Sometimes a major's trash is a junior's treasure. That's the story in East Africa, where majors began outlining resources and then ditched them for onshore assets. In their wake, junior companies with technical expertise are ready to unlock more wealth than the large caps thought possible. In this interview with The Energy Report, Canaccord Genuity Director of Research Christopher Brown fills us in on hidden opportunities in the rift basins of east Africa. He also shares an interesting perspective on how to make money on oil and gas ventures in Ukraine.
The Energy Report: Christopher, you cover oil and gas explorers operating in the rift basins of Africa and South America. How is the introduction of hydraulic fracturing technology affecting the oil and gas industry operating in these rift basins?
Christopher Brown: Fracking is in its infancy in the eastern African basins. Companies are mostly pursuing conventional targets. As these prospects mature, the companies will need to unlock the remaining resource. The idea is to identify the conventional targets first in order to understand the migration pathways from the source rock. Once those pathways have been identified, and the low-hanging fruit plucked, drillers will start fracking the source rock.
TER: Why is the geology of rift basins propitious for fossil fuels?
CB: The rift basin complex is geologically interesting because the rifts form where the continent pulls apart. Ancient lakes coalesce inside the rifts into what we now consider to be source rock, and then sediments backfill the declivities. The East African rifts can be viewed from outer space; they are very dominant features in the modern landscape. As technologies improve, we can drill deeper, down into the ancient lake beds in the rifts to unlock the oil and gas. Since mid-2005, a flurry of exploration activity has identified billions of barrels of recoverable opportunity in these basins.
TER: What was the technological advance that allowed us to unlock the opportunities?
CB: Initially, it was drilling technology that allowed explorers to dig deeper while managing increasing pressure and temperature with improved mud systems. The next step is to enhance oil recovery with unconventional, complex fracking completions.
TER: Will the approvals involve production sharing contracts?
CB: Yes; production sharing contracts are different from the concession contract, with which North American investors are familiar. Production sharing contracts are very lucrative and attractive to foreign investment because they allow for cost recovery. It enables an operator to recover its investment dollars upfront before the profit sharing component of the contract kicks in. After investors recoup their capital and operating costs, the state takes a certain percentage, and the investors keep the rest. It is a very good contract for emerging economies and encourages foreign investment.
TER: Let's turn to South America. Which oil and gas explorer firms do you like there?
In Argentina, we like Americas Petrogas Inc. (OTCPK:APEOF) for its unconventional pursuits. It is leading the way for junior exposure to the Vaca Muerta. Argentina is looking up for foreign investments with the government's recent settlements regarding the expropriation of the YPF ownership from Repsol. The government is now reimbursing Repsol for those expropriated assets. Consequently, three companies in Argentina-Americas Petrogas-is experiencing very positive share price increases. This development shows that people are overcoming their former apprehensions about investing in Argentina and are now looking at what these companies are capable of unlocking in the region.
TER: How does the price to cash flow basis shape up in South America?
CB: South America is drawing a lot of attention now because our domestic E&P universe is getting pricey. On a price to cash flow basis, in general, our domestic E&Ps average about seven times price to cash flow. International price to cash flow ratios are still in the five times range. There is a great international investment opportunity for netbacks-solid cash flow for base investment with exploration upside in Colombia, Argentina, and Brazil.
TER: Let's turn to the Ukraine, where there's a great deal of economic uncertainty these days. How is the political situation affecting oil and gas development in the region?
CB: The Ukraine is a gas-focused country. Oil and gas operators in the Ukraine are still executing their programs, albeit with some apprehension. A lot of their operations are outside the major cities. They do not have to deal with government building occupations and protests. The direct operations themselves are not impacted. The overriding concern is whether a portion of the eastern Ukraine will be handed over to Russia. My contacts with the companies in the Ukraine say that a small group of people are causing a large amount of disruption and headlines. The larger population is not inclined to join Russia, even though they do speak Russian. "Been there, done that," seems to be the prevailing mass sentiment.
TER: Are there any other promising junior oil and gas firms that you like around the globe?
CB: For a safe investment, but with a nice exposure to Brent optionality for upside pricing, the best bet is Bankers Petroleum Ltd. (OTCPK:BNKJF) in Albania. It is run by David French. He is taking the low-cost producer approach and slowly building up production volumes. But he is also providing investors with an interesting upside for a polymer-enhanced type of recovery on one of Europe's largest oil accumulations. Bankers Petroleum is worth watching!
TER: Thank you, Christopher.
CB: Take care, Peter.
Christopher Brown serves as director, research, international oil and gas at Canaccord Genuity and has provided international analytical coverage since 2006. Previously, Christopher worked as the international oil and gas analyst for BMO Capital Markets. Brown's industry experience includes reservoir engineering work at various large-cap oil and gas companies. Prior to that, he was employed at an international M&A firm with mandates out of London. Brown holds a Bachelor of Science in chemical engineering.
This interview conducted by Peter Byrne of The Energy Report and can be read in its entirety here. (5/22/14)
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1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: none.
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3) Christopher Brown: I own, or my family owns, shares of the following companies mentioned in this interview: Americas Petrogas. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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