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Eco Atlantic shares soar on major Guyana discovery and Total tie-up, but can momentum continue? ECO

The last month has been something of a game-changer for Eco Atlantic Oil & Gas (LSE:ECO), with a series of major updates from its part-owned Orinduik block in Guyana pushing shares up by 60pc to their current 51.6p. With all of its work now fully funded following a $12.5m option payment from Total, a partnership in place with Africa Oil Corp, and drills planned across its portfolio, Eco is now looking at where to move on to next.

So, can the good times continue? We spoke to Eco’s chief executive Gil Holzman to get an update on what to expect from the business over the near-term and beyond.

Value generator

The last two weeks have been particularly busy for Eco Atlantic, with the company making meaningful progress at its 40pc-owned Orinduik Block in Guyana, South America.

Alongside Tullow Oil, Orinduik’s 60pc owner and operator, Eco carried out an extensive 3D seismic survey of the block last year, and the pair have been processing the data they collected for signs of potential ever since. This patience finally paid off last week with the release of a maiden competent person’s report (CRP) for Orinduik, which put the block’s prospective resources at an impressive 2.9 billion BOE across ten leads.

The much-anticipated news was well received by the market, leading Eco’s shares to soar by 20pc over the day’s trading. Holzman said the figures back up the potential he has long believed to present at Orinduik:

‘These are significant numbers for all the partners and most importantly the people of Guyana. Ten key leads have been identified on Orinduik to date. The partners will carefully consider in the coming months the prioritisation of the leads for drilling as we continue work on the drilling engineering and the environmental permitting.’

As well as demonstrating Orinduik’s potential, the CPR’s release also set in motion a highly lucrative option agreement between Eco and oil major Total, which was signed last year. For an initial price of $1m, Total purchased the right to buy a 25pc stake in Orinduik from Eco for $12.5m within 120 days of receiving a complete set of 3D seismic data.

Encouragingly, news that Total had exercised the option reached the market within two days of the CPR’s release. In fact, Holzman said the firm agreed to exercise before it had even received a complete set of 3D seismic, doubling Eco’s cash balance to $25m and leaving it with a 15pc stake in Orinduik in the process. This position translates to 450MMboe net to Eco alone.

Holzman said the money it has received from Total will carry it for the costs of two-to-three wells at Orinduik without raising additional funds and will recover the costs of the seismic survey. In an RNS, he added:

‘The entrance of Total into the Orinduik Block provides further endorsement of the prospectivity of this License. With Tullow as Operator and the technical contribution that both Total and Eco now bring to the project, we look forward to working with these two world-class players in further progressing the exciting exploration of the Orinduik Block.’

First well

The three Orinduik partners now plan to drill their first well on the block in early Q3 next year. Of the ten leads, three have a 22.4pc estimated probability of success, making them top candidates. So, which one will the firms choose?

Holzman tells us this decision became somewhat easier last month when ExxonMobil made a massive discovery at a neighbouring lease. Exxon has made numerous nearby discoveries but this, its ninth, marks the most significant yet because it is located just 7km from the Orinduik licence boundary

The well – called Hammerhead-1 – was drilled to more than 4,000m and discovered material quantities of oil in turbidite channel systems. With these systems extending updip into Orinduik, Holzman said the discovery has seriously positive implications for Eco’s acreage:

‘Every time ExxonMobil discovers something nearby, it de-risks us, but this was particularly material, positively mitigating both reservoir and migration principal risks. Although the discovery is on their licence, the underlying geology extends into our field. For all intents and purposes, this means that without even drilling yet we have a nearby discovery. This makes the corresponding area on our acreage a major candidate for our first well. One important aspect to note is that the CPR still didn’t include the data and substantial implications from Hammerhead-1 discovery. Once the partners continue their seismic evaluations, we can only expect a big jump in resource potential and probability of success.

Namibia potential

Eco has also made progress at it four offshore licences in Namibia’s Walvis Basin, which it is developing alongside major partners like Tullow Oil, AziNam, ONGC, and Namcor. The sites, called Cooper, Guy, Sharon, and Tamar, are expected to contain a combined c2.6bn barrels of resources net to Eco.

Since we spoke to Holzman in February, Eco has been granted a one-year extension to March 2019 on its licence at Tamar. However, its most significant progress has occurred at Cooper, where it is 32.5pc owner and operator.

Eco plans to drill an exploration well at Cooper targeting an 882MMbbls prospect called Osprey. Tullow Oil, one of its partners on the opportunity, will carry it for the costs of the well. In June, Eco published a public notice for Environmental Clearance Certificate for the well, marking the final stage in the drilling permit application process ahead of planned drilling later this year.

While waiting for approval to drill the well, Holzman tells us he is keeping an eye on outside drilling activity in the Walvis Basin. Earlier this month, Tullow Oil spudded an exploration well targeting 125MMbbls on the basin. The company said it expected to reach final depth after 34 days, meaning results should be due at the end of September or the beginning of October. Meanwhile, fellow AIM oiler Chariot Oil and Gas plans to spud its much-anticipated Prospect S well in Q4 in partnership with Azinam. The latter firm announced plans last week to float on Oslo’s stock exchange and raise $60m to drill the Namibian acreage it jointly owns with Eco in Q3 2019.

Holzman says this external activity will give Eco a better understanding of the oil systems in its own blocks: ‘If Tullow’s well is a success or has oil shows, then it has very positive implications for our assets. Indeed they could become subject to enhanced drilling programmes and farm-in activity from majors such as Exxon and Total, who are currently taking positions in the Basin and sitting on the sidelines. If the well is not successful, then there will be a subsequent well drilled at Prospect S, which could also have a similar effect on our assets. I believe Tullow will yield a moderate discovery that will generate additional exploration activity.’

Moving forward

With cash now at $25m, Holzman says Eco easily has the capital required to cover two years of scheduled work. With its strategy freshly validated by the recent success at Orinduik, he tells us he is now looking at new opportunities for the company and is currently weighing up prospects:

‘We think our existing model of going into a prospective oil basin in a somewhat under-explored area, negotiating directly with the government and taking a large stake before partnering with firms somewhere down the road can be applied more broadly. At the moment, we are busy looking at least two additional opportunities.

To do this, Eco can likely draw on partner Africa Oil, which bought 19.5pc of its shares for c.£8.5m in November to work with Holzman and his team on new exploration assets and their initial work programmes. As Holzman puts it:

‘Africa Oil Corp is a very large company that wants to work with us to identify new opportunities. This is great for us because it gives us the guidance and support of a huge, experienced player in the market while also meaning we do not necessarily have to go out and raise money in the market to fund any potential acquisitions we may identify.’

What’s more, despite the company’s shares leaping from 33.2p to 51p since the beginning of the month, giving it a £81.2m market cap, he believes there will be plenty more upside in the short term and next year once targets are selected, and drilling plans announced:

In many ways, Guyana is our value generation asset, and it will be huge, we calculate that it is at least $600m net to us on risked basis (unrisked – $2bn). Namibia will be a bonus and Tullow has just spudded a well a week ago. We are currently trading with a market cap of £80; this will easily go much, much higher than that next year once we have made a drilling decision.’

More upside?

Now that a CPR for Orinduik has been released and Total has signed its option over the acreage, the heavy lifting will really begin for Eco as it gears up for an intense period of drilling activity. The firm’s ability to repeatedly attract the attention of big-name partners is encouraging, and – who knows – could one day see it become the target of a highly lucrative takeover deal. For the time being, the promise of drilling success and additional de-risking from nearby drilling activity in both Guyana and Namibia form the likeliest candidates for positive share price catalysts over the coming year.

 

Author: Daniel Flynn

Disclosure: The author does not own shares in the company mentioned in this article

 

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