Eco Atlantic - an exploration drill buy suggests Gary Newman

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Back in 2010 it seemed that barely a week would go by without some tiny AIM oil explorer drilling a well that could potentially make or break the company, but these days much of that excitement seems to have disappeared. That has largely been down to the collapse in oil price which has seen concentration on producing assets and it much harder for smaller outfits to secure the sort of funding that is needed for these drills, which often runs in the tens of millions. As we saw previously, with the Falklands drills, successfully hitting one of these larger targets has the potential to send the share price rocketing to many multiples of its pre-discovery level, even if it subsequently pulls back once the excitement dies down and the focus turns to appraisal and development.

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The flipside of that was clearly seen with the high profile drills in Namibia, which ultimately amounted to nothing and sent the share prices of those companies plunging when dusters were announced. These days we don’t really have many drills of that sort of magnitude taking place, so it is hard to see how there won’t be plenty of attention surrounding relative newcomer to AIM, Eco Atlantic Oil & Gas (ECO), if and when it commences a drill in the Orinduik block in Guyana, at which point it will have a 15% working interest in this play with more than 900 million barrels in mean resources. It is very easy to get over-excited about resources which are still in the ground and have yet to even be drilled – as we have seen previously with all sorts of valuations bandied around, only for the drill to fail. But in this case there would seem to be a bit more justification for at least a modicum of positivity, as ExxonMobil has made a succession of discoveries on the adjacent Stabroek area and reserves estimates for those licences are as high as 3 billion barrels of oil equivalent. Orinduik is also up-dip of the three successful discoveries on the Liza field, which bodes well, although there are never any guarantees and the geology doesn’t always play out as expected. The company also has four licences in the Walvis Basin, in Namibia, and although in the past exploration drilling for many companies hasn’t exactly gone to plan, the area is still getting plenty of interest, with several large companies such as Shell and Total having drills planned within the next couple of years. For Eco though, drilling isn’t likely to take place before 2020 and the licences are still at a very early stage with seismics yet to be shot on all but the Tamar licence, where 2Ds have already been completed and interpreted.

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So the focus really should be on the Guyana licence, where Tullow Oil (TLW) has a 60% interest, and subject to the completion of a recent farmout deal option, Total could end up with the remaining 25%. Total has already paid $1 million for this option, and subject to the processing of the recently completed 3D seismics, it then has 120 days to decide whether or not to go ahead with the $12.5 million deal for the 25% interest. These types of offshore drills are never cheap for small companies like Eco, and each well at Orinduik is expected to cost around $30 million or so in total, leaving the company with a share equating to roughly $4.5 million. But with the money from the farm-in, plus the payment for the option, that would pretty much give Eco enough funds for the first three drills. This puts the company in a far more comfortable position than that which we have seen for many other AIM explorers carrying out this sort of drilling, where they pretty much got one shot at it before running out of money and then having to try and raise further funds once the share price had been decimated by the failure.

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Looking at the financials, the company had nearly $5 million in the bank as at the end of June 2017, but on the face of it the running costs would seem very high given that it lost more than $2.1 million during the three month period. But once you take into account exceptional items, such as nearly $1.1 million in share compensation as a result of the IPO, plus the costs relating to its exploration activities, such as obtaining licences and seismics, then this doesn’t look so bad. General and admin expenses actually came in at a pretty reasonable $172,000 for the period. So we’ve looked at all the good stuff and the reasons why any sort of oil discovery in Guyana would give a huge boost to the current market cap of £26 million, given the oil-in-place being targeted on any drill. But there are of course also plenty of risks, and the farm-in deal with Total is yet to even complete and is dependent on the seismics being as good as expected. Even if that does prove to be the case and all goes ahead as planned, then there is still plenty of risk involved with any drill. Although you could argue that has been offset to at least a small degree by the surrounding discoveries on the same structures.

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The interpretation of those seismics could come at any time from now on, given that the company stated a timeframe of two to three months to process them, and if the news is good then I would expect a further rise in the share price in anticipation of confirmation that Total has taken up the option. We also have to consider how long it would be from the completion of a farm-in to any actual drill taking place, and how much of a drag that would have on existing funds, especially once work begins on seismics on the Namibia blocks. But certainly for the foreseeable future the company would appear to be funded from existing cash balances.

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The company has been getting a bit more attention recently, and having been trading steadily in the 17-19p range, the shares have enjoyed a quick run up to 22p to buy. But I can still see value from this sort of share price if you love a gamble on this type of drill, as buying now before the company really starts to get a lot more interest from PIs may well give you the option further down the line of derisking some of your holding and being able to leave some free shares to run for any actual drill. Eco is highly speculative, but it is also one of just a handful of companies on AIM which is not only targeting a potential oil deposit of this sort of size, but also looks to have the funding in place to carry out multiple drills. I also like the fact that the directors hold a decent amount of stock and have enough skin in the game themselves.

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Filed under: Eco Atlantic, Tern, Fiona Jones, Andalas, Next, Boxhill, AIM Regulation, Allenby, Corero

2017-11-01 12:06:57

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