This morning Eco Atlantic (LSE:ECO) reported a 35% increase in the estimated P50 gross prospective oil resource at the Orinduik Block, offshore Guyana. Quoting a Competent Person’s Report (“CPR”) written by Gustavson Associates, Eco’s best estimate is that Orinduik could contain 3.99bn barrels of oil. With its 15% retained interest in Orinduik, Eco’s shares responded well to the news, trading at 91.25p last seen. However, speaking exclusively to ValueTheMarkets.com CEO Gil Holzman enthused why this might only be the beginning.
After so much disappointment on AIM in the oil and gas exploration space over recent years, Eco’s stock has remained in high demand. Over the last 3 months, its shares have moved 40p to a recent 52-week high of 98p. Investors have been drawn in by the potential at Orinduik and this morning’s news has helped bolster that appetite.
A big part of the attraction to the Orinduik project is the quality of the partners Eco has secured. Tullow Energy has taken 60% and is the block’s operator, while oil super-major Total exercised its option to acquire 25% in September 2018. In total Total paid $13.5m to secure its stake, a significant sum for the project at this stage. What was it that attracted such strong commercial interest?
As Holzman put it to us “the quality of the project speaks for itself. The technical aspects of Orinduik were already exciting. Our original CPR (11 September 2018), which was based only on the Cretaceous targets, delivered extremely promising numbers.
However, Exxon’s recent Hammerhead discovery has had a significant impact on Orinduik. Hammerhead extends into Orinduik, so our block is already subject to a small discovery. But what is much more promising is that it has opened up a whole new play. We are now also looking at Tertiary age targets and today’s updated CPR reflects this latest development.”
The effort that the Orinduik partners have put into re-evaluating the block’s 2,550km2 of 3D seismic data is encouraging. Orinduik’s best-estimated P50 oil resource is now 3.99bn barrels, with 597m barrels net to Eco. Although this is a gross unrisked figure, with exploration drilling yet to happen on Orinduik, the magnitude of the project is clear. Orinduik now contains 15 confirmed drilling leads. If the partners can emulate a small proportion of the success Exxon has been having regionally then this would be transformational for Eco’s market cap, which currently sits at £147m.
The extent to which Eco can deliver further share price gains will be influenced by its ability to sustain further news flow. Once the drill bit starts turning, this looks like a company that could generate a great deal of speculative interest. With the geological chance of success now at 81%, following the Hammerhead discovery, this stock has pretty much all of the ingredients for a sustained run higher.
However, in the meantime, another interesting aspect concerning Orinduik is the amount of exploration activity that is happening in blocks surrounding it. Exxon has been aggressively pursuing its regional drilling strategy and as Holzman told us “the more work Exxon does, the more oil it discovers, the more it upgrades our block and the more it derisks our project.”
Again, this is good news. Under the terms of the current four-year license period, the Orinduik partners were required to complete and process 1,000km2 of 3D Seismic data. 2,550km2 was completed in 2017. The next (as yet unconfirmed) three-year renewal period brings with it a commitment to drill at least one exploration well, followed by a second exploration well in the second three-year period.
Although this means that the Orinduik partners have time on their side, it is quite possible that the improving potential economics of the block might encourage it to accelerate its plans. As operator, Tullow will make the final call on when to drill, so this is somewhat out of Eco’s hands. That certainly presents some timing risk to Eco’s shareholders, but if the market does lose patience and gives up some of the recent gains then this could present a significant opportunity.