- Reconnaissance Energy Africa (aka ReconAfrica) stock (OTCQX:RECAF;TSXV:RECO) is a good example of a glorious investment story with little hard evidence for long-term value creation
- This thesis is backed up by poor financial performance, allegations of corruption, and prospective assets without enough drilling to substantiate a path to shareholder value
- Though ReconAfrica stock (OTCQX:RECAF;TSXV:RECO) is down by 92 per cent since its all-time-high in 2021, the stock has held on to a gain of more than 274 per cent since inception
ReconAfrica stock (OTCQX:RECAF;TSXV:RECO) is a good example of a glorious investment story with little hard evidence for long-term value creation. This makes the stock an option, i.e. a ticket to a binary outcome, composed of either outsized returns or a virtual total loss.
A potentially life-changing stock
ReconAfrica (or Reconnaissance Energy Africa Ltd. as it is officially known) is developing the newly discovered Kavango Sedimentary Basin, located in the Kalahari Desert of northeastern Namibia and northwestern Botswana, where it holds petroleum licenses comprising about 8 million contiguous acres.
Guided by defined targets for 2024 exploration, the company is keen to exploit its potentially expansive resource (slide 10), which consists of 2.3 billion barrels of undiscovered oil-in-place and 28 trillion cubic feet (TCF) of undiscovered gas-in-place, and might result in tens of billions in revenue should management happen upon a discovery.
Questionable finances
One major indication that ReconAfrica isn’t a good investment is its financial performance. The company has reported a net income loss in each of the past five years, having failed to uncover economically extractable resources despite the quality of its data.
Dubious exploration potential
ReconAfrica is also the target of widespread criticism about the realistic value of its Kavango holdings. The Globe and Mail has reported on alleged corruption and dishonest stock promotion, while respected geologist Paul Hoffman has expressed doubt about the lofty amount of oil management intends to recover.
Strong opposition from nearby communities and environmental activists also poses a risk to ReconAfrica’s drilling efforts, given its land’s proximity to the Okavango Delta, a water system used by tens of thousands of people, as well as a UNESCO World Heritage site known for being one of the world’s richest and most pristine havens for wildlife.
A recent operational pause in response to this pressure led to a technical review, the identification of 2024 drill targets, and a divestment, in addition to a C$7.5 million capital raise, to fund upcoming exploration, but public sentiment remains broadly against the company.
Shadowy management
While CEO Brian Reinsborough, who has discovered more than 2.4 billion barrels of oil equivalent over his career, maintains that ReconAfrica’s impact on the surrounding environment is minimal, the company has been accused of making baseless ESG claims to sway investor sentiment in its favour. One of the strongest critiques in this regard stems from a highly publicized 2021 short-selling report by Viceroy Research, which claims that ReconAfrica is “drilling blind” in the Kavango Basin with a “near-zero chance of finding any asset of value.”
Co-founder Jay Park, a previous executive at ReconAfrica, should also be viewed with scrutiny, as his lengthy history of questionable business practices helped to lay the early foundation for the company’s business, which has nevertheless managed to reward shareholders with a more than 274 per cent return since inception in 2019 – even after shares fell by 92 per cent from their all-time-high in 2021 to US$0.72 per share.
A matter of risk capacity and risk tolerance
Given all we’ve discussed thus far, the question of whether ReconAfrica is a good investment comes down to an individual investor’s relationship with risk.
If the company’s story plays out as it expects, despite deafening opposition and severe long-term environmental consequences, investors will have earned a handsome return through speculation, i.e. without enough evidence to date to be certain of economically attractive resource extraction.
Conversely, if ReconAfrica’s plans are derailed, investors to date would have only themselves to blame because available information on the company for due diligence reveals the potential but not the probability of a highly successful outcome.
This is not to say that speculative investments have no place in your portfolio; rather, their level of appropriateness should be determined by your financial and mental ability to assume investment risk. In other words, any money you invest in ReconAfrica stock must be left over after accounting for basic needs, emergency fund and retirement savings, as well as your ability to sleep soundly without nightmares of extreme volatility keeping you up at night.
Click here to continue your due diligence process by reading ReconAfrica’s latest investor presentation.
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