Time for Eco Atlantic to ignite?
“…Prospective investors in ECO, then, have quite a bit to consider. Right now though, at around 25p, Eco looks quite cheap. With several campaigns underway in highly prospective fields, Eco Atlantic may be a tinderbox waiting to spark…”
Eco (Atlantic) Oil & Gas (AIM:ECO), an oil and gas exploration company focused on Atlantic margin basins offshore Guyana, Namibia, and South Africa has been one AIM’s more interesting speculative plays for some time.
ECO has significant holdings in some of the world’s most prospective fields. An updated CPR published earlier this year indicated Best Estimates, net to ECO, of 681 MMbbls oil and 544 BCF gas for Guyana, 6,705 MMbbls and 6,565 BCF for Namibia, and 6,705 MMbbls and 6,565 BCF for South Africa. In the words of CEO Gil Holzman ‘Eco’s ambition is to become the “go-to” small-cap exploration vehicle for investors seeking exposure to high-impact drilling programs in three of the world’s most exciting hydrocarbon provinces in Guyana, Namibia and South Africa.’
The company is most closely associated, perhaps, with its 15pc interest in the 1,800 km2 Orinduik Block Operated by Tullow Oil in the shallow waters of the Guyana-Suriname Basin off the north coast of South America. With untapped resources of 13.6 billion barrels of oil and 32 trillion cubic feet of natural gas, the US Geological Survey ranks it as the world’s second-most prospective and under-explored offshore basin. Adjacent and updip to ExxonMobil’s 13 discoveries on the Stabroek Block, which has estimated recoverable resources of more than six billion barrels of oil, Orinduik Block offers 22 prospects, with 11 leads in the Upper Cretaceous horizon, most having a 30pc or better chance of success.
Orinduik caught the market’s imagination three years ago when drilling at the Jethro-1 and Joe-1 exploration wells indicated more than 100 million barrels of oil in high quality sandstone Tertiary and Cretaceous horizons, news that sent ECO’s share price soaring from just under 70p to around 170p within the space of a month. But the euphoria was short-lived, the price tumbling back down when Tullow’s initial analysis suggested the discovery’s oil was comprised of heavy crudes with a high sulphur content rather than the light, sweet crudes preferred by refiners. ECO’s price tumbled to 55p, and, when the pandemic struck, to around 25p where – excepting occasional rallies – it has stayed ever since.
Arguably, that was an overreaction. ECO has made the plausible case that Orinduik crude is not dissimilar to the commercial heavy crudes in ExxonMobil’s nearby Hammerhead discovery, and similar to to those currently in production in the North Sea, Gulf of Mexico, the Campos Basin in Brazil, Venezuela and Angola. Analysis to date suggests that while the crudes are deemed to be heavy, the oil is mobile, located in high quality porous sand accessible to horizontal drilling.
And more drilling is on the horizon. ECO and its partners are currently considering targets in the Block’s Cretaceous light oil, and ‘will update the market on the 2022 target selection and drilling plans on the block once finalised.’ ECO has an interest in another prospect offshore Guyana, the Canje Block directly adjacent to the Exxon-operated Stabroek Block, through a 6.4pc holding in JHI Associates, which has a 17.5pc interest in the Block. Last autumn ExxonMobil recorded hydrocarbon shows in Canje’s Sapote-1 well, and continues to work to define the reservoir’s properties. Elsewhere CGX Energy has confirmed a discovery at the Corentyne Block, on trend geologically with Orinduik. Earlier this year ECO was on the cusp of acquiring JHI’s 17.5pc interest though a cashless acquisition worth around $52m, signing a Commercially Binding Term Sheet. But the initiative fell through after the parties failed to agree on the terms of lock-up arrangements designed to restrict and control any subsequent immediate sale of the shares that would have been issued to JHI’s shareholders, and which would have given ECO’s ‘appropriate levels of protection’. The prospective partners ‘may re-evaluate the proposed acquisition at a future date.’
Namibia and South Africa
ECO has a stake in another of the world’s emerging hydrocarbon locations, the Walvis Basin, offshore Namibia, which is estimated to hold some 25 billion barrels of prospective resources. The company is the majority stakeholder and operator of four Namibian licence blocks spanning 28,593 km2 across the Basin. ECO has established partnerships with several exploration companies focused on the region, including NAMCOR, AziNam, ONGC Videsh and Spectrum Geo. Joint Operating Agreements have been drafted for all four wells, and paying partner approvals have been granted by Namibia’s Ministry of Mines and Energy.
Earlier this year ECO signed a Memorandum of Understanding to acquire the offshore asset portfolio of the Azinam Group, increasing the company’s interest in the four blocks to 85pc. The agreement also gives ECO a stake in the Orange Basin offshore South Africa, through respective 50pc and 20pc interests in Blocks 2B and 3B/4B. Block 2B, covering an area of 3,062 km2, has an estimated 349 million barrels of oil (Best Estimate – Gross Prospective Resources) in relatively shallow water depths of less than 200 metres, and hosts a previous light oil discovery, the AJ-1 well that flowed 191 barrels of oil per day back in the 1980s. 3D seismic data acquired in 2013 indicates further prospectivity up-dip from the discovery. ECO and its partners have defined proposed drilling targets, completed a seabed survey, conducted a semi-submersible rig tender and begun negotiations to secure critical equipment, and are negotiating a rig contract: an exploration well, Gazania-1, is expected to spud in early September. The well is being drilled in shallow water 25 km offshore the Northern Cape to a depth of around 2,800 metres to target a stacked pay section up dip of the AJ-1 well, in the proven oil horizon. The partners believe Gazania-1 has the potential to establish a 300 million barrel light oil resource.
Block 3B/4B, located between 120 and 250 kms offshore, directly south of the Graff-1 and Venus-1 multibillion barrel discoveries announced earlier this year by Shell and TotalEnergies, covers an area of 17,581 km2 and lies in water depths ranging from 300 to 2,500 metres. ECO and its partners are currently reprocessing a large 3D seismic survey that will be used to define targets for a potential drilling campaign next year. ECO signed a farmout agreement earlier this summer with Azinam to acquire an additional 6.25pc interest in Block 3B/4B, increasing the company’s stake to 26.25pc.
The deal is funded by an fundraise of $12.3m, which boosts ECO’s treasury to $38m, allowing the company to fund all ‘current planned exploration needs in … South Africa, Namibia and Guyana including the drilling of the Gazania-1 well in September and additional near-term wells on Guyana Orinduik Block and in Block 3B/4B.’ ECO’s most recent interim results, to 31 December 2021, stated the company was debt free with cash and cash equivalents of $5.8m. Total assets were $19m and current liabilities $2m. The company recorded a net profit of $236,043 for the period, against a loss of $990,217 for the equivalent period for the proceeding year. ECO’s market cap at the time of writing is just under CAD$150m.
The future for new hydrocarbon developments
With a bit of luck, ECO is well positioned to benefit from strategic holdings in some of the world’s most promising basins. A question mark that hangs over these and other longer term assets, however, is whether stakeholders will have a sufficient window of opportunity to secure meaningful returns before the energy transition begins to price them out of the market. This year, of course, oil and gas prices have been supercharged by an exceptional set of circumstances: the post-pandemic supply crunch followed by Russia’s estrangement from western energy markets. But efforts of the world’s major economies to meet climate change targets, however stop-start they may be, cast a shadow on the long term future of the next generation of oil ‘super-basins’, like Guyana-Suriname and Orange.
A bombshell report by the International Energy Agency published last May argued that the drop in oil and gas consumption required to achieve net-zero global emissions by 2050 meant no new oil or natural gas fields would be required beyond those already approved for development. Green energy campaigners argue that by the time big new fossil fuel projects come on stream the electrification of the world’s energy systems by electric vehicles and other innovations will rendering them economically unviable. Speaking to Investors’ Chronicle, Carbon Tracker oil, gas and mining head Mike Coffin said: ‘It will take three to seven years for new assets to reach first production, essentially the end of the decade … by which time policy action and deployment of renewable technology will be eroding that demand quite rapidly.’ Then there is the increasing pressure being applied by the regulations and the courts: climate change-related cases have more than doubled since 2015.
But, as TMS suggested in a review of the oil and gas industry’s prospects earlier this year, it is instructive to look beyond the noise and note what the sector is itself doing. It’s true that companies are wary of repeating the mistakes of the 2000s – cruelly highlighted by the 2014 oil price crash – by over committing to capital spending. A more judicious balance has been observed between investment in new production and funnelling cash back to shareholders. But the industry’s ultimate confidence in the world’s medium-to long-term demand for oil and gas is indicated by its continued exploration for undiscovered oil and gas in remote regions. According to Wood Mackenzie nearly 800 exploration and appraisal wells were drilled worldwide last year, somewhat down on 2019 but roughly the same number as in 2020. OPEC has forecast that demand will support production of 109 million barrels a day to 2040 before plateauing.
As Wood Mackenzie’s 2022 Global Upstream Outlook notes, continued exploration by the oil majors reflects the world’s continued dependence on significant fossil fuel extraction for some decades to come. Right now oil and gas still supply more than 84pc of global primary energy. Though developed economies can afford to transition to greener energy, developing countries, in which some 770 million people don’t have electricity, and 2.6 billion no access to energy for clean cooking, still need fossil fuels. And international dependence on fossil fuels extends well beyond energy, of course: petrochemicals provide crucial fertilisers, and are used in clothes, for packaging, medicine, cleaning and roads. Gas is used in hospital surgeries, in the agricultural industry, and for cooling nuclear reactors. Three times as much energy is being used as 50 years ago and at current growth rates – 2.4pc a year – that will soon double again. So even if the proportion of energy produced by renewables rises, the absolute amount of oil and gas produced will still be substantial. Commodity analysts Goehring & Rozencwajg forecast 10pc oil and gas demand growth by 2030, pointing to demand from China and other rapidly developing countries. In an interview with the Financial Times earlier this month Shell CEO Ben van Beurden said ‘On energy security matters, energy balances, investment levels, I’ve never had as good a set of discussions with governments as we are having today.’
It seems, then, that the world will need oil and gas from emerging basins. But another intriguing Wood Mackenzie report highlights a further consideration: net zero targets set by the industry itself means that production will have to be concentrated in those basins best placed to produce the greenest fuel. Those where production is electrified and carbon capture techniques introduced will attract capital: others will be ‘disadvantaged’. Wood Mackenzie suggests good examples of future energy super basins include the Gulf Coast and Permian in the US, the Rub al Khali in the Middle East, the North Sea, and Australia’s North Carnarvon. But Russian, Alaskan and Venezuelan basins will struggle. The consultancy suggests Guyana-Suriname and Orange will make the grade if there is sufficient investment in solar as a means of electrification. Commenting on the report, Wood Mackenzie vice president Andrew Latham said: ‘These scores are not set in stone. Plenty of basins currently sit somewhere in between energy super basins and disadvantaged basins. Host governments may have opportunities to improve the outlook of a basin. Carbon taxes and other fiscal and regulatory moves to accelerate decarbonisation – especially where they enable CCS – could play an important role and should be seized where possible.’
Prospective investors in ECO, then, have quite a bit to consider. Will one or more of the drilling campaigns in which it is invested come good? If not, can the company find new capital to fund further efforts? And if there is success, will future revenues persist long enough to justify the investment? ECO could work as a much shorter term bet, of course. Investing in pre-revenue companies is just about betting that the project gets to production: companies can trade higher pre-production than once cash starts rolling in. It is unclear whether ECO’s share price will ever scale the heights touched back in 2019 on the back of speculation. But right now, at around 25p, the company looks quite cheap. With several campaigns underway in highly prospective fields, ECO may be a tinderbox waiting to spark.