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By Gary Newman | Sunday 8 July 2018
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.
Oil exploration is very different to the boom we had back in 2010 in terms of the share price movements that we see for companies that are engaged in drilling.
But with oil prices currently high and expected to stay strong barring any major changes in the current political situation, especially in relation to OPEC and Iran, I would expect to see interest being shown by investors in shares in any company that has an upcoming drill.
There have already been some signs of that, and whilst we may never again see the crazy rises that we used to get purely for a company spudding a well, and then again on any sort of discovery, and ridiculously high market caps being reached based on something still in the ground and yet to be proven commercial, there does seem to be more interest in these types of companies.
One company which was flavour-of-the-month back then and reached a market cap in the hundreds of millions back then was Chariot Oil and Gas (CHAR), but a couple of failed big drills and a general downturn in the sector meant that it has been out of favour for some time now.
On paper I can see why some might argue that Chariot is still expensive as it has a market cap of around £29 million at a 7.8p share price, doesn’t produce any revenue and is still very much at the exploration stage.
But where it differs from many other small AIM listed explorers is that it has around $30 million in the bank, having raised $16.5 million back in March at 13p and allowing for typical cash burn, and it has a drill coming later this year.
Chariot has always engaged in drilling large targets, and the Prospect S drill at its 2312 central blocks in Namibia is no different, with gross mean prospective resources of 459 million barrels. In the past it has failed to find any commercial hydrocarbons, and Namibia has failed to live up to expectations for the company, but all it takes is one successful drill for a company of this size when going after that amount of oil, and it will be a real gamechanger – remembering of course that the chance of success for these targets always means that the odds are against you.
This type of drill isn’t cheap and is expected to come in at $20-25 million, with Chariot being liable for its 65% share of costs, but it easily has the money to cover that.
It also has several other potential high impact drills lined up over the next 12 mon this or so, depending on whether it is able to secure farm-out agreements to fund them – as it did with Eni and the drilling of Rabat Deep-1 in Morocco earlier this year, although that came up dry.
This does show that the company has an ability to secure big name partners for these drills, as it has also managed to do in the past.
Currently it is looking for partners on its 75% owned Kenitra-1 (464mmbbls of gross mean prospective resources) and LKP-1a (350mmbbls) drilling prospects in Morocco; plus its 65% owned Prospect W (284mmbbls) in Namibia; and its largest one, the 100% owned Prospect 1 on the BAR-M licence area in Brazil, where it will be targeting 911 million barrels of gross mean prospective resources. Assuming that it is able to secure partners for these drills, it is hoping to have them all underway by mid 2020, dependent on results from other drills on surrounding licence areas.
These numbers sound great, but as we all know, gross mean prospective resources are fairly meaningless other than as an indicator of the size of target that is being drilled. Chariot actually needs to find some oil and prove it is commercial, as so far over the years the company has spent an awful lot of money for no reward.
But all it will take to turn things around is one successful drill, certainly in terms of the share price, as any strike would see it opening up at multiples of the current level.
Holding for results is always a big gamble, as failure these days tends to mean 50% or more being instantly wiped off of the share price, in many cases.
I believe though that buying at the current level offers value and as we get closer to the drill spudding we will see interest returning. That could mean that anyone who is in at a relatively cheap price is able to derisk some of their holding prior to target depth being reached, whilst leaving the rest running just in case the company is successful this time around. For me that offers and decent enough risk versus reward play-off to make these shares a speculative buy currently, and you’ll be getting in ahead of the crowd.
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