In an age where there's not much oil left to discover on land and the supermajors have gone out to sea where development takes decades and costs are often prohibitive, there's nothing more exciting than getting a sneak peek at what could to be one of the last giant onshore oil plays.
Africa is the industry's final frontier, and the final, final frontier is a geological system running from Namibia to Botswana.
And while there are a lot of supermajors circulating around this underexplored part of Africa, the last major onshore play is shaping up to be the massive Kavango Basin, where one small junior explorer is shaking up tradition in a supermajor way.
One of the world's most renowned geochemists, Dan Jarvie, the driving exploration force behind the Barnett gas play and former chief geochemist for EOG Resources, revealed Recon Africa's oil potential in
Jarvie sees 120 billion barrels of petroleum generated potential on just 12% of Recon Africa's holdings.
With nods of confidence coming in from all sides--geologists, geochemists, and investors--Recon bought more.
Their land position is now almost the size of Switzerland.
This could be the play that transforms this region of Africa forever. That would be a massive feat for a $140M market cap company that's punching above its weight and so far winning.
The Pure Play of the Decade
Recon Africa has now acquired all the long-term rights over the entire Kavango basin In Northeastern Namibia and Northwestern Botswana.
That's over 8.75 million acres as deep as the Permian, one of the world's most prolific basins.
And Kavango appears to be analogous to the Main Karoo in South Africa and the Permian Basin in Texas, where Shell will be standing by and paying close attention as Recon Africa tries to prove up Kavango and build it out.
All the while, the numbers just keep climbing...
First up was reservoir engineering firm Sproule, which earlier assessed oil potential in the Namibian portion of the Kavango Basin in 2018. At the time, Sproule estimated the basin could contain as much as 12 billion barrels of oil (or) 119 trillion cubic feet of natural gas.
And things get even better. In its , Haywood notes that it's initiated coverage and put a short-term $2.50 price on RECO because the company is "set and funded to de-risk a potentially material resource play onshore Namibia and Botswana with 1,348 mmbbls/58.1 Tcf. (UPDATE: Haywood have just raised their )
Haywood is recommending "accumulating a position ahead of drilling/evaluation news flow in H1/21 aimed at proving up the presence of a working hydrocarbons system, which if confirmed, should provide abundant opportunities for further exploration and appraisal drilling".
And Jarvie thinks his estimates are "conservative".
Drilling Down to Put Namibia on the Oil Map
Namibia's never produced a drop of oil--ever.
And Jarvie, who's sitting in the front row ohas a trick up his sleeve that gives Recon an advantage in Kavango: They are using water-based mud to drill, which Jarvie says makes it easier to pinpoint the highly exploitable zones--the pay zones.
According to the geochemist, this is what often makes or breaks exploration. Oil-based mud makes it difficult for geochemists to identify what they are drilling through because that mud is mixed with reused oil residue that could even have come from a different basin.
It's a problem they have in Mexico and in the Permian, largely because oil-based mud makes it a bit easier for the drillers, who are just there to drill. But Jarvie's at the helm here, and the point isn't just to drill, it's to pinpoint the pay zones. He won't risk bypassing them over mud.
And once they hit the pay zone, the development costs are looking just as sweet as the basin itself. Based only on the recoverable oil from the play in Namibia (12 billion barrels), they look like this:
Those are projected per-barrel development costs that would thrive even in a sustained pandemic.
And, as we wait on the first drill results to come in, it's worth remembering that Bloomberg and Reuters have charted out the per-acre value of Kavango, which is now prime real estate that the supermajors are happy to have a junior develop:
Why It's All About the Junior Explorers
The supermajors don't really explore onshore anymore. They've gone offshore and they're delegating to the juniors. The MO is simple: Let a savvy junior make the discovery, prove it and build it out, and then a supermajor sweeps in and picks it up.
Giant offshore finds that put Guyana and Suriname on the map are for supermajors and some mid-caps who can pull it off. But the next great onshore find--becoming rare now that we've tapped into almost everything on land--will probably come from the small-cap corner.
For investors, unless you're a huge hedge fund, all the risk-reward of upside is in the junior pure plays.
That's exactly why Jarvie says: "Forget about supermajors like Exxon, Chevron when it comes to onshore exploration outside of the United States... they aren't the ones who make these onshore discoveries work. Instead, you should be looking for locations where independents are out in force looking for the next big thing"
And there's no arguing that Africa is the final onshore frontier, and on the continent, Namibia is sitting on geology that's vastly underexplored. So far, it's been to the delight of some of the world's most famous geologists and geochemists.
If the results are anywhere near as good as the experts predict they will be, Kavango might become a household name, and if so, the company that put it there will end up being the junior play to remember.
Other companies set to rise as oil bounces back:
Chevron (NYSE:CVX) is an oil supermajor with massive presence in Africa, particularly in Nigeria and Angola. In fact, the oil gaint ranks among the top 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.
Egypt has also captured the attention of the oil giant in recent years. Just this year, in fact, the country awarded Chevron and Shell key exploration blocks in the red-hot Red Sea. The blocks cover a total area of around 10,000 sq km and carry a combined minimum investment of $326 million, Egypt's petroleum ministry said, adding that potential investment would rise to "several billion dollars" if discoveries were made.
Though its interests are spread out among the continent, it's all planned. With bets on both oil and natural gas, Chevron is looking to take advantage of both of the fossil fuels. Though prices are still depressed at the moment, as fuel demand returns to normal, Chevron is set to soar when oil returns to pre-pandemic prices.
After falling to a yearly low of $66 in mid-March, Chevron has seen its share price bounce back by over 30%. And while it has not yet recovered to pre-pandemic levels, the future is still looking bright for the giant of industry.
Royal Dutch Shell (NYSE:RDS.A) has been in the African oil game for ages. In fact, the Dutch oil giant began drilling in the region over 70 years ago. While it has sold off a number of assets in the region in recent years, it continues to maintain a strong presence, particularly in South Africa.
Shell's South African assets are important because the government has been significantly more stable than some of the other major plays on the continent. Moreover, it's been very supportive of Shell in its endeavors in the country. Its 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.
Shell isn't ignoring Namibia, either.
"Namibia is one of the places where the geology is very interesting," Shell Upstream's VP of exploration for the Middle East and Africa, Colette Hirstius, an African oil conference in Cape Town. "We recently acquired seismic data and are continuing to be encouraged by what we see," she added.
Like many other oil companies, Shell took a major hit in March as oil markets plunged. After falling from a year-start of $60, it fell all the way to $25. Since then, however, it has seen positive gains, climbing by over 40% to today's price of $35. While it's still down on the year, positive sentiment is growing for Shell and other oil majors.
Total (NYSE:TOT) has a wide reach in the energy industry. From oil and gas to renewables and beyond, it maintains a 'big picture' outlook throughout its endeavors. And thanks to that, it has outperformed other pure oil majors this year. It is not only acutely aware of the needs that are not being met by a significant portion of the world's growing population, it is also staying ahead of the looming climate crisis by boosting its renewable assets. In its push to create a better world for all, Total has committed to contributing to each of the United Nations' Sustainable Development Goals.
As such, Total is not only betting big on renewable energy, it is also doing its part in reducing emissions in its day-to-day activities. Patrick Pouyanne, Chairman and Chief Executive Officer at Total noted, "It's our job to meet growing energy needs while reducing carbon emissions"
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.
As previously mentioned, Total has been one of the more resilient oil companies this year. It's still down 23% on the year, but that's significantly better than many of its peers which have seen their market cap slashed in half, or worse.
Exxon (NYSE:XOM) is another oil giant looking to cash in on Namibia's upcoming crude oil boom. It recently bought up an additional from the Namibian government for a block extending from the shoreline to about 135 miles offshore in water depths up to 13,000 feet, with exploration activities to begin by the end of this year.
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.
Like Royal Dutch Shell, ExxonMobil has also shed nearly half of its value since the beginning of the year. Despite this, Exxon has been making big moves in the energy realm, and is positioning itself perfectly to capitalize on the rebound in oil prices, as well as the global pivot to natural gas, in the coming years.
Suncor Energy (NYSE:SU, TSX:SU) has pioneered a number of high-tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, however, it is a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta.
When the rebound in crude prices finally materializes, giants like Suncor are sure to do well out of it. 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.
Better still, some analysts are already turning a bit more bullish on the oil sands, which is great news for Suncor.
"With improved cost structures and increased propensity to be capital disciplined, Canadian producers are emerging from the downturn stronger, with greater ability to generate free cash flow", Morgan Stanley analysts Benny Wong and Adam J Gray