Energy Reconnaissance: 8 – 2 well results, H1 2022 Support A Buy (RECAF)
Less than a week ago, Reconnaissance Energy Africa (OTCQX:RECAF) (TSXV:RECO:CA) – the Canadian oil and gas player focused on exploration activities in the Kavango Basin in Namibia/Botswana – announced its Q2-2022 results and reported some relevant operational updates. The market reacted extremely positively, with the stock climbing 34.6% on September 1.
In this article, I will provide a review of the financial and operational results and reiterate my buy recommendation.
If you are unfamiliar with Reconnaissance Energy Africa – also known as ReconAfrica – you can check out my first article where I provided a detailed overview of the company’s operations or you can check out my latest article which covers the results for the first quarter of 2022.
Stock market performance
The stock currently trades at $3.19/share, which equates to a market cap of $653 million, and it’s down 35% year-to-date and 44% year-over-year. The 52-week low is $2.54/share, which was hit last week on August 30, 2022, while the 52-week high is $5.97/share, recorded on December 1, 2022.
The stock price has been characterized by high volatility (52-week standard deviation is $0.69/share or 22% of current price) since ReconAfrica is an E&P company with very little production and most of the value is exploration-based, so every news or rumor about drilling results strongly affects the stock price.
During Q2-2022, ReconAfrica continued its drilling campaign which had previously started in early 2021 with the drilling of wells 6-2 and 6-1. After the completion of the first two wells, ReconAfrica took time during Q4-2021 and Q1-2022 to analyze all the data from the well as well as to process the first part of the 2D seismic (approximately 500 linear kilometers): with these studies, four different new drilling opportunities were identified.
Of the four drilling prospects, ReconAfrica decided to start from well 8-2, located in the Kavango East area: in June 2022, well 8-2 was put in place using the drilling rig belonging to the company Jarvie-1. The original plan was to reach a depth of around 2,800 meters and test the potential for conventional oil and associated gas in the Karoo Rift Fill, a main light oil zone.
On August 30, the results of Well 8-2 were announced, with the market reacting positively to the news: indeed, the stratigraphic well was drilled to a depth of approximately 2,050 meters, and all previously defined geological targets were been reached. Most importantly, the well was completed on time and within budget. It should be mentioned that the total depth of 2,056 meters is lower than the originally planned target (2,800 meters) and this makes me believe that the target geological formations (Pre-Karoo and Otavi) were probably shallower than expected. According to ReconAfrica, the Jarvie-1 rig will remain in place at Shaft 8-2 until coring and logging operations are complete.
On the seismic side, in May 2022, ReconAfrica completed the second 2D seismic by acquiring approximately 761 kilometers of data using cableless sensors. The Company is now in the seismic processing phase with the goal of identifying new prospects and developing a better understanding of the already defined drill locations. The preliminary results of the seismic interpretation are currently expected in October and will certainly play a catalytic role.
ReconAfrica generated revenues of $8 million in Q2-2022 and $14.5 million in the first half: these revenues are generated by a few minor direct stakes in certain Mexican assets (Amatitlan and Chiapas blocks) obtained when ReconAfrica acquired Reconnaissance Oil in July 2021. These revenues are subject to royalties which in Q2-2022 were $6.3M and in H1-2022 were $11.6M.
On the cost side, total operating expenses were $14.2m in Q2-2022 and $22.6m in H1: the main cost elements are share-based payments (10.9m $) and G&A ($9.5M in H1-2022), with management and consulting fees representing $4.4M.
Overall, ReconAfrica recorded a loss of $14.3 million in Q2-2022 and $24.9 million when considering the first six months of the year.
Looking at the cash flow statement, a few things stand out:
- Capital expenditures of $13.7 million as investment in exploration and asset evaluation,
- $50.2M in proceeds from the sale of shares since the Company completed a financing transaction of approximately 7.5M shares.
From a balance sheet perspective, ReconAfrica appears strong with a cash balance of $92.5 million and no outstanding debt.
In my previous Society article, I expressed concern that protest actions by environmental activists may have slowed ReconAfrica’s drilling operations. Indeed, a few weeks ago, a group of activists sued ReconAfrica in the High Court of Namibia challenging some recent amendments to ReconAfrica’s environmental compliance certificate and trying to stop the drilling campaign. In this case, the High Court of Namibia quickly ruled in favor of ReconAfrica dismissing the charges. From a certain point of view, I read this news in a positive way because it seems that the Namibian government could support the activities of ReconAfrica, which would make sense if one considered that the discovery of a significant volume of oil would be a tremendous stimulus for the Namibian economy. However, I believe this will not prevent environmental activists from carrying out other campaigns, and therefore, I believe that the “activism” risk cannot be totally ignored.
Overall, I think ReconAfrica is a company that deserves a buy recommendation since, so far, all exploration results indicate the presence of large volumes of oil. As a reminder, the third-party resources report published in May 2022 estimated 854 Mbbl of oil and 1.3 Tcf of natural gas (on a risk-free basis). Additionally, ReconAfrica management was able to guide the company efficiently without overspending and delivering the drilling program on budget and on time. In the coming weeks, there will be catalysts – which are likely to impact the share price – including the Phase 2 seismic interpretation report and additional wells.