Last week, Eco Atlantic Oil & Gas (LSE:ECO) received the ‘Exploration for Excellence’ award at the Oil & Gas Council’s Awards of Excellence ceremony. The merit recognises the true scale of the firm’s success this year at the Orinduik block alongside partners Tullow Oil and Total. Most notably, this has included two significant discoveries from the drilling of two wells. However, with Eco struggling to recover since hitting 50p last month when oil samples from Orinduik were found to be heavier than expected, we think this progress is continuing to be majorly overlooked by the market.
To recap, Eco holds a 15% position in Orinduik alongside Total, which has a 25% stake, and Tullow Oil, which owns the remaining 60pc and also operates the block. Orinduik covers 1,800km2 in shallow water off the shore of Guyana and is adjacent to ExxonMobil’s Stabroek Block, where 6 billion barrels of recoverable oil equivalent is estimated to span 13 discoveries.
After completing and analysing an extensive 3D seismic survey programme between 2017 and 2018, the partners launched into their maiden drilling programme over the block earlier this year. This work, which targeted two particularly well-defined prospects, led to discoveries Jethro-Lobe and Joe-1.
Jethro-Lobe, which was announced in August 2019 following the drilling of the Jethro-1 exploration well, encountered an initial 180.5ft of net high-quality oil pay located in Lower Tertiary sandstone reservoirs. This supported recoverable oil resources and confirmed the continuance of a petroleum system onto Orinduik, updip of prolific discoveries at the nearby, ExxonMobil-operated Stabroek Block.
Shortly afterwards, in September 2019, the JV partners announced that another discovery had been made by a second exploration well called Joe-1. The well encountered 52ft of continuous thick sandstone of the Upper Tertiary age, opening up a new play and further proving up the presence of recoverable oil resources at Orinduik. Meanwhile, thinner sands above and below the principal discovery indicated the possibility for incremental pay.
Rise and fall
Unsurprisingly, the two discoveries prompted a substantial increase in Eco’s share price, which rose from 68p to a record 177p in a matter of weeks throughout August and September. However, these gains were wiped away overnight last month. The catalyst was the news that samples from the two Orinduik discoveries were found to be mobile heavy crudes with high sulphur content. The business fell to 50p, a point from which it has yet to recover; At writing, it sits at 49.5p with a £94m market cap.
However, we believe that this could – in fact – be where things start to get really interesting. Fundamentally, it looks like the market has treated the news of heavy oil discovery as akin to a write-off for Orinduik. However, this could be short-sighted.
First, heavy crude oil with high sulphur content remains pivotal for many oil refineries. For example, large numbers around the world continuing to produce such petroleum at scale profitably. Think EnQuest’s Kraken field and Equinor’s Mariner fields in the North Sea, or Equinor’s Peregrino field and Enauta’s Atlanta field off the coast of Brazil. In fact, there are now even concerns of a global shortage of heavy sour crude oil driven by ongoing OPEC production cuts as well as unplanned sanction on Venezuela. The key takeaway here is that there is still major demand for the sort of oil present at Orinduik’s Tertiary age discoveries.
Second, and arguably most importantly, Eco and its partners have only just started at Orinduik. A new CPR released in March 2019 put Orinduik’s estimated gross unrisked prospective resources at nearly four billion barrels of oil equivalent across a total of 15 leads. Eco’s 15pc share of this figure comes in at 596.4 million barrels of oil equivalent.
Excitingly, just one-billion of these estimated barrels are expected to be found in Orinduik’s Tertiary horizons – i.e. the ones unlocked by Jethro and Joe. The three-billion-barrel balance is thought to be located in a deeper Cretaceous play. This horizon, which the Orinduik partners are yet to open up, is expected to hold older lighter oil such as in Liza discovery on the neighbouring block.
The Oil & Gas Council’s award recognises what the market hasn’t. It gives Eco deserved credit for its two-for-two discovery record at Orinduik. Concerns over heavy oil aside, this provides excellent proof of concept for the block and sets up the partners perfectly for future exploration.
The Orinduik partners are currently awaiting the results of a nearby well called Carapa before taking the block forwards. However, an updated CPR, further information on the planned development of Jethro and Joe, and a 2020 drilling programme are all on the cards. If the partners can deliver some positive newsflow and de-risk their block, there is a good chance the market’s recent negative sentiment towards Eco will reverse.