Lots of private investors talk about ‘investing’ in oil and gas exploration plays, but in most cases I would argue that ‘gambling’ is a far more suitable description and has a similar outcome, with the majority ending up losing money. In recent years there have been very few successes with the drill bit amongst the smaller companies, certainly when compared to the start of this decade when it seemed that discoveries were common – although many of those have since proven to be far less valuable than initially thought, and in some cases pretty much worthless. In most cases the chance of success is low – especially when considering the chance of a drill being an economic, and not just a geological, success – or the company is re-drilling some old prospect targeting smaller amounts of oil, and often where the original discovery was deemed uncommercial. With the very odd exception, ‘investing’ for this type of drill will have been a quick way to lose all of your money in recent years as there have been very few successes, and failure generally leads to large drops – up to 80% being wiped off of the share price instantly upon bad news in some cases. We also don’t tend to big rises in the lead up to drills like we used to, and rather than people piling in on anticipation of a big find, most are frantically derisking before the drill ends – even more so in the cases where there has been a placing shortly before, or even during, drilling. One company though that seems to have bucked this trend and has been acting like the oilers of old, is Eco (Atlantic) Oil and Gas (ECO)...
I tipped this as a speculative buy back in October 2017 at 22p shortly after its shares commenced trading on AIM. Since then it has seen its share price rise by around 300% and is now around 90p, and the sensible approach would seem to be to bank at least some of that profit now, given that it has a market cap of £144 million and its only assets are a share in some exploration licences in Guyana and Namibia, along with enough cash in the bank for three high impact exploration drills – amounting to a little over $20 million at the end of November 2018. This drill isn’t ‘all or nothing’ for the company in terms of its ability to take part in further drilling without additional dilution for shareholders, but despite the fact that there will be more drilling to come, and with bigger targets, failure on its first drill would probably see the price plummet, at least temporarily.
That means that its first drill at the Orinduik block in offshore Guyana, where it holds 15% (Tullow Oil 60% and Total 25%) is still high risk for the share price, despite the actual drill itself having been significantly derisked in recent times due to other discoveries in the area – Exxon has a discovery rate of 92% in the area, including the recent Hammerhead-1 well which is just 6.5km down-dip for Orunduik, and there are numerous other discoveries around this licence, such as Payara, Longtail and Ranger. Of course nothing is ever certain in drilling for oil and the proximity of other discoveries is no guarantee that Orunduik will be a success, but it certainly helps to derisk it to some extent. You also have to consider the size of the target that is being drilled - the best estimate gross prospective resources (P50) comes in at just under 3 billion barrels of oil equivalent, and means net P50 for Eco of nearly 440mmboe, for the block as a whole. The initial drill though will be targeting the upper tertiary which has 250mmbbls gross prospective resources and a 44% COS, and a rig has now been sorted out for that, with spud expected in early June and Eco’s share of costs is anticipated to be around $7.6 million. The company does also have exploration licences in Namibia, in the Walvis Basin, but for now all of the focus is on Guyana.
The share price here has been on a steady upwards trajectory, and with the drill still a few months away we could see it continue to rise further, but I would expect to see people derisking at least some of their holding prior to the drill getting underway. That is definitely the sensible play here, especially if you are in from that low 20p area, even if you do leave a bit running for the drill results, as the COS here is decent for this type of drill. Although net prospective resources here aren’t huge, at around 37.5mmbbls - given the current market cap - a successful drill will further derisk the rest of the block, so there should be a strong, sustained rise in share price if they do hit oil in the amounts that they are anticipating. You also have to consider the fact that it already has partners with the ability to move things along quickly following a successful drill - so no waiting around for years for a farm-in on bad terms, like with so many others. How each investor plays this one will largely come down to their own appetite for risk, but the odds are certainly more favourable than with a lot of other drills, and you do have at least some protection from the fact that there will be more drilling to come in the immediate future.
Filed under: Eco (Atlantic) Oil and Gas, Kier, Woodford, Bearcast, Driver Group, UK Investor Show, Maria Miller
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