RE:RE:RE:The elephant in the room ADDRESSING FEAR / UNCERTAINTY / DOUBT (FUD)
Investing in junior oil & gas explorers is not for the faint of heart. Proving a highly valuable conventional discovery is typically a long, slow process. Many of the world’s largest, most productive conventional oil & gas plays were discovered after years of exploration and dozens of test wells. In Namibia, Recon Africa and NAMCOR have achieved what feels like “the impossible” with their first two wells.
Over the past several 4-8 weeks there has been a significant increase in the number of people across investment forums spreading fear, uncertainty, and doubt about the geology of the Kavango Basin and the “above-ground” risks associated with this exploration program, despite additional data that further indicates this is indeed a world-class conventional oil & gas discovery.
Before I address these “risks”, I want to remind readers it is much easier to doubt a rare success story than it is to believe in one. Also ask yourself, what do these “concerned investors with valid questions” gain by constantly clouding your mind with FUD? Don’t they have better things to do?
The answer is simple: they don’t -- they make a lot of money when you get scared and sell.
I am the first to acknowledge this play isn’t for everyone, but I hope the following information helps you make the decision that is best for you.
FEAR #1: Unproductive Geology
Short sellers continue to spread fear surrounding why the company stopped drilling short of planned / permitted depths. I’ve read many posts claiming “they stopped short because this basin is a flop”. In other words, this basin is not as deep as the aeromagnetic survey led our technical team “to believe”, implying this basin will not be productive (produce oil that can be extracted and sold).
First, there is a margin of safety built into any permit application to allow for flexibility in the field, especially important for an explorer’s maiden drills. The permitted depth was one which the drill rig could safely achieve, not a depth where the company expected needing to reach.
Scot Evans, the CEO of Recon Africa, recently gave investors the reason for declaring touchdown where they did, but short sellers will say anything to lead you to believe you are being lied to. His comments were:
“For the first well, based on initial aeromag mapping, we thought we would be drilling on a structure, and as the well was drilled it became clear that we were correct in our assumption. The well gave indications of crossing geologic faults at certain points, which can cause drilling issues if not correctly managed. After drilling through the major intervals of hydrocarbon shows, the frequency of potential faults began to increase, so to be safe we called an early total depth.”
Can you imagine how the market would have reacted if a less experienced team drilled deeper and lost all the oil and gas PAY that was being LOGGED?
As a long-term investor, I am absolutely placing a premium on a management team that does not put their operation at risk, for any reason.
Second, based on the information available to us, we have no evidence that this sub-basin is not as deep as the technical team initially hypothesized. The aeromag data suggested this sub-basin is very deep, with steep sides, and some internal structure. The uplift that 6-2 was drilled on (as described above by Scot Evans) is evidence of this structure. So, with steep sides, and most likely steep faulted internal uplifts, information from just the first well does not allow us to see the entire strat section, and it does not prove the depth-to-basement is not significant.
While the market has been busy selling off on fears of a shallow unproductive basin, it has clearly forgotten that conventional oil and gas must have migrated from somewhere. I would have expected the market to place a premium on data that suggests we may indeed have significant amounts of shallow oil that can be recovered at a discount first to oil located in deeper reservoirs (reservoirs where this oil may have even migrated from).
Although we will need 2D data to confirm for sure, I find it VERY INTERESTING that the head of investor relations (Grayson Andersen) tweeted yesterday:
This would be a DIRECT response to the cancerous theory that continues to spread regarding the deep-basin theory is no longer in play.
A fellow Recon Africa investor and ACTUAL GEOLOGIST with 39 years of oil & gas exploration experience said it best yesterday after seeing Grayson's tweet: Deep-Basin Model: CONFIRMED.
Finally, and most importantly, oil is oil! The data presented to-date confirms a working conventional hydrocarbon system. The basin shows oil has migrated from the source, with “natural” fracture associated porosity and permeability.
No matter how the oil has been generated, we can expect 2D Seismic and VSP will lead the technical team to target an area where it has been trapped.
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FEAR #2: Company Value Will Be Held Back by Exploration Limitations
The second fear is the easiest to refute because it’s the most irrational. Fear surrounding “above-ground” risks, particularly how we will be treated by our host, the Government of the Republic of Namibia, has spooked many investors with little or no experience investing in international ventures.
I read posts daily about “the exploration countdown clock” and how “once a commercial discovery is declared, the clock starts ticking on our exploration license”.
In my professional M&A experience, I can say with certainty that legal agreements between partners change all the time! In my opinion the relinquishment clause (within the exploration agreement) was written to keep Recon Africa on a tight leash / ensure productivity and action (“we don’t want you making one quick discovery and neglect the rest of the basin!”) Agreements like these can be amended in good faith and given the depth of the relationship between Recon Africa and the Namibian government, I believe it will in due time.
What else gives me confidence that Recon Africa will be treated fairly by their host?
Well, just this past week we witnessed Recon Africa founder Craig Steinke and Diana McQueen meet with President Geingob and various ministers in what was very clearly a genuine display of a healthy working relationship. President Geingob commented extensively on how starved for investment Namibia has been, and how happy he is with the progress Recon Africa has made with both their oil & gas exploration and ESG program so far.
I suspect short sellers will always cast doubt about the relationship between Recon Africa and Namibia, but I’d encourage investors to ask themselves what kind of a signal would Namibia be sending to the entire oil & gas value chain if they blindsided the one company who took on the biggest risk, after praising them publicly?
Namibia needs to build goodwill to attract world class vendors to this project and the best way to accomplish this is by acting in good faith with a JV partner who has not only demonstrated they are capable of executing a successful exploration program, but that they are also charged by advancing the quality of life of Namibians, as evidenced by their $10M ESG pledge to fund programs that will benefit local communities.
Finally -- to the short sellers out there slinging FUD around the Government -- your FUD is not only irrational, it is extremely disrespectful. So far, Recon Africa has been treated very fairly by the Republic of Namibia. I don’t have a reason to believe they won’t continue to award Recon Africa opportunities to create future value. It is entirely possible for a company to earn respect by simply operating conscientiously and responsibly.
I see two partners treating each other exactly how they would like to be treated: with mutual respect.
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