to the north of Liza one at a water depth of around 2,000 meters. The Payara field is expected to break even at $32 per barrel, highlighting the operations’ considerable profitability in an environment where Brent is selling for over $85 per barrel.
More importantly, a combination of low breakeven prices for the oilfields in the Stabroek Block and a very favorable production sharing agreement with Guyana’s government, with a low royalty rate and the means to recover development costs, makes Guyana a highly profitable jurisdiction for Exxon.
Chevron Corp. (NYSE:CVX) is an American multinational energy corporation with headquarters in San Ramon, California and has been operating for more than 110 years. It was founded on September 6, 1879 by Benjamin Silliman Jr., Charles Noyes and John D. Rockefeller as the Standard Oil Company of Ohio which became part of a monopoly that controlled 90% of all oil production in the United States. In 1911, it changed its name to Standard Oil Co. (Ohio). It later merged with other companies into a new company called Chevron Corporation which expanded from the US to several other countries around the world including Canada, Algeria, Angola and Nigeria.
Chevron Chairman and CEO Michael Wirth recently expressed optimism about the oil price trajectory, saying that he sees “a fair amount of support” after prices spiked above $80 a barrel in recent weeks.
Wirth noted that oil prices have been making strong gains in a seasonally weak October period, which normally sees a lull in demand. “The fact that we’ve seen prices actually strengthen at a time when they typically weaken, suggests that there’s a fair amount of support in the market,” he said.
For the long-term outlook, Wirth noted that the rising demand for green energy has made it more difficult to develop new supplies of oil and also increased pressure on companies to return excess cash to shareholders in the form of dividends and buybacks rather than spending it on new exploration and drilling.
ConocoPhillips (NYSE:COP) was founded by two oil pioneers in 1917, and has since grown to be one of the largest energy companies in the world. They are committed to delivering a diverse range of products that meet society’s needs for food, transportation, power generation, home heating oil and more.
ConocoPhillips is dedicated to working with others in industry and government to provide responsible development of resources while minimizing environmental impact. ConocoPhillips also strives to make sure their employees feel valued as they work towards success together.
A couple of months ago, Bank of America upgraded ConocoPhillips shares to Buy from Neutral with a $67 price target, calling the company a “cash machine” with the potential for accelerated returns.v According to BofA analyst Doug Leggate, ConocoPhillips looks “poised to accelerate cash returns at an earlier and more significant pace than any ‘pure-play’ E&P or oil major.”
Leggate ConocoPhillips shares have pulled back to more attractive levels “but with a different macro outlook from when [Brent] oil peaked close to $70.” Best of all, the BofA analyst believes COP is highly exposed to a longer-term oil recovery. But BofA is not the only Wall Street punter that’s gushing about ConocoPhillips.
Cheniere Energy (NYSE:LNG) is an energy company that specializes in liquefied natural gas (LNG) and Liquefied Natural Gas production. The company has a number of plants, pipelines, and storage facilities across the United States as well as a global presence in Australia, Qatar, Nigeria, Canada, and Trinidad & Tobago. With demand for LNG increasing all over the world due to its role as a safer alternative to coal and oil-based fuel sources such as gasoline or diesel fuel Cheniere Energy is poised for growth over the next few years.
With the global shift towards cleaner energy sources in full swing, LNG and natural gas bring the benefits of being the cleanest-burning hydrocarbon, producing half the greenhouse gas emissions and less than one-tenth of the air pollutants of coal. Consequently, LNG demand is expected to grow 3.4% per annum through 2035, with some 100 million metric tons of additional capacity required to meet both demand growth and decline from existing projects. Natural gas use in power generation capacity is expected to grow by an additional 300 GW by 2040, equivalent to 300 million tonnes of LNG, with the majority of that demand coming from Asia, especially China, India, and other Southeast Asia countries. And that’s great news for Cheniere Energy.
That marks natural gas/LNG as the only fossil fuel that will experience any kind of growth over the next two decades. Goldman sees a strong ramp in contracted U.S. LNG export capacity and solid exposure to spot pricing for remaining volume helping Cheniere record free-cash-flow growth of ~50% from 2021 levels. Indeed, LNG could record even stronger growth, with Woodmac saying adoption of carbon capture and storage (CCS) technology could massively boost the sector’s green credentials at little extra cost.
‘Crescent Point Energy Corp. (NYSE:CPG; TSX:CPG) is an oil and gas company based in Calgary, Alberta. The Company’s shares are traded on the Toronto Stock Exchange under the symbol CPG. Crescent Point holds interests in over one million net acres of petroleum and natural gas rights in Saskatchewan, Manitoba, North Dakota, Utah, Colorado and Montana.
Crescent Point Energy explores, develops, and produces light and medium crude oil and natural gas reserves in Western Canada and the United States. The company’s crude oil and natural gas properties, and related assets are located in the provinces of Saskatchewan, Alberta, British Columbia, and Manitoba.
Crescent Point shares once traded above $45 per share and even paid out a generous dividend, compared to the current $5.15 share price.
Unfortunately, the 2014 oil price meltdown left the company battling plunging cash flows and high debt levels leading to heavy dividend cuts–and the shares have never fully recovered. Even after this year’s 120% gain, Crescent Point shares are trading 80% below 2014 levels.
Thankfully, the ongoing oil price rally has allowed Crescent Point to start generating healthy cash flows and make several strategic acquisitions. That said, this stock is likely to remain volatile, and any setbacks in the near future could send the shares crashing again.
Cenovus Energy (NYSE:CVE; TSX:CVE) is one of Canada’s largest oil and gas producers. It was formed in 2001 following the merger of Petro-Canada and Pacific Petroleums. Cenovus Energy develops, produces, and markets crude oil, natural gas liquids, and natural gas in Canada, the United States and the Asia Pacific region. The company operates through Oil Sands, Conventional, and Refining and Marketing segments.
Cenovus Energy shares have shot to a 52-week high after J.P. Morgan upgraded the shares to Overweight from Neutral with a C$14.50 price target (45% potential upside), citing progress on execution of last year’s takeover of Husky Energy (OTCPK:HUSKF). Cenovus shares remain undervalued, and with WTI now above $80/bbl for the first time in four years, the company is in a great position to generate enough free cash flow to buy back its ConocoPhillips’ stake.
A subsidiary of Exxon Mobil Corporation, Imperial Oil Limited (NYSE:IMO; TSX:IMO) is a Canadian company that produces and refines petroleum products, including gasoline. It has operations in Canada, the United States and elsewhere. Imperial Oil is an integrated oil company that produces and sells crude oil and natural gas in Canada. As of December 31, 2020, the company Upstream segment had 138 million oil-equivalent barrels of proved undeveloped reserves.
A few months ago, Imperial Oil announced plans to move ahead with the production of renewable diesel at a new complex at its Strathcona refinery in Alberta. The facility is expected to produce ~20K bbl/day of renewable diesel when it is completed in 2024, which the company says could reduce emissions in the Canadian transportation sector by 3M metric tons/year. The company says the renewable diesel will be produced from blue hydrogen, involving natural gas reforming accompanied by carbon capture and storage.
By. Tom Kool
**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, timing of drilling, other exploration and results, 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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