RECAF - Reconnaissance Energy: 8-2 Well Results And H1-2022 Still Support A Buy Recommendation

Summary

• ReconAfrica reported H1-2022 and the balance sheet is strong.
• 8-2 well was successfully drilled up to 2,056 meters.
• The High Court of Namibia dismissed some environmental charges against ReconAfrica.

Less than a week ago, Reconnaissance Energy Africa (RECAF) (RECO:CA) - the Canadian-based oil and gas player focused on exploration activity in the Kavango Basin in Namibia/Botswana - announced its Q2-2022 results and reported some relevant operational updates. The market reacted extremely positively with the stock going up 34.6% on September 1st.

In this article, I will provide a review of the financial and operating results and I will reiterate my BUY recommendation.

If you are not familiar with Reconnaissance Energy Africa - also known as ReconAfrica - you can have a look at my first article where I provided a detailed overview of the company's operations or you can check my last article that covers Q1-2022 results .

Stock performance

The stock is currently trading at $3.19/share, equivalent to a market capitalization of $653M, and it is down 35% year-to-date and 44% year on year. The 52-week minimum is $2.54/share, which was reached last week on August 30th, 2022, while the 52-weel maximum is $5.97/share, recorded on December 1st, 2022.

The stock price has been characterized by strong volatility (52-week standard deviation is $0.69/share or 22% of the current trading price) since ReconAfrica is an E&P company with very little production and most of the value is based on exploration: therefore, every news or rumor about drilling results highly affects the stock price.

Operational update

During Q2-2022, ReconAfrica continued its drilling campaign that had previously started at the beginning of 2021 with well 6-2 and well 6-1 being drilled. After the completion of the first two wells, ReconAfrica took some time during Q4-2021 and Q1-2022 to analyze all the well data as well as to process the first part of the 2D seismic (about 500 linear kilometers): with these studies, four new different drilling prospect opportunities were identified.

Among the four drilling prospects, ReconAfrica decided to start from the 8-2 well, located in the Kavango East area: in June 2022, the 8-2 well was spud using the Jarvie-1 company-owned drilling rig. The initial plan was to reach a depth of about 2,800 meters and to test the potential conventional oil and associated gas in the Karoo Rift Fill, a light-oil primary play.

On August 30th, results of the 8-2 well were announced with the market reacting positively to the news: indeed, the stratigraphic well was drilled to a depth of about 2,050 meters, and all the previously defined geological targets were reached. More importantly, the well was completed on time and within budget constraints. It is worth mentioning that the total depth of 2,056 meters is less than the initial planned target (2,800 meters) and this makes me believe that the target geological formations (Pre-Karoo and Otavi) were probably shallower than expected. According to ReconAfrica, the Jarvie-1 rig will remain on-site at the 8-2 well until the operations of coring and logging are completed.

Moving to the seismic side, in May 2022 ReconAfrica completed the second 2D seismic acquiring about 761 kilometers of data using cable-less sensors. The Company is now in the phase of processing the seismic with the objective of identifying new prospects and developing a better understanding of the already defined drilling locations. The preliminary results of the seismic interpretation are currently expected for October and will for sure act as a catalyst.

Financial results

ReconAfrica generated $8M revenues in Q2-2022 and $14.5M during the first half of the year: these revenues are generated by some minor working interests in some Mexican assets (Amatitlan and Chiapas Blocks) obtained when ReconAfrica acquired Reconnaissance Oil in July 2021. These revenues are subject to royalties that in Q2-2022 amounted to $6.3M and in H1-2022 to $11.6M.

Moving to the cost side, total operating expenses were $14.2M in Q2-2022 and $22.6M in the first half: the main cost items are share-based payments ($10.9M) and G&A ($9.5M in H1-2022), with management and consulting expenses accounting for $4.4M.

Overall, ReconAfrica reported a $14.3M loss in Q2-2022 and $24.9M if considering the first six months of the year.

Looking at the cash flow statement, a couple of items stand out:

• $13.7M capital expenditure as an investment in exploration and evaluation of assets,
• $50.2M of proceeds from the sale of shares since the Company carried out a deal financing of about 7.5M shares.

From a balance sheet point of view, ReconAfrica looks robust with a cash balance of $92.5M and no outstanding debt.

Environmental issues

In my previous article about the Company, I expressed my concerns about protest actions organized by environmental activists that could have slowed down ReconAfrica drilling operations. Indeed, some weeks ago, a group of activists took ReconAfrica to the High Court of Namibia challenging some recent amendments to ReconAfrica's Environmental Compliance Certificate and trying to stop the drilling campaign. In this case, the High Court of Namibia quickly ruled in favor of ReconAfrica dismissing the charges. From a certain point of view, I read this news in a positive way since it seems that the Namibian Government might be supportive of ReconAfrica activities, which would make sense if we considered that the discovery of large oil volume would be an incredible booster to the Namibian economy. However, I believe that this will not stop environmental activists from carrying out other campaigns, and therefore, I think that the "activism" risk cannot be completely overlooked.

Conclusion

Overall, I believe that ReconAfrica is a company worth a BUY recommendation since, so far, all the exploration results are pointing towards the presence of large oil volumes. As a reminder, the third-party resource report issued in May 2022 estimated 854 Mbbl of oil and 1.3 Tcf of natural gas (on a non-risked basis). In addition, ReconAfrica's management has been able to guide the company in an effective way without overspending and carrying out the drilling schedule on budget and on time. In the next weeks, there will be some catalysts - that are likely to have an impact on the stock price - including the phase 2 seismic interpretation report and additional wells.

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