With evidence of an active petroleum system now confirmed after two test wells in Namibia’s 6.3-million-acre Kavango Basin, the game is afoot with 2D seismic and a 6-well exploration drilling campaign that hopes to put this final frontier nation definitively on the commercial oil map.
Recon Africa (TSXV:RECO, OTC:RECAF), the junior explorer behind the new play, and its JV partner NAMCOR, Namibia’s state oil company, think they might have drilled into a reservoir in their first test well, and they are very excited about what comes next.
So, let’s drill down here to better understand exactly where we stand with exploration in the Kavango Basin, and why many of us are so excited about it.
Here are 5 key details that are very important to understand:
#1 Exactly what did Recon Africa find in its first two test wells?
Key Takeaway: They’ve found light oil showings and evidence of an active petroleum system, helping to de-risk the 8.5-million-acre position in the Kavango Basin. The company’s expectations are that much more is to come, and now full-blown exploration begins.
The purpose of the first two stratigraphic wells was to determine evidence of whether Recon Africa is sitting on an active petroleum system. These wells were not drilled with the intention of completion for production, which comes at a later stage if all goes well, though the first well has been left in a state that will enable re-entry for flow testing.
ReconAfrica’s first test well (6-2) now has a complete set of data. Complete data from the second test well (6-1) is being assembled for submission to and must be accepted by the Government of Namibia before the company can release it in the public realm. We expect that shortly.
What we know so far from the first test well is that data shows three main intervals with a variety of oil shows and associated gas shows.
Drilled to a total depth of 2,294 meters, this well had over 250 meters of hydrocarbon shows.
(So far, without complete data released, we know that well 6-1 was drilled to a total depth of 2,780 meters and had over 350 meters of hydrocarbon shows.)
#2 Mud-logging has already revealed the existence of intervals of light oil
Key Takeaway: ReconAfrica’s mud-logging results—one of the most critical sets of data—have already told us there is light oil here.
Mud-logging is said to be one of the most critical elements of exploration—and we believe it’s crucial for investors in terms of determining the potential value of a company’s exploration results.
It used to be that mud-logging was a less comprehensive affair involving the recording of depth and the describing of the lithology of formations encountered in drilling. Those results would then determine whether the formations contained hydrocarbons.
But, as Schlumberger notes, mud-logging has expanded significantly in recent times. Today, it involves an impressive collection of high-tech sensors, including gas chromatographs, weight-on-bit and mud-pit level indicators. Advanced tech mud-logging now combines a basket of surface indicators that give us an incredibly concise record of subsurface geology and hydrocarbons.
In our view, ReconAfrica’s (TSXV:RECO, OTC:RECAF) mud-logging results are quite impressive.
Conducted by U.S.-based Horizon Well Logging Inc, mud-logging for the 6-2 well returned 52 intervals with shows. All of that was documented by U.S.-based Horizon Well Logging Inc, and the description is available on the ReconAfrica website.
Samples are described every 3 meters, and any samples that have evidence of oil are described, and then the oil itself is extracted and rigorously evaluated for quality. Likewise, gas is sampled directly from the flowline and sent to a chromatograph, which measures the amount of gas and some basic properties
Horizon CEO Doug Milham noted: “Horizon is proud to be part of the team at ReconAfrica and the potential resource that has been discovered with their first two wells. The presence and quality of oil and gas shows encountered while drilling the 6-2 and 6-1 wells was remarkable, with many positive indicators of hydrocarbons encountered throughout both wells. Our sample logging data and analysis has identified significant intervals of oil and natural gas in each of the two wells drilled, with varying characteristics from multiple zones. This is an exciting oil and gas exploration project with world-class potential.”
What this mud-logging data shows most clearly is evidence of the presence of a conventional petroleum system with many light oil shows.
That, in turn, means the company has significant support for a comprehensive 2D seismic program that will more definitively evaluate the Kavango Basin.
#3 3 Zones of Thickness Could Potentially Be Reservoirs
Key Takeaway: What ReconAfrica knows for sure now is that this is evidence of a conventional petroleum system with light oil shows. It’s possible they’ve hit a reservoir on the first test well already. That would be a major win. But they won’t know this until they get data from 2D seismic which is expected in September and more explorations are undertaken.
First of all, this is a conventional petroleum system. We know this now because the comprehensive data shows signs that—as in a conventional system—the petroleum is migrating along faults, fractures, or porous rock from a source into a reservoir or trap. In Recon Africa’s 6-2 well, the three intervals, we don’t know yet if they hit an actual reservoir in its first well.
That’s the most exciting part: We’ve already got evidence of an active petroleum system in a massive basin, with showings of light oil. Now, the question is whether the intervals in the 6-2 well represent residual oil (oil left behind in migration through to a reservoir) or reservoir oil itself that can potentially be produced.
#4 Core Lab results expected in a month, and 2D seismic aims to establish reservoirs
Core labs are expected to give us critical data about the rocks specifically, which in turn should feed into the analysis of the wireline logs.
These are said to be taking about 4-5 weeks longer than anticipated due to COVID restrictions that made it more time-consuming to ship from Namibia to Core Labs in Houston, Texas.
The company reports that 2D seismic has already started and remains on schedule, and Recon Africa is already receiving information to interpret.
Test lines have been finished as of the first week of August, and Recon Africa reports it is now shooting its first line in production mode.
So, in addition to the wider 450km seismic acquisition across the Kavango Basin, Recon Africa is also shooting vertical seismic profiles in the 6-2 and 6-1 wells in an effort to tie them to the wider seismic line. We think this is significant because it should allow the company to accurately correlate the zones they’ve already found through the first two test wells.
Target completion of seismic data acquisition is said to be by the end of September.
#5 Recon Africa is cashed up for exploration
As of the time of writing, Recon Africa (TSXV:RECO, OTC:RECAF) reports it has CAD$60 million in cash to cover the seismic program, additional wells from now until June 2022, and its ESG commitments to Namibia and the people of the Kavango Basin.
As soon as the seismic acquisition is complete, which again is expected by the end of next month, Recon Africa says it will start drilling more wells.
The company intends to drill one to two wells by the end of this year, and an additional two to four wells in the first half of next year.
What that means is that between now and the second half of next year, we expect a number of reports of additional results coming in as Recon Africa aims to move through its next phase of de-risking—the potential commercial element. From Core Lab results and seismic interpretations in the coming weeks, to full seismic acquisition completion expected by the end of next month, followed by the anticipated Q4 2021 drilling … the de-risking looks set to continue at a fast pace and with a momentum that we think should interest investors.
Other companies looking to capitalize on the rise in oil prices:
Chevron (NYSE:CVX) comes in just above Shell as the world’s second-largest oil and gas company by market cap. Chevron is also betting big on Africa, particularly Nigeria and Angola. The supermajor ranks among the top oil producers in the two African nations. Other areas on the continent where the company holds interests include Benin, Ghana, the Republic of Congo and Togo. Chevron also holds a 36.7 percent interest in the West African Gas Pipeline Company Limited, which supplies Nigerian natural gas to customers in the region.
With bets on both oil and natural gas, the company is looking to take advantage of both fossil fuels. Though prices are still depressed at the moment, as fuel demand returns to normal, Chevron could be a big winner as prices climb back up to pre-pandemic levels.
While it’s still an oil company at the core, Chevron has emerged as one of the fossil fuel industry’s biggest proponents of hydrogen, even playing a major role as a global advisory body to the Hydrogen Council in order to provide a long term vision for the role of hydrogen in the energy transition.
Netherlands-based, Royal Dutch Shell Plc. (NYSE:RDS.A) operates as an integrated oil, gas and chemicals company. Shell remains one of Big Oil’s least optimistic companies when it comes to the long-term oil and gas outlook Shell says we might already be past peak oil demand and is bracing itself for a worst-case scenario: Demand to never fully recover.
“I think a crisis like this has the potential to capitalize society into a different way of thinking, much as the Paris Agreement has had,” company CEO Ben van Beurden has told investors.
Shell has also revealed that it expects ~75% of its proved oil and gas reserves to be exhausted by 2030 and nearly all by 2050.
It’s no stranger to Africa’s oil boom, either. The Dutch oil giant began drilling in the region over 70 years ago, and now has energy assets in over 20 countries across the continent. Though it has sold off a number of its prized plays in the region in recent years, it continues to maintain a strong presence, especially in South Africa.
South Africa is key for Shell because the government has been significantly more stable than some of the other big bets on the continent. Moreover, the country has been very open to Shell in its projects. The company’s operations in South Africa include retail and commercial fuel, lubricant, chemical and manufacturing. It’s also heavily invested in upstream exploration. It even holds the exploration rights to the Orange Basin Deep Water area, off the country’s west coast and has applications for shale gas exploration rights in the Karoo, in central South Africa.
BP Plc. (NYSE:BP) engages in the energy business worldwide, including oil and gas production and refinery, trade in natural gas; offers biofuels and operates onshore/ offshore wind power, and solar power generating facilities. Also known as British Petroleum, BP is a multinational energy company that has been around for over 100 years. BP was formed in 1909 by the merger of two rival companies- Anglo-Persian Oil Company and Royal Dutch Shell. With operations in more than 80 countries and regions, BP is one of the world’s largest oil and natural gas producers.
We are still a long way from Beyond Petroleum. But chief executive Bernard Looney believes that we are only 30 years from a net-zero BP. He has promised that in September the company will lay out a more detailed plan that shows the path to that destination. But he has shown already that there is more to his commitment to net-zero than there was to Beyond Petroleum 20 years ago.
“Renewables and natural gas together account for the great majority of the growth in primary energy. In our evolving transition scenario, 85% of new energy is lower carbon,” Spencer Dale, BP group chief economist, said, commenting on the outlook to 2040.
TotalEnergies (NYSE:TTE) is one of the most diversified and forward thinking oil majors in the business. And it’s no stranger to the African oil game, either. Total betting big on the region’s potential. The company has been in the region for over 90 years, and it is showing no sign of reducing its footprint anytime soon.
Recently, Total said that it would accelerate its dividend growth “in the coming years” as it looks to return more cash to shareholders. The group will increase its “dividend by 5 to 6 percent per year instead of the 3 percent per year as previously announced,” Total said.
It’s also one of the most conscious companies in the business. Total checks every box in the ESG checklist. It is promoting diversity and safety, making massive changes in its operations to ensure that its business is environmentally sound, and has even committed to going carbon neutral by 2050 or sooner. It’s no surprise that shareholders are loving its forward-thinking approach.
Baker Hughes (NYSE:BKR) recently announced what it calls the largest deployment of its remote operations digital technology, and this deployment involved all of Aramco’s drilling operations. This is how the company describes what the project entails: “a single solution that covers data aggregation from the edge; real-time, unified data streaming and visualization; data management; software development services; rig-site digital engineers; and monitoring personnel.”
In other words, what we may call remote drilling in a conversation actually involves a comprehensive push to unify and centralize operations in the upstream industry. Baker Hughes has been doing it for 20 years already, and its peers are doing it, too. According to Jegatheeswaran, this is the future of the upstream. Because it’s beneficial for everyone involved.
ConocoPhillips Company (NYSE:COP) as the largest pure upstream company, has performed relatively well in this depressed market, generating ample free cash flow and returning a good chunk of it to shareholders. Unlike many of its peers who continued to expand aggressively during the shale boom, COP has taken several steps to lower costs and fortify its balance sheet.
Like many of its peers, ConocoPhillips has been gradually offloading non-core assets, including the sale of its North Sea oil and gas assets for $2.7 billion and the planned sale of its Australian assets for $1.4B. Its asset portfolio, however, remains healthy.
Thanks to a global recovery in demand, Conoco has seen an increasingly bullish look on the industry, and it was one of the few companies which did not partake in the mass-layoffs seen in the industry last year. In addition, Conoco has also seen a fairly decent about of insiders buying into its stock, which is a good sign.
Petrobras (NYSE:PBR) is focused on developing its pre-salt operations. And it’s easy to see why. Those upstream projects being approved for development must have a breakeven price of $35 per Brent or less. Brazil’s national oil company has budgeted capital spending for exploration and production activities of $46.5 billion from 2021 to 2025.
Clearly, while the pandemic has hit Brazil’s oil industry causing production to fall because of savage budget cuts and well shut-ins, it appears to have done no material long-term damage. Demand for Petrobras’ low sulfur content fuel is firm and will grow because of the global push to significantly reduce emissions, which will ultimately make Petrobras even more valuable over time.
Petrobras remains one of the most underrated oil majors in the world. It’s got desirable crude oil, a massive footprint in its domestic industry, and a growing amount of interest from investors. It’s also bouncing off of low share prices like the rest of the industry, indicating there could be some upside left.
Exxon (NYSE:XOM) was hit with incredible losses sparked by the global COVID-19 pandemic and the resulting demand destruction. Earlier this year, the company even did something that it was holding off on doing long after all the rest of the Big Oil club did it: it revised down its oil reserves.
ExxonMobil isn’t ignoring the reality of the market, however. It has made major moves in its commitment to reduce its emissions. It claims to have about one-fifth of the world’s total carbon capture capacity. The company captures about 7 million tons per year of carbon.
ExxonMobil is also big in its commitment to reduce its emissions. It claims to have about one-fifth of the world’s total carbon capture capacity. The company captures about 7 million tons per year of carbon. This has been in place since 1970, and the company claims to have captured more CO2 than any other company — more than 40 percent of cumulative CO2 captured.
Schlumberger (NYSE:SLB) is transforming itself to survive and thrive in an oilfield a fraction of the size it was only a few years ago. The emphasis is shifting from throwing big chunks of iron and a schoolyard full people at a project to minimizing capital intensity of operations through the digital PSO transformation we have discussed here. The digitalization of the global oilfield will prove to be very sticky and begin to deliver subscription-type returns to both companies.
SLB is ahead of the rest of the oilfield pack with their New Energy Genvia venture, which aims to produce carbon free blue hydrogen through a hydrogen-production technology venture in partnership with the French Alternative Energies and Atomic Energy Commission (CEA), and with Vinci Construction. This new venture will accelerate the development and first industrial deployment of the CEA high-temperature reversible solid oxide electrolyzer (SOE) technology.
SOE can potentially be a game-changing technology in the medium term because it offers a unique and efficient method to produce clean hydrogen by water electrolysis using a renewable source of electricity. Genvia’s mission is to deliver differentiated system efficiency when producing hydrogen from water, compared to current commercial electrolyzer technology, and as such, enabling clean hydrogen production at highly competitive price.
Ecopetrol (NYSE:EC) is another company to keep an eye on as oil prices slowly return to pre-pandemic levels. The Colombian producer has a bright future in one of the world’s up and coming hydrocarbon regions. South America is often overlooked in the market, but as the world’s biggest consumers scramble to broaden their import sources, the region is set to grow rapidly in the coming years.
In a recent announcement, Ecopetrol approved an investment plan to help improve the company’s growth potential. In fact, it’s even betting on its own domestic fields, allocating as much as 80% of its planned $4 billion investments in Colombia, with the remaining 20% to be split between operations in Brazil and the United States.
Though Ecopetrol is still grappling with a pushback against its fracking plans, it has a lot of potential. And if hydraulic fracturing really takes off in Colombia, it could be a boon for not only the country’s petroleum-dependent economy, but for Ecopetrol’s shareholders, as well.
Enbridge (NYSE:ENB, TSX:ENB) is in a unique position as oil and gas stages its 2021 comeback. As one of the more potentially undervalued companies in the sector, it could be set to win big this year. In fact, in early December, it issued optimistic updates, planning higher dividends and expecting more profits in 2021, after the challenges the oil industry has faced last year due to the COVID-19 pandemic and the wider market crash. Kinder Morgan also expects to raise its dividend for 2021 by 3 percent compared to this year.
Kinder Morgan Inc’s chief executive officer Steve Kean noted, “With budgeted excess coverage of that dividend, we expect also to be able to engage in share repurchases on an opportunistic basis.”
Kinder Morgan is a must-watch in the industry. With dividends on the rise, oil prices increasing, and bullish sentiment returning to the oil industry, there could be some significant upside left for this pipeline operator, especially as oil begins flowing at pre-pandemic levels.
Crescent Point Energy Corp. (TSX:CPG) was another Canadian oil producer that struggled in the oil price crisis of last year. The mid-cap company saw its share price tumble from a January high of $4.56 to an all-time low of just $0.70 as oil demand dissipated and prices tumbled into the negatives in a historically bad first-quarter. The terrible year forced the company to lower output and capex forecasts for 2021.
Despite its struggles, however, Crescent has seen its share price climb significantly over the past month. The 28% gain may just be the beginning of a turnaround for the embroiled Canadian oil giant. In fact, it has even received a ‘strong buy’ signal from analysts at Zack’s thanks to its strong price performance and improving technicals.
In addition to bullish news from OPEC and Asian demand recovery, Canada’s oil sands are looking a bit more positive as well. According to government data, the controversial oil sands hit record-production in November and will likely continue to grow throughout the year. This turnaround in Canadian oil will likely be a boon for Crescent, and a full recovery is looking evermore probable.
Canadian Natural Resources (TSX:CNQ) has been able to do what many of its Canadian counterparts haven’t been able to, keep its dividend intact after swinging to a loss for the first half of the COVID pandemic, while Canada’s producers are scaling back production by around 1 million bpd amid low oil prices and demand. Though Canadian Natural Resources kept its dividend, it withdrew its production guidance for 2020, however. It also said it would curtail some production at high-cost conventional projects in North America and oil sands operations and carry out planned turnaround activities at oil sands projects in the second half of 2020.
Though there is a lot of negative press surrounding Canada’s oil sands, the industry is starting to clean up its act a bit. And Canadian Natural Resources is leading the charge. And if analysts are right about Canada’s comeback, Canadian Natural Resources could be in for a big year.
Though the Canadian energy giant has seen its stock price slump this year, it could provide a potential opportunity for investors as oil prices rebound. It is already up over 170% from its March 2020 lows, but it is just getting started. If oil prices continue to climb, it could be huge news for investors that held on.
TC Energy Corporation (TSX:TRP) is a Calgary-based energy giant. The company owns and operates energy infrastructure throughout North America. TC Energy is one of the continent’s largest providers of gas storage and owns and has interests in approximately 11,800 megawatts of power generation. It’s also one of the continent’s most important pipeline operators. With TC Energy’s massive influence throughout North America, it is no wonder that the company is among one of Canada’s strongest and well-known companies.
Like a number of its peers, one of TC Energy’s biggest challenges in recent years was grappling with the particularly difficult approval process for its Keystone Pipeline. But that’s all history now, and with the bounce back in oil and gas demand, TC Energy could stand to benefit. While TC Energy’s stock price has yet to recover from pre-pandemic levels, it is one of the few industry giants which has managed to keep high dividends rolling in. With quarterly payouts exceeding 6%, TC has remained appealing for investors in the industry.
Suncor Energy (TSX:SU) is another giant in Canada’s industry. It has set itself apart from some of its peers through a number of high-tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, but it is also a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta, showing that it is committed to reducing its carbon footprint.
Now that oil prices are finally recovering, giants like Suncor looking to capitalize. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook. And that upside is further amplified by the fact that it is currently looking particularly under-valued compared to its peers, especially as lithium, which is present in Canada’s oil sands, becomes an even more desirable commodity.
CNOOC Limited (TSX:CNU) is one of the world’s most interesting oil and gas companies. It is China’s most significant producer of offshore crude oil and natural gas, and may well be one of the most controversial oil stocks for investors on the market. A label that has nothing to do with its operations, however.
The relationship between the United States and China has admittedly been better, and if things were to take a turn for the worst, it could have a major impact on global natural gas, given that CNOOC is China’s largest importer of LNG. But the Biden administration has been working to improve relations and as such, Chinese companies, including CNOOC, are likely to breathe freely once again, and it be great news for investors in Chinese stocks.