Taking risks on exploration drills is generally a mugs game and a good way to lose money quickly, but just very so often if you choose carefully, it can really pay off. The latter has definitely been the case with Eco Atlantic Oil and Gas (ECO) as it announced a “major oil discovery” at the Orinduik block in offshore Guyana, when the Jethro-1 drill found 55 meters of net high quality oil pay in the lower tertiary sandstones. This is great news for anyone - including myself - who held for these results, especially as this was the first drill on this block, in which Eco holds a 15% interest, along with partners Total (25%) and Tullow Oil (TLW – with 60%). The share price responded accordingly and is now significantly up from the 70p level it was trading at last time I covered the company back at the end of June – anyone who followed my original buy tip from 22p will be even happier!
It is always difficult in these situations to decide whether to let it run, especially with another drill about to get underway here, or to cash in, and many people see this as a very black and white decision. But personally I always prefer to cash in a bit on my winners whilst leaving some to run, and that would be my intention with Eco, and also makes sense from a risk management point of view. The great thing about an oil strike on the first drill is not only is it very good for sentiment, but it also goes some way to further de-risking future drills on this block and increasing the chance of success. Jethro had a 43.2% chance-of-success and with P50 prospective resources of 220mmboe, so it will be interesting to see what the contingent resources figures come in at once it has been decided exactly how and when it will be appraised – it has been cased pending that decision. If it comes in at anywhere near to the prospective resources figure then that will be massive for a small company like Eco – particularly as, unlike some discoveries in new areas, it also looks likely that production could be reached fairly quickly considering that on the adjacent Stabroek block, Exxon Mobil is looking to begin production from the Liza field sometime next year. So far Stabroek has yielded 13 discoveries, with a level of exploration success that seems to be fairly unique to offshore Guyana, certainly in terms of the size of the finds, with 6 billion barrels of oil equivalent recoverable resources so far.
The size of the net pay discovered at Jethro also compares very favourably with Liza, and exceeds some of the other Stabroek discoveries – so that does suggest that there could easily be upside from the original prospective resources estimate. Interest in this company, and Guyana in general, should remain high as the rig is moving straight on to the Joe drill in the north west part of Orinduik, and that has gross prospective resources of over 148mmboe. This drill had a COS of 43.2%, but given the success, that may well have improved. Following the drilling of Joe, Eco is still potentially funded for up to a further six drills on the block, depending on what its partners decide, and I would expect that drilling activity will continue, even more so if Joe was also to prove to be a success. To me this suggests that Orinduik overall has the potential to eventually show a very large amount of oil in place.
It is still very early days and the company is now valued at well above £200 million which does add to the risk as any sort of failure at Joe could well produce a sizeable drop. I think that it is prudent to bank some profit now so as to reduce risk exposure – I intend to do exactly that having added to my position a few times during drilling, but will probably be keeping some of my original holding. It is always hard to gauge just how far the share price can run on these types of plays, especially in the shorter term, and it is worth remembering that there hasn’t been a discovery like this for an AIM company for quite a number of years, so it really depends on just how much risk you want to continue to take – there is the chance here to have a free ride on the next drill, as well as taking some profit as well, assuming that you bought in before the drill results.
Filed under: Eco Atlantic Oil and Gas, ShareProphets Radio, Carson Block, Muddy Waters, Burford
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