Stockwatch Energy today
Energy Summary for April 19, 2021
2021-04-19 20:16 ET - Market Summary
by Stockwatch Business Reporter
West Texas Intermediate crude for May delivery added 25 cents to $63.38 on the New York Merc, while Brent for June added 28 cents to $67.05 (all figures in this para U.S.). Western Canadian Select traded at a discount of $10.35 to WTI, down from a discount of $10.34. Natural gas for May added seven cents to $2.75. The TSX energy index lost a fraction to close at 117.36.
Craig Steinke and David Elliott's Reconnaissance Energy Africa Ltd. (RECO) had another good day, adding 93 cents to $8.55 on 9.46 million shares. It has shot up from just $3.51 over the last three trading days. As discussed in last Thursday's Energy Summary, Reconnaissance's very first well, a wildcat on the Namibian side of the Kavango basin, turned up preliminary but promising signs of a large oil discovery. The stock responded by bounding up $2.01 on Thursday and $2.10 on Friday. Today it continued the gains after signing a non-binding deal to buy Renaissance Oil Corp. (ROE), down half a cent to 34 cents on 69.5 million shares. (For simplicity's sake, given the similar names, we shall start calling Reconnaissance by its preferred short form of ReconAfrica.)
Renaissance is a Mexican oil junior, but that is not why ReconAfrica is interested. These two companies are already quite familiar with each other. The above-noted Mr. Steinke, a sizable early backer of ReconAfrica, is also Renaissance's chief executive officer. He undoubtedly played a large role in the deal that Renaissance entered in June, 2020, to option 50 per cent of ReconAfrica's acreage on the Botswanan side of the Kavango basin.
The deal was billed as a win for both companies. ReconAfrica was more interested in the Namibian side, not the Botswanan side, while Renaissance was interested in just about anything beyond its increasingly unpromotable Mexican assets. (They will become more promotable if the Mexican government ever gets around to upgrading Renaissance's contract over one particular asset, the long-hyped Amatitlan block, but Renaissance has been working on this for two years with no luck.) To secure the option, Renaissance paid $1.3-million in cash and shares. It then had three years to exercise the option by paying either $1-million or $1.5-million, depending on the exact timing.
If Renaissance had exercised the option, it would have acquired a 50-per-cent interest in 2.45 million acres in Botswana, representing nearly one-quarter of ReconAfrica's entire Kavango holdings of 8.5 million acres. As noted above, ReconAfrica was more interested in the Namibian side of the Kavango, and that is where it drilled its first well. The preliminary results of the well last week indicated that it hit marine source rock. This is important, as it suggests that the rock may be homogeneous across the basin (vastly improving the chances of further discoveries). This would include the heretofore less-hyped Botswanan side of the basin.
Renaissance was thus almost as overjoyed as ReconAfrica when the results came in. Previously trading at 10 cents, Renaissance soared to 19 cents on Thursday and then to 34.5 cents on Friday. In other words, an option agreement that cost Renaissance $1.3-million last summer led to an $86.9-million jump in its market cap last week. Buying Renaissance will give ReconAfrica full control over the Kavango basin once again. Its offer price -- 0.046 of a share of itself for each Renaissance share -- values Renaissance's stock at 39 cents. Renaissance closed today at just 34 cents, suggesting that investors are unsure that the deal will go ahead. At this point the deal is non-binding and the companies have given themselves 30 days to try to agree on terms. If Renaissance and its shareholders accept the deal and the takeover goes through, ReconAfrica plans to continue focusing on Africa and put the Mexican assets up for sale.
Another international explorer, the Guyana-focused CGX Energy Inc. (OYL), lost eight cents to 81 cents on 162,800 shares. It has secured a $19-million loan from its joint venturer and major shareholder, Colombian oil producer Frontera Energy Corp. (FEC), down seven cents to $6.50 on 148,700 shares. Frontera owns 212 million of CGX's 287 million shares. It started investing in CGX in 2011, and over the next two years it spent $107 million snapping up shares at an average cost of $2.12. That investment looked good when CGX was trading as high as $15 (all prices adjusted for a 1-for-10 rollback in 2013), but that was many, many years ago. After drilling two unsuccessful wells in 2012, CGX entered a prolonged slump, getting as low as six cents in 2017. It has not drilled a well since the 2012 dusters, despite years of promising that a new drill program was coming right up.
These promises got a boost -- and Frontera got several chances to average down -- starting in 2018. That was the year that the companies arranged an official joint venture in Guyana. As part of the arrangement, CGX repaid $17-million (U.S.) worth of debt that it owed to Frontera (the debt was actually in default) in the form of shares at just 29 cents. CGX also arranged a rights offering that allowed Frontera to acquire over 100 million shares at just 25 cents. Through these and other dealings, Frontera has reduced the cost base of its 212 million shares of CGX to just 70 cents. With CGX's stock having climbed to today's close of 81 cents, this investment is finally in the green.
One thing that the companies have yet to do together is actually drill a well. The plan was to do so in 2020, but the COVID-19 pandemic threw them off schedule. They have availed themselves of the Guyanese government's generosity in extending their drilling deadlines. (Considering that CGX is now at least six years behind on its previous drilling commitments, its requests for extensions are nothing new to Guyanese regulators.) The companies said last month that they expect to drill one well by November, 2021, and a second well by February, 2022. They are also building a deepwater port because their assets are offshore.
Today's $19-million loan agreement will help CGX pay its share. "We have exciting exploration plans ... [and] look forward to executing on our programs and creating value and opportunity for our stakeholders," cheered CGX's long-time executive chairman and chief promoter, Dr. Suresh Narine. CEO in all but name (as CGX does not have an official CEO), Dr. Narine has been with the company since 2012. He was born in Guyana and clearly has a strong network, or a less patient company might have replaced him years ago. Frontera, while it is clearly a very patient majority shareholder, did take the step of getting a co-chairman installed on CGX's board last year. It picked its own chairman, Gabriel de Alba.
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