On the face of it, West Africa-focused oil and gas explorer Canadian Overseas Petroleum (LSE: COPL) is currently offering little to justify its £10m market cap. After a series of major blows over the last year, in its results for the third quarter the firm said there is a ‘material uncertainty’ that it will be able to continue as a going concern unless it receives additional funding. This sounds pretty grim, but a combination of promising new drilling plans, efforts to enter new geographies and bids to secure licensing agreements mean Canadian Overseass looks poised to set 2018 alight.
With the company also boasting a highly experienced management team, there are still plenty of reasons to have faith in the company, and at just 0.7p a share on the offer, it could be worth a speculative punt before things take off.
What went wrong?
Canadian Overseas, which is also listed on the Toronto Stock Exchange, has struggled to recover since its share price collapsed from 8p to 1.6p last December. This disastrous drop came after the firm and its partners failed to identify any hydrocarbons at its affiliated Mesurado-1 well near Block LB-13 in Liberia, where drilling began the prior month. Ultimately, this led the well to be plugged and abandoned.
Canadian Overseas’ chief executive Arthur Millholland stoically claimed the firm was ‘naturally disappointed’ by the results. But with the firm owning a 17pc stake in the Block LB-13 project alongside industry giant ExxonMobil, the reality is that this really was a big deal for the company.
The disappointment worsened this November, when Canadian Overseas said that, despite its technical team seeing opportunity in other areas of Block LB-13, the firm had elected not to enter into a further exploration period at the site. This surrender resulted in a $15.6m impairment; a level of value destruction which was particularly stinging when it came just a month after the firm elected to raise £2.5m to carry out ongoing general and administrative expenses.
Since the fundraise, which was available to retail investors via the Teathers App, Canadian Overseas has only disappointed further, with shares falling from 1p to 0.7p on the offer.
On to better things?
Liberia was no doubt a major setback for Canadian Overseas, but don’t let the firm’s outdated website (which still includes swathes of information about the ExxonMobil project) fool you; it still has plenty of irons in the fire.
Currently, the company’s chief focus is the OPL 226 oil site in Nigeria, in which the company bought an 80pc stake last September through its 50pc owned affiliate Shoreline Canadian Overseas Petroleum. OPL 226 is located 50km offshore in the central area of the Niger Delta in water depths ranging from 40 to 180 metres and has an area of 1530km2.
Upon purchase, Canadian Overseas had already identified a drilling location, which will be an offset to an oil discovery made in 2001 by a previous contract holder.
After being long delayed by the complicated nature of doing business in Nigeria, the firm plans to drill an initial appraisal well at the site early next year. What’s more, the firm hopes to place the asset on production through an early production scheme, eschewing the oil mining licence usually needed by foreign firms due to its use of local facilities and employees. This should be followed by the drilling of up to three additional similar wells on the structure.
In its Q3 results, Canadian Overseas said it has continued to work with investment bankers to source funds for the project, and has held numerous discussions with potential contractors and suppliers to drill the appraisal well. If these talks continue positively, then the firm’s funding issues will be at least somewhat alleviated.
Obviously, as the firm is still in the earlier stages of developing the field, little concrete information is known about its upside potential. That being said, the information the firm has been able to provide looks pretty promising.
Indeed, five wells have already been drilled at the site historically, with the first oil discovery on the Block made in 2001, after earlier drilling intersected predominantly gas-bearing sands. Furthermore, an independent report evaluating the contingent and prospective resources attributed to OPL 226 as at 1 March 2016 found the gross unrisked prospective oil resources (recoverable) for undrilled areas in the site to be as much as 808m barrels of oil. And that’s not even including the potential gas resources that were found.
Life in the old dog yet
Aside from potential in Nigeria, Millholland remains confident that all is in fact not lost at Liberia despite the $15.6m impairment. If Canadian Overseas returns back to Liberia – which it plans to do – than this write down can be written back up again, he said in a Vox Markets podcast last month. He also said Liberian authorities have said they will hold a licensing round next year following the completion of the country’s election, which could allow Canadian Overseas to return to its site in the country.
On top of all this, the company is part of a consortium that is in final discussions regarding the awarding of a prospective onshore license in Mozambique. Canadian Overseas expects to arrive at the conclusion of these discussions by year-end.
What’s it all worth?
On the face of it, Canadian Overseas is not generating cash, it is has taken longer than expected to secure its funding, and it has pinned a large amount of hopes on the success of one early-stage project despite the recent failure of another. But with such a high market cap the stock clearly has retail appeal.
Canadian Overseas could well find itself become flavour of the month next year if it begins production at Nigeria, makes progress in Mozambique, and manages successfully to navigate Liberia. Any weakness in the company’s shares could present quite an opportunity.