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With a potential 120 billion barrels of oil equivalent on the table and an entire sedimentary basin in its hands, ReconAfrica might just be the oil play of the decade. 

They say that investing shouldn’t be exciting – but everyone needs a speculative punt from time to time to liven things up. The key is making sure that when you do have a speculative punt, the odds are tilted in your favour.

Asymmetrical upside is key, as is chance of success. And one play that ticks all the boxes for me is Reconnaissance Energy Africa* [CVE:RECO]. This small Canadian exploration company has secured the rights to an entire sedimentary basin in Namibia, which could turn out to be the biggest oil discovery of the decade – in fact, it might end up being the last hurrah of the industry.

Recon has put together a who’s who team in the oil and gas sector in order to prove up this thing, and it has a rig out there right now, which will complete three wells this year. Some estimates put the size of the basin at a potential 120 billion barrels of oil, which is pretty much off the charts when it comes to comparative recent discoveries.

But let’s be clear: this is an all-or-nothing play, as the shares would no doubt get wiped out should ReconAfrica not find what it is looking for in the Kavango basin. But that’s pretty unlikely, as I will endeavour to explain.

The signs are there

Energy entrepreneur Craig Steinke of Realm Energy fame was looking for his next big play when he came across a gold mine of data in Namibia that the Namibian Government had done nothing with, up until now, purely because there had never been any oil and gas industry activity in the area. In order to get a better idea of the potential of the area, Steinke passed the data over to Bill Cathey of Earthfield Technologies – the go-to guy for the majors.

And here’s where it gets interesting. The data revealed to Cathey a Permian age sedimentary basin 30,000 feet deep, covering an area the size of the Eagle Ford in Texas. In Cathey’s words, “nowhere in the world is there a sedimentary basin this deep that does not produce hydrocarbons…” Armed with this information, the ReconAfrica team bought up the rights to the entire basin – 6.3 million acres in total.

Cathey liked what he saw so much that he joined the team, as did another industry veteran, Dan Jarvie, the man behind the Barnett Gas play and a major force in the shale revolution in the US, who jumped into Recon as a shareholder. Jarvie reckons the Kavango basin could be the last major onshore discovery on earth, with the potential for 120 billion barrels of oil equivalent on just 12% of the company’s acreage.

Incredibly, Jarvie believes his numbers are conservative, and if they pan out as expected, ReconAfrica could have an oil and gas basin the size of the Permian Wolfcamp or the Eagle Ford on its hands – major producing basins that support tens of billions of dollars of market cap. In fact, Jarvie even goes as far as to say Recon “could be sitting on something absolutely huge”, where the numbers could be “laughable because they are so high”.

Reconnaisance Energy Africa

Reconnaissance Energy Africa opening up a new sedimentary basin

Should the wells prove unsuccessful, the downside could be 100%, and investors should be prepared for this. However, given what the experts involved think they know about this basin, that seems an unlikely outcome.

The flipside is that success could bring huge upside for shareholders. Broker Haywood recommends the shares as a ‘buy’ ahead of drilling and evaluating newsflow expected in late Q2. Its price target of C$7.00 offers upside of more than 100% and is based on an 18% chance of success.

Shareholders won’t get a better idea of which way the wind is blowing until the drilling results start to come in, but “With an initial discovery, ReconAfrica could experience rapid value accretion,” notes Haywood. “It is in this phase [that] share price growth can be rapid upon success and/or anticapition of success.” Haywood also suggested unrisked upside of C$24 a share based on a ‘modest’ discover of 500 million boe.

Investors will no doubt have taken heart from the recent appointment of Mark Gerlitz as a Director. Gerlitz runs MonteLago Consulting and has particular experience in negotiating M&A, JVs, farm-ins and other business combinations in the oil and gas sector. Upon drilling success, investors can expect ReconAfrica to move rapidly to the next phase, which will include negotiations on farm-in deals for the majors to come in and develop the basin. If and when we get to that point, ReconAfrica investors just might be in for a terrific payday.

* James Faulkner owns shares in Reconnaissance Energy Africa. 

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

James Faulkner

James Faulkner

James Faulkner is the Editor in Chief of Master Investor. Having started investing in his teenage years, James started his career in the City as a market commentator and researcher. He eventually rose to become editor of several investment publications including Small Cap Shares and T1ps.com, before becoming Editor of Master Investor in 2014. James holds the IMC designation and is a member of the CFA Society of the UK. 

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Comments

This Post Has 2 Comments

  1. In investment terms this could well appeal to private investors for whom investing in fossil fuel companies fits their investment style – not my cup of tea, but I hope I can respect other people’s choices.

    I wonder, though, if you see a downside risk for institutional investors specifically. Companies seen to be putting money into, if you’ll forgive a loose interpretation, not only drilling for oil, but doing so in a rainforest.

    You don’t have to be Greta Thunberg to question how an investment firm can reconcile the monetary upside against the immediate environmental damage from a wholly legitimate drilling operation, plus the subsequent environmental damage from burning the end product in a world of climate accords, electric vehicles, zero-carbon, etc etc.

    Put another way, does the PR grief – not least from prominent celebrity/wildife expert opponents – and even lost income from disapproving customers that an investment company might experience following such an investment make this sort of endeavour, to use a term from a couple of recent Armchair Trader Podcast interviewees, uninvestable? Will ESG concerns significantly restrict the number of companies wishing to invest, come fundraising?

  2. @Graeme – that might be true for wealthier 1st world economies, but for emerging economies in APAC, LATAM, and Africa itself will be consuming much more conventional energy sources as they ramp up middle class growth. Investors in those areas can’t ignore that fact, and ESG is less of a concern when the country is still focused on basic infrastructure necessities.

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