RECAF - Reconnaissance Energy: Waiting For Q1-2023 Results With Doubts On Cash And JV Partner

2023-06-12 19:07:41 ET

Summary

• ReconAfrica's stock performance remains uncertain, with a 76% year-to-year decrease, and awaiting Q1-2023 results.
• Recent events include the completion of the Phase 2 2D seismic program and positive eFTG survey results, but no updates on JV partners.
• Risks include a shareholder claim, potential environmental issues, and limited cash balance for a capital-intensive industry.

In the last weeks, there have been many news and rumors about Reconnaissance Energy Africa ( RECAF ) (RECO:CA), also known as, ReconAfrica. In this article, I will explain what has been going on, and I will support my HOLD recommendation as we wait for the Q1-2023 results that have not been released yet.

Stock performance

The stock is currently trading at $0.97/share, equivalent to a market cap of about $200M. ReconAfrica is up 2% year-to-date while it is down 76% year-to-year, mostly due to the company not always respecting the hype around drilling wells. The 52-week minimum is $0.8/share (recorded on September 24 ^th , 2023) while the 52-week maximum is $4.52/share (recorded on September 14 ^th , 2022).

Key recent events and catalysts

• Seismic : in November 2022, ReconAfrica started the Phase 2 Extension program of the 2D seismic process, which aimed at gathering an additional 1,400 km of data. The purpose of this additional seismic collection process was to develop a stronger understanding of the leads to reduce the risk of future drilling targets. At the beginning of April , ReconAfrica announced that as a result of the 2D seismic program, a new play had been confirmed in the western and southern parts of the PEL 73 exploration license in Namibia. This new play - named “Damara Belt Fold” - is mostly made of anticlinal folds that have a significant trend in a direction that goes from North-West to South-East with carbonate reservoir rocks, relevant oil shows and 17% matrix porosity. After these results, the company submitted an application for six drilling permits in the Damara Belt. In May 2023, ReconAfrica announced that the Phase 2 2D seismic program data collection is officially completed.
• Enhanced Full Tensor Gravity Survey (eFTG Survey) : in the second half of 2022, ReconAfrica started an eFTG aerial survey over 2,000 square kilometers in the northeastern part of Namibia. On May 24, 2023, ReconAfrica announced the first update of the eFTG survey, and the market reacted positively with +18.7% and +10.5% on 05/25 and 05/26 respectively. The first update confirms the high quality of the images collected with rift bounding faults, intra-rift highs and rift floors well delineated. The eFTG was also able to provide more information on the three wells drilled so far (Makandina, Kawe, Mbambi). In addition, there is a high correlation between the data collected with the eFTG and with what had been gathered with the 2D seismic. At this stage, the company believes that further analysis of the collected eFTG data will be needed to enable de-risking for selecting the next drilling locations. There is a great expectation around possible new drilling coordinates to be announced.
• eFTG Second Phase: considering the good results gained with the eFTG survey, ReconAfrica decided to carry out an additional eFTG aerial survey over an area of 2,800 square kilometers in the PEL 73 license. Results are expected at the end of May or the beginning of June. For the time being, no results have been released.
• JV Partners: currently, there are no updates on the JV selection process, and I believe this is not a good sign. If potential investors had found interesting material in the VDR, I guess by now some sort of announcement could have already been made. Indeed, it has been almost 9 months since ReconAfrica launched the process and no news is out.

Risks

In terms of risks, it should be mentioned that on May 23rd, a shareholder of ReconAfrica filed a claim alleging that the company misrepresented some information in core and non-core documents. ReconAfrica’s first reply to the claim is that it will review it in further detail, but there is no point at all in the claim. Without having more information on the claim, it is not easy to forecast a possible impact, if any, on the company. While ReconAfrica's reply was immediate and very clear, this is for sure an aspect to be monitored in the next months.

From an environmental perspective, in the next few days, ReconAfrica will be waiting for the verdict from the Namibian Minister of Environment , Forestry and Tourism about an appeal brought forward by an environmental movement regarding the decision by the Namibian Environmental Commissioner to amend an Environmental Clearance Certificate instead of carrying out further analysis. Should the verdict be against ReconAfrica, that could slow down the Company’s operations due to the possible need for new permits. However, considering that the Namibian government seems to be looking very positively at the new boom of the oil and gas industry in the country, I see unlikely a potential ruling against ReconAfrica.

For what concerns liquidity, as of year-end 2022, ReconAfrica had a cash balance of $47 M and no debt. The company claimed it was enough to cover the eFTG survey, the 2D seismic and the 5-1 well. My view is that a cash balance of $47M is very limited for a company that operates in a capital-intensive industry such as the oil and gas one. To give an idea, during 2022, the company spent exactly $46.8M in operating expenses (drilling only one well, Kawe 6-2, and postponing the 5-1 well) alone plus an additional $16M in financial expenses. Currently, I believe that for ReconAfrica, accessing the debt capital market could not be easy since it has limited production to use as collateral. Therefore, the search for a JV partner that could inject liquidity and give more robustness to ReconAfrica is becoming more and more important.

Conclusion

Overall, I believe that the risk associated with ReconAfrica is gradually increasing. My advice would be to avoid buying the shares now but to remain invested if you already hold, particularly if you bought at much higher prices.

Q1-2023 results should give a bit more clarity on the company's direction and its cash availability, one of the aspects that worries me. However, the company has not announced a specific date for the Q1 release but, last year, by this time, results were already public.

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