Eco Atlantic (ECO) is a small scale exploration driller which would appear to be in the right place at the right time – Guyana. Two hits from two drills in the hottest place in oil expo land currently just cannot be ignored, but neither can a market cap of £320 million with no certified reserves. Gary Newman made a cracking buy call at 22p less than 2 years ago. At 175p as I type, is it worth buying or not?
The company is a junior partner with 15% of the Orinduik block, with Tullow Oil (TLW) as the operator. The partnership has drilled wells Jethro -1 and Joe-1, and both hit oil. For a small AIM listed oiler involved in wild cat drilling, that is some going! Gary reviewed the investment case after the first drill result from Jethro in August. I think de-risk but run profit is perhaps a fair summary of his comment. Like Gary, I held shares in this company from low levels – in my case from 32p I recall. I sold prior to a fund raise in April this year, which was prior to the Jethro drill. I then re-bought after the share price drop post placing. So I must have a crystal ball right? Um..no! I re-bought at a higher price, but the investment case was for me then de-risked – or Pete is a plonker? Whichever! We have no resource estimates on either drill outcome at this stage. We know the Jethro drill delivered a stated 55 metres of net pay. The CPR modelled several cases and based on just this net pay parameter it looks to be between mid and best case. On a very simplest level perhaps 800 million barrels in place and say 220 million barrels recoverable. At 15%, that’s perhaps some 33 million recoverable attributable to Eco Atlantic. The latest Joe-1 well returned a stated 16 metres net pay (plus more possibly). This looks to me to be at the lower end of the CPR range and hence perhaps some 80 million barrels recoverable total and some 12 million barrels to the company account. Importantly, this is in a different geological play to the Jethro well - these discoveries are not linked directly on a Geo basis. That second drill result is really very good news indeed.
So I would conclude the company has, on my best estimate, perhaps some 55 million barrels of potential certified resource. I will be wrong on this number as no one knows currently until the field maps are calibrated against the drill bit results and properly assessed and I would have to stress I am being very simplistic on the assessment to derive these numbers – but what else can I, or others, do with the current public domain information? With a nominal $400million market cap and my “back of fag packet” assessment of resources this company is valued at some $7.3 per barrel of potential contingent resource. That is utter madness – there are shedloads of companies listed on AIM with 2C resources valued at cents per barrel. There are many asset deals concluded for certified reserves in production at less than this. So why consider this company further?
The company has what is, in my opinion, a cracking asset in the hottest basin in the O&G world at the current time. In my view, this company needs to grow into its valuation – but with two hits in two different plays with a high level acreage CPR that shows clear running room for further large oil discoveries I can readily see potential value. The company has funding for its share of costs to poke some more holes in the seabed either to appraise these discoveries or to look for more oil deposits in the basin. I have a concern that the company will use the current high valuation per barrel to justify raising money via placing to look to replicating this success in Guyana elsewhere – like Namibia where the company has significant acreage also. I think this is, on balance, unlikely at the current time but it is a risk I see – not least as Namibia will only need a good drill result or two (and several drills are planned for the near term) to become the next “hot” O&G exploration basin. At least the company has interest in each! I sold my shares in the company prior to the Joe-1 result. I have learnt the hard way that expo drilling outcome is a risk to one’s bank balance if the result is not good. I am happy with that investment (gamble?) action.
Given the very high valuation of this company on fundamentals at the current time, but the clear upside opportunity this new oil basin has to any participant and the high likelihood, in my view, that the company will be taken out long before production stage, I can only take the advice of a film star on buy / sell / hold / watch. As Clint Eastwood would say:
“You've got to ask yourself one question: 'Do I feel lucky?' Well, do ya, punk?”
I feel moderately lucky...but will await private investors getting bored and seeing the share price drift down, as I expect, before I take my chance. I watch currently.
Filed under: Eco Atlantic, ShareProphets, Ric Traynor, Yu Group, Yourgene, Kingfisher, Woodford
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