Private investors seem to love the boom or bust scenario that applies to many of the exploration drills for oil and gas, but is it really worth taking the risk on these types of plays? In the majority of cases I would say not and I tend to avoid them these days – gone are the times where every drill used to see big share price rises for the companies involved, as a matter of course – as in the event of failure the share price tends to crash badly.
Generally the odds are not in your favour as many of these drills have a low chance-of-success, are in regions with little or no existing infrastructure to bring any discovery to market for years, and when smaller companies are involved, often they will only have the funds for one drill, so it is really all or nothing for them. The upside is often the chance of making a large discovery which could be worth many multiples of the current share price.
One company which I seem to be seeing mentioned a lot recently is Eco Atlantic (ECO) which is about to embark on its first drill in offshore Guyana, where it has a 15% working interest and is partnered by operator Tullow Oil (TLW) with 60%, and Total with the remaining 25%. It’s Orinduik block has best estimate prospective resources of nearly 600mmboe net to Eco and it is about to embark on two consecutive drills at its Jethro Lobe and Joe prospects, with the former exploring a cretaceous target, as well as the upper and lower tertiary turbidites.
But what makes these drills any different to any of the others, as others companies have also been in a position where they are targeting resources of this sort of size. Geographical location is never any guarantee of success just because you happen to be located near to large existing finds, but in this case I would argue that it plays a bigger factor than normal as it is right on the edge of the area where ExxonMobil has already had great success and has discovered over 5.5 billion barrels of oil so far across the Stabroek area, with its Hammerhead block extending into Orinduik, and Eco’s block also being up-dip of these discoveries. Hammerhead found 197ft of oil bearing sandstones.
Exxon has already sanctioned the development of the Liza prospect, which is expected to produce up to 220,000bopd, and is embarking on a 30 well programme. It’s rig is currently testing the Longtail-1 discovery, with results due soon – if they are good and land during the Jethro drill it certainly won’t do any harm - and will then move on to drill Hammerhead-3. Exxon has so far achieved a successful strike ratio in excess of 90%, and although that doesn’t guarantee that Eco will also be successful, it certainly bodes well and is why the Eco wells have a COS in excess of 40% for each well, which is about as good as it gets for an exploration drill. Eco isn’t totally reliant on one drill either, as it is funded for these initial two wells plus up to a further six additional wells, so that certainly reduces the risk of a complete share price crash should the first drill prove to be a failure.
With everything else going on in the area, I would expect that in the event of success we would see a rapid move towards a situation where any finds are put into production, and the economics for the area are good – the neighbouring Liza field is expected to produce at $35/barrel for phase 1, dropping to $25 per barrel for phase 2, which makes it ones of the lowest cost major offshore developments in the world. Given the size of its partners, funding shouldn’t be a problem for any development, and I would expect a deal to be done to help Eco to finance its share, should that stage be reached. There is of course still plenty of risk involved and if the first drill fails I would expect to see the share price below the current level of around 70p, but also think it would quickly find some report with the second drill straight afterwards.
You could also argue that the company isn’t particularly cheap at £127 million market cap, given it is purely an explorer, but the amount of interest generated should it make a big find – and with likely a steady stream of further news to come – will make that look cheap, I believe (similar questions were always raised about the valuation of another favourite of mine, Hurricane Energy, but now that is producing and valued at nearly £1.05 billion). So, if ever you are going to take a bit of a gamble on shares in an exploration drill, then I believe that this is the one to buy in for – I have done myself and it will be the first exploration drill for a small company that I’ve held shares in for a long time, as usually I don’t see the risk as being worthwhile.
It also seems like a good level to buy at as the share price has dropped back a fair bit recently and is well below the level that funds were last raised at a few months back. It would seem that the Canadians would agree, as the shares are dual listed on the TSX and are currently trading there at the equivalent of 86p, and it is unusual to see such a big discrepancy between that and the London price. If this drill attracts the level of interest that I am expecting, then there may well be the chance to derisk some of your holding before results come, but this is one where I will be leaving at the very least part of my investment to run and see how things pan out several drills down the line. For an exploration drill, I would rate this as about as strong a buy as you really get for that scenario, and if it is successful I can see a lot of upside from the current share price, just based on the first drill alone.
Filed under: VRS, Vesarien, Eco Atlantic, ECO, Tullow Oil, TLW, Oil
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