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:
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Mid-November 2020: Rig mobilization to Namibia
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Late December 2020: 6-2 well spud
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Q1/21: 2D seismic acquisition and interpretation
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Q1/21: 6-2 well (evaluation) and drilling/evaluation of two other back-to-back wells
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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!