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London – June 11, 2021 – The African nation of Namibia has never produced a barrel of oil in its history. Now, for the second time in less than two months, it’s received positive signs that it could be home to 120 Billion barrels of oil generated in its giant Kavango basin. Mentioned in today’s commentary includes: Petróleo Brasileiro S.A. – Petrobras (NYSE: PBR), Suncor Energy Inc. (NYSE: SU), ConocoPhillips (NYSE: COP), TotalEnergies SE (NYSE: TOT), Marathon Petroleum Corporation (NYSE: MPC).
The small-cap explorer that’s bringing in the good news for Namibia is Reconnaissance Energy Africa (“Recon Africa”) (RECO, RECAF), and its stock spiked last week after it encountered evidence of oil and gas for a second time and made an impressive commitment to ESG.
On April 15th, Recon Africa announced the results of its first of three drills (6-2), showing evidence of an active petroleum system.
Not only did the results point to indicators of an active petroleum system in this nearly 9-million-acre basin, but also provided 200 meters of oil and natural gas indicators/shows over three discrete intervals in a stacked sequence of reservoir and source rock.
Then, on June 3rd, RECO gave investors another reason to be excited, when the first section of its second well (6-1) provided further confirmation of a working petroleum system. At shallow depths, the well encountered 134 meters of light oil and gas.
“In these first two wells, the many oil and gas shows, with such variety, is certainly remarkable. It is highly encouraging to see clastic and thick carbonate sections which appear to have similar reservoir characteristics as observed in many other petroleum provinces,” ReconAfrica director Dr. Jim Granath said in a statement.
The company also announced its commitment to allocate a minimum of CA$10 million of ESG expenditures to the Kavango region in which it operates.
Stock forums look to be buzzing… particularly since the rights to this huge basin, the size of Belgium, belong to a small-cap explorer that appears to have significant potential and cash in the bank…
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 some like this to be a ‘hit’ on the first penetration well drilled based primarily on a geomagnetic survey. This is astounding.”
Doug, an early investor, commented on Yahoo:
“So far, so good, not only in exploration success, but also good will and investment in the people of Namibia. I invested in RECAF in October, 2020 at 0.7138. Good companies not only make profit, they help people prosper. From what I can see, well done, team RECAF, well done.”
The Fast-Paced De-Risking of Our Pick For The Onshore Oil Play of the Decade
When the first results came in April, Dan Jarvie – Recon Africa’s geochemist and advisory board member – confirmed the results as showing indicators of the existence of 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.”
The Kavango basin is over 8.5 million acres and as deep as the Permian basin in Texas. That’s a huge basin for a small-cap company, but it’s fully funded for a 6-well drill and extensive seismic campaign, and we think it’s so far proven that it has what it takes with its experienced team.
When Kavango started coming to the attention of some investors a few years ago, geologist and geophysicist Bill Cathey, who has worked with many of the oil and gas supermajors, commented about the basin: “nowhere in the world is there a sedimentary basin this deep that does not produce commercial hydrocarbons.” To put things into perspective, late last year, Dan Jarvie provided what he called a “conservative” estimate of Kavango’s potential based on only 12% of Recon’s holdings.
He estimated the basin could have generated 120 billion barrels of oil equivalent.
In November, Haywood Securities initiated coverage on RECO (RECO, RECAF), saying that a discovery success would present manifold opportunities for strategic joint ventures for further de-risking–without additional shareholder dilution.
A month later, Haywood adjusted their evaluation, noting that results showing evidence of the presence of a working hydrocarbons system, “should provide abundant opportunities for further exploration and appraisal drilling”. Even without the recent positive first drill results showing indicators of a petroleum system, Haywood appeared to see material upside as Kavango may be de-risked:
Haywood’s adjustment also coincided with an analogous report from Wood Mackenzie, comparing RECO’s Kavango basin to the enormous (Permian aged) Midland Basin in Texas. The Midland basin’s estimated development value is $540 billion.
Now, Haywood has adjusted its short term price target on RECO upwards, saying the company “has all the ingredients to establish the existence of a working hydrocarbon system (in a relatively short cycle time) and subsequently evaluate and exploit the potential of the Kavango Basin”.
That includes “a fully-funded six well drilling and extensive seismic program, nearly 100% working interest in acreage across a vast, relatively straightforward land access, an owned drilling rig, a committed and capable management and technical team, stable governments with attractive fiscal terms and proven commitment to responsible development” … among other things.
Year-to-date, RECO (RECO, RECAF) is up approximately 377%. There is a sizable amount of risk here. As Haywood notes, this is a high-risk/high-reward oil play. If the exploration fails, it could disappoint investors. But if it continues to find indicators of the existence of oil and its economic viability, we think it stands to have very exciting potential because this is a junior explorer sitting on a super-major size play.
The drivers of further upward movement in the near future include, most urgently, the completion of drill no. 2 by the end of this month, and the full analysis of all results from the wells 6-1 and 6-2 which are anticipated at the end of July.
This is a basin the size of Belgium, the rights to which are owned by a small-cap explorer with experienced geologists and cash to potentially go even beyond a six well drill campaign. If this continues, and it’s economically viable, it may enter JV territory, when investors could be rewarded for having jumped in on what could end up being the last major onshore oil discovery the world ever sees.
Oil Giants Look Promising As Crude Prices Rise
Total (TOT) barely squeezes into the top 4 oil and gas companies in the world, as well. And it’s no stranger to the African oil game, either. Total betting big on the region’s potential. The company has been in the region for over 90 years, and it is showing no sign of reducing its footprint anytime soon.
Recently, Total said that it would accelerate its dividend growth “in the coming years” as it looks to return more cash to shareholders. The group will increase its “dividend by 5 to 6 percent per year instead of the 3 percent per year as previously announced,” Total said.
Demand for the sweet crude oil grades produced by Brazil’s pre-salt oilfields has exploded in recent years, and Petrobras (PBR), being focused on developing its pre-salt operations is set to be one of the industry’s biggest winners. 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.
Even old-school fossil fuel producers are getting in on this race. While many of the oil majors have given up on oil sands production – companies like Suncor (SU) 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. But that’s just one part of its business, however. Suncor is also a world leader in renewable energy innovations. Recently, the company invested $300 million in a wind farm located in Alberta.
Last year, Houston, Texas-based shale producer ConocoPhillips (COP) earned itself accolades after announcing some of the deepest production cuts at a time when many shale companies were reluctant to lower production and relinquish market share. The company lowered its North America output by nearly 500,000 bpd, marking one of the biggest cuts by an American producer. This year, ConocoPhillips has kept drilling activity subdued and also kept a tight lid on capital expenditures.
Marathon Petroleum (MPC) is one of the leading E&P companies and the owner of the nation’s largest refining system, with approximately 2.9 million barrels per day of crude oil processing capacity across 13 refineries. Earlier in the year, four of Texas’ largest oil refineries saw widespread damage from the cold snap and could take weeks to repair, according to Bloomberg. The outages could reduce demand for crude, but cut the supply of refined products. The four refineries include ExxonMobil’s Baytown and Beaumont plants, Marathon Petroleum’s Galveston Bay refinery, and Total’s Port Arthur facility. The impact undoubtedly impacted Marathon’s bottom line, but the company is back on track, and despite underperforming compared to its peers, it’s still well-positioned for a rebound.
By. Chris Davey
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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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