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Is it worth giving Chariot another chance?

By Gary Newman | Sunday 19 March 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Chariot Oil and Gas (CHAR) has begun to get my attention again recently, as it has plenty going on operationally during the next year or so, and could well become a popular share to be in once again.

A few years ago this was a definite favourite of PIs and soared to a crazy valuation based purely on the exploration potential of its licences in Namibia, but a couple of failed drills soon changed all that and it came crashing back down to earth and has remained at a far more reasonable valuation ever since.

It still has interests in Namibia, but has also branched out into other parts of the world, and during the last couple of years has done a good job of preserving its cash so that it can take advantage of opportunities as the oil market begins to show signs of a revival once more.

The focus with this one is still very much on high value targets, with its licences holding the sort of amounts of prospective resources that would seriously change the fortunes of the company if any were proven to be commercial.

That does of course mean that the big risk with Chariot is once again any further failure with the drill, and given the Chance of Success for many drills of this type, then the odds are more in favour of a duster than a hydrocarbon discovery.

But plenty of private investors like to take this sort of gamble, and at a market cap of around £31 million, with a share price of 13p to buy, then any sort of big strike would likely see multiples of that amount.

That market cap is underpinned to some extent by the $25 million that Chariot had in the bank at the end of 2016, plus the fact that it is totally debt-free, and it has now completed all outstanding work commitments for its licences.

Although things have been quiet on the drilling front, the company has still been carrying out plenty of work in readiness for a drilling campaign across several of its blocks, and has also successfully reduced the risk and cost of some of those drills via farm-out deals.

Another challenge has been to significantly reduce costs so that cash can be better preserved, and although overheads are still high – admin expenses were $3.5 million for 2016, although that is still a lot lower than in the past – the company reduced losses for the year to $6.8 million, and nearly $5.2 million of that was as a result of the impairment of exploration assets, so in reality the loss of $1.6 million is far more reasonable for a company of this type.

On the operational front, the first drill will be on the Rabat Deep block in Morocco, which was farmed out to Eni, with Chariot retaining a 10% stake and the JP-1 well will be fully funded. This drill is expected to take place during the middle part of the year and is targeting gross prospective resources of 768mmbbls.

Any success on this block would also help to de-risk Chariot’s neighbouring 75% owned Mohammedia permits, which is also targeting potentially large amounts of oil-in-place, with gross mean prospective resources of over 800mmbbls. Currently the company is seeking a partner to drill two wells on this block and if one isn’t found by then, any success at JP-1 would certainly help. The company is hoping to drill the LKP-1a and Kenitra-A wells during the latter part of 2018, or in early 2019.

Rather than trying to raise substantial amounts of cash to carry out drilling on its own, the company seems to be taking the far more sensible route of farming out a share of its licences, and it is looking to go down the same route with its gas licences on the Southern Blocks in Namibia. Things have not gone well for the company there previously, but it is hoping to turn that around with any discovery on the 8.1tcf gross mean prospective resources that it is targeting.

If you’re looking for a safer shares investment then this one isn’t for you and you should concentrate on companies that are actually already producing, but if a higher risk investment with the potential for large upside appeals to you, then this is well worth a look. Although ideally I would be looking to buy on any dips as the share price has recently reached a 12 month high – although you could argue that is anticipation of operations getting underway again.


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