Oil Up?, Shorts hit ReconAfrica RECO, Trillion TCF update
The chart on Oil is interesting. I commented before that I believe the late May price plunge was intervention so if that price drop was false, than the price is down at the bottom of the up trend channel. It has also come down to support around $79. Technically oil prices should bounce higher. Fundamentals have been positive with a largely unexpected 5 million barrel drop in crude supplies last week.
The premium of front-month US crude futures over the M2 contract widened to its highest since October 2023 last week, as high as $1.60 per barrel. There seems to be negative concern on Chinese demand but a better than expected GDP number today in the U.S. adds support to the demand side. Gross domestic product increased at a 2.8% annualized rate in the April-June period after rising 1.4% in the previous quarter, the government’s initial estimate showed. The economy’s main growth engine — personal spending — advanced 2.3%, also more than projected.
Some recent news so an update on my two favourite oil exploration plays
ReconAfrica - - TSXV:RECO, OTC:RECAF - - - - Recent Price - C$1.05
Entry Price - $0.56 - - - - - My Opinion – strong buy
Last week RECO announced a very good farm in agreement with BW Energy that is also investing US$16 million (approx. C$22 million) at C$1.25 per share. The stock got hammered down and did not make much sense until I checked daily shorting activity in the US, too bad there is no data in Canada. On the 16th to 18th about 55% to 62% of trades were short sales. As a rule of thumb, if you have 35% or more of daily trades as short sales, the stock is under attack. We can only assume there was similar trading in Canada, but we won't get any data until early August.
So lets look at this deal -Key highlights of letter agreement:
Working interest sold to BW Energy is 20 per cent;
BW Energy to participate in two Damara fold belt exploration wells and a 3-D seismic program, with an option to participate in two Rift basin exploration wells over two-year period;
$16-million (U.S.) ($22-million) equity investment supporting the exploration program;
$45-million (U.S.) ($62-million) bonus earned at declaration of commerciality (final investment decision), providing additional capital carry-through to first production;
$80-million (U.S.) ($109-million) of production bonuses based on certain cash flow milestones achieved by BW Energy;
$141-million (U.S.) ($192-million) total potential consideration, including all incentives and production bonuses, which are paid after achieving positive free cash flow;
The joint venture structure preserves a 70-per-cent working interest in PEL 73 for ReconAfrica, exposing shareholders to significant upside on success;
Provides alignment with strategic partner to explore both the Damara fold belt and Kavango rift basin with significant in-country expertise on oil and gas monetization markets.
First off, I did not know of BW Energy so who are they?
BW Energy is an affiliate of the BW Group, a global maritime energy transportation and floating gas infrastructure company with an 80-year history. BW Group is currently a significant shareholder in BW Energy, BW Offshore, BW Ideol, BW LNG, BW LPG, BW Epic Kosan, BW Dry Cargo, BW Solar, Hafnia, DHT, Navigator Gas, Corvus and Cadeler. BW Energy is listed on the Oslo stock exchange in Norway.
BW Energy, operator of the Dussafu Marin licence in Gabon and the Golfinho cluster offshore Brazil, reported EBITDA for the first quarter of 2024 of USD 109.7 million, down from USD 133.4 million in the fourth quarter of 2023, mainly due to lower oil sales in the quarter. Net production from the operated assets was ~27,300 barrels of oil per day in the quarter, slightly up from the previous quarter.
So BW Energy is a huge company as part of the BW Group and although their production is small to mid size, they are very profitable.
RECO has 230.7 million shares out and at $1.05 has a market cap of C$242.2 million less about $20 million cash so a value of about $222 million.
BW Energy is investing about C$22 million to participate in 4 wells and if one is declared commercially viable they will pay another C$62 million. So if this drilling is a success BW Energy believes it is worth C$88 million for 20%, that values RECO's 70% at $308 million, much higher than the current $222 million valuation.
But here is the big kicker, if BW Energy achieves good cash flow they would pay another C$109 million so a total of about C$192 million for 20% suggesting a value for RECO's 70% of C$672 million or about 3 times the current stock price.
This is the value a large energy company sees in RECO's Namibia prospects. Of course how the stock responds will depend on drill results. These wells have potential to be highly profitable if they have high flow rates so potentially a much higher stock price.
The other positive aspect is RECO is fully funded to drill the next 4 or 5 wells and is successful has the funding to go to production.
I think this is a very good deal for RECO shareholders because we still retain 70% working interest in these wells, should they succeed.
You can check out the US short sales here and below is a 3 day summary
Date - - - Short volume - - Total volume - - percentage
16th - - - - 110,464 - - - - - - 178,227 - - - 62% short sales
17th - - -1,487,803 - - - - - 2,548,207 - - - 58% short sales
18th - - - - 333,679 - - - - - - 604,966 - - - 55%
Often a stock is knocked down to the finance level but it has been hammered much lower. It does not make much sense other than attack by funds backed by climate activists against oil&gas exploration. They are not going to stop this and it is just a temporary effect, but is does present a buying opportunity.
The stock fell right through the lower up trend line and support around $1.26. Again makes little sense with positive news and the only good explanation is the short attack. Support is holding around $1.00/$1.02. If the stock can stay above this into next week it will be looking better. There should also be support from short covering.
Trillion Energy - - - CSE;TCF, OTC:TRLEF - - - - - Recent Price - C$0.155
Entry Price 0.19 - - - - - - My Opinion - buy
Wednesday, Trillion provided an update on the flow rates and well perforations at the SASB gas field.
South Akcakoca-2: Updates on the flow rates are as follows: well head pressure (WHP) has stabilized at 371 psi and the well was recently producing 1.94 MMcf/d (million cubic feet per day) using 42/64-inch choke.
Guluc-2: Initial flow was diverted to the platform vent line with a 64/64-inch choke where producing WHP was about 350 psi, the well was shut in and within 40 minutes the WHP increased to 1200 psi. Guluc-2 is currently producing at 3.35 MMcf/d with a WHP of 484 psi using a 32/64-inch choke.
West Akcakoca-1: Only two of the five zones slated for perforations have been completed at this time due a wait for a replacement tool expected to arrive Thursday. The two perforated zones contain 5 metres gas pay, where WHP went from 1,150 psi to 1,350 psi. Three more gas zones totalling an additional four metres are expected be perforated, after which the well will be tested and flowed. The company expects good results based on the initial WHP increase.
Akcakoca-3 was perforated over 11 metres of gas pay with no observable WHP increase, most likely due to water loading, which is currently at 315 metres depth. The well is expected to come back on at about two MMcf/d upon installation of a velocity string (two 3/8 production tubing).
This is all positive news and the stock responded a little bit. I believe there was too much confidence eroded and the market won't be convinced until it sees higher cash flow numbers in the financial s and these won't be for a while. Perhaps the company will press release some results before the financial s come out. It is not going to show in the next financial s of Q2 but will in Q3.
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