Looking at Oil as a Contrarian Bet

Written by Nick Hodge
Posted June 3, 2020

Publisher's Note: Oil is the cheapest it's been in years. That means it's time to start looking at it from a contrarian perspective. I've stayed away from oil for nearly eight years. I told you shale companies would go bankrupt. Over 200 oil companies have gone bankrupt since 2015. Oil prices went negative this year. It's time to start looking around for upside. You can start with this interview I did yesterday with long-time oil executive Craig Steinke. Enjoy. 

Call it like you see it,

Nick Hodge Signature

Nick Hodge
President and Founder, Outsider Club

Nick Hodge: Hello everyone. This is Nick Hodge, the founder of Outsider Club. I'm sitting down with Craig Steinke. He's the founder of Reconnaissance Energy Africa (TSX-V: RECO)(OTC: RECAF), better known as Recon Africa and it's a bit of a different story for me.

If you know my history in the markets and in the financial space, you'll know that I came into this business well over a decade ago on the energy side of things. I was a cleantech analyst and I did a bit of oil investing as well, and certainly caught the first wave of the shale plays with the Bakken and the Eagle Ford, et cetera. I also wrote a two books about energy investing, including Energy Investing for Dummies, so I'm no stranger to the energy space, though I've certainly found myself knee deep in the more metal side of the resource space for the past half decade or so, but nonetheless, the conventional energies, the coals and the natural gases, and the oils of the world aren't going anywhere and I keep an eye on that side of the business.

I watch it out of the corner of my eye, and here we are with oil prices really cratering, obviously, going negative earlier this year in 2020 on the back of the coronavirus and the demand destruction there. And as a contrarian investor, when I see a commodity price collapsed, that's when I start to get interested.

It just so happened that's when I was introduced to Craig and the Recon Africa story. So Craig, let's start there. Tell me just briefly about yourself and about Recon Africa.

Craig Steinke: Well, thanks Nick. Myself, quickly, I've been involved in the oil and gas business for 30 some odd years. Since 2002 I've focused on the unconventional side. And the reason is that I think it has much less of an exploratory component to it, and once you find a good unconventional play, i.e., shales, it's more of a manufacturing process.

So it's less risky and it's where all the resource is. It's where the oil and gas is cooked, so it all starts in the shales or the source rock. Then the source rock expels oil and gas to the more conventional zones, but we've discovered a lot of our conventional traps and opportunities, and so it's a high-impact play — the shale play or the unconventionals. So I focused on that since 2002. That's a little bit about myself.

Now to the second part of your question, Nick, to answer that, is fortunately what we've done in the Namibia, northeast Namibia specifically, is we've discovered a new sedimentary basin. Amazing. I've been all over the world in numerous countries in my career, developing oil and gas plays, unconventional and conventional, but never ever have I seen one little company with a $40 million market cap that holds the rights to an entire new sedimentary basin. I've never seen it. And this sedimentary basin — the Kavango — as it turns out, is similar in size to the Eagle Ford. Hundreds of companies own rights in the Eagle Ford, and one company, Recon Africa, holds the rights to the Kavango. So it's the most unusual situation I've ever been in, in my career.

Nick Hodge: I remember when boom towns were occurring in North America as a result of the shale boom here in the late 2000s and the early 2010s. I've driven through the Permian. I've been to Fort McMurray. I've seen doublewide trailers selling for $200,000. I've seen waitresses making $20 or $30 or $40 an hour. That's sort of what happens when a play, a regional play like this, comes online. I want to make sure we spend a minute drilling down and really get to the size because size is something I like when I'm looking at a potential gold play or uranium play or copper deposit or whatever it is. I'm looking for something that's regional or district scale that really a major would want to come in and have a piece of, or exploit on their own. And with Recon Africa, you really have that. Can you spend another couple of minutes just talking about the sheer size of the ground you have and maybe relate that to some of the North American plays a bit?

Craig Steinke: Certainly. Thanks, Nick. This definitely has size. It has impact. And just a little bit of history, Nick, we went around the world looking for source rocks, and I got a really good technical team with an excellent track record to help me. This is back in 2013-14, and we wound up in Northeast Namibia because Namibia, first of all, above ground ticks all the boxes. People call it the Switzerland of Africa. It's a former German colony. It's got some of the best fiscal terms in the world, 5% royalty, et cetera, good infrastructure, rule of law, excellent petroleum regime. So it ticked all the above-ground boxes, but frankly, the below-ground criteria that we were using, we didn't have a lot of data.

We keyed off the ST1 well. It was drilled in 1964 by Etosha Petroleum, but what's important about this well, is that it drilled through 620 feet of Permian shales. Now we knew that the basin was more shallow, or the basement was more shallow at the ST1 location. And on kind of a hunch and extrapolation, we felt that the basin got deeper as you went east towards Botswana. So just based on a hunch, or a scant amount of data, I started leasing the land. And as it turns out, and we can get into it if you like, but as it turns out we have discovered a new sedimentary basin. We've proven through the aeromagnetic survey that I purchased from the government, that nobody else had ever purchased, and we had interpreted by Bill Cathey, the CEO of Earthfield Technologies in Houston. The consensus is he's the best guy in the business for aeromag surveys.

We've proven that, through the Bill Cathey work, that we've established a 30,000-foot sedimentary basin. Why that's important is that 30,000-foot sedimentary basins — all basins of that depth in the world produce vast amounts of hydrocarbons.

It's deep, the shales are going to be thick. The ST1 well, 620 feet of Permian shales, you can extrapolate that as the basement where the ST1 was drilled, it's about 10,000 feet, but we've proven we go down to 30,000 feet as you go to the East onto our lands, and typically if you use the Permian Basin in Texas and other well-established basins, you can expect up to a five to tenfold increase in that petroleum system or the Permian shales.

So it's going to get a lot thicker. When you want to talk about quantifying the size sprawl, a third-party engineering report out of Calgary, Tier One Engineering Company, they've given us 12 billion barrels of oil in place just in the Permian shales. But they use the 620 feet in the ST1. We believe strongly that the shales are just going to get a lot thicker over our land. So 12 billion barrels is a lot. Does it get bigger? Well, we think so.

That's just in the shales alone. We're doing a bunch of work right now to support the conventional component of this play, because we see a lot of traps by way of faulting that we've proven have occurred in the basin, so we're expecting conventional traps as well to add to the resource. So it's pretty big.

Nick Hodge: Well, it's huge. It's millions of acres and you have it all to yourself. And it's never been drill tested. So that's obviously the next question I want to ask you because that's what drew me to this story. And I'm going to talk about it in terms of metal I guess... You got this district-scale play, you've got these targets that are just screaming at you to be drilled. If this were a gold play or something, I would be certainly excited about sticking a couple of drill holes in there, and letting the truth machine get to work. And that's sort of your ambition for this oil play as well. Talk to me about your plans for exploration and how you're executing them.

Craig Steinke: Right. Well, we need to drill this. This has to be drilled. And we bought our own rig to drill this because we feel that we can drill this the three-well program, and at the end of the day still own our own rig and be in control of our destiny. We can do that for 40% of the cost that a couple big international drilling companies were quoting us. The rig is almost ready to get on a ship. It's being refurbed in Houston right now. The rig's never been used. And we believe we'll have it for an October/November spud on location in Namibia.

The goal of this three-well drilling program, Nick, is to go down and prove that there's an active petroleum system likely in the Permian shales and just how thick it is. Now, once we do that, I think that the market is just going to radically revalue Recon Africa because it owns the entire sedimentary basin. After that, we're going to be looking for the sweet spots of the shale play, and then we're also going to shoot seismic to accompany the logs that we'll have taken in the first three wells to identify the more conventional zones. So that's the overall goal and picture of what this fall is going to look like.

Nick Hodge: Craig, I bought a new truck last week and I don't think there was a single electric truck for sale on the lot. I'm also an investor in lithium and critical resources that are necessary for a battery production. I certainly see that as part of the future, especially for grid storage. But when I look at mass transportation, when I look at cars and auto sales, and I look out my window here in downtown Spokane, and I see the train go by 10 times a day, loaded down with coal and oil.... and certainly from my seat here, as a resource investor, it's clear to see that oil and gas and coal aren't going anywhere for the foreseeable future.

When I see a quality exploration play like this, I really do get excited. You and I have been talking about it, and so I guess that's where I want to end. I wanted this to be an introduction to Recon Africa, but I also would like you to maybe paint a picture of how you view the energy space, given the worldwide pressure to go green or renewable and given the price action that we've seen in oil this year. How do you frame all that in your mind?

Craig Steinke: Wonderful question. I think in light of what's occurred, Nick, particularly in the last three months, I'm an unequivocal oil bull, and here's why. First of all, the renewables. I'm all in on renewables. Now I'm in the energy business and I've got investments in renewables, but I think it's long-term. Renewables are for wealthy nations. They need to be subsidized, and most of our economies aren't wealthy and they're looking for products that are produced by the oil and gas industry, just like the wealthy nations. I think that the demand is going to continue to grow. I think that the economies are going to normalize here soon and the demand will continue to grow. But importantly, I think what's occurred over the last three months on the supply side is huge.

I think it's something that a lot of people just don't recognize yet. First of all, I'd like to bring your attention to a report, a really good report, put out by JP Morgan, early March of this year. They call it the “$1 Trillion Capex Hole.” Due to the fact that climate change and GSE issues, et cetera, industry just hasn't been putting the capital upfront for exploration that it needs to meet future demand. It's a really well done report and I'd encourage you to read it. But that whole issue has been exacerbated by what's occurred due to COVID-19 and, consequently, the oil route. And so what's occurring is massive shut-ins on marginal wells, like these stripper wells that produce maybe five barrels a day — they've been just hanging on. Well, at these prices, they're getting shut in and they'll never come back.

There's probably one and a half million barrels a day in the U.S. of stripper wells and you can double that, or more, around the world. Then a whole bunch of non-economic wells, here's the way I look at it. I think there's just a massive housecleaning going on in the oil and gas industry, which is really going to affect supply. When you shut in wells, that's tricky business. You get a host of problems trying to bring them back on. So I think that's going to exacerbate JP Morgan's full, comprehensive report on the supply side. I think as demand normalizes, I think oil is going up and what's important is that Recon Africa has no debt, but what it's really looking for to run its economics on is oil or the stripped price of oil. What's oil in 2022 when we expect to be producing? We think it's just going to be a lot

Nick Hodge: I watched a lot of the so called shale players struggle with some of the things you're describing — with the vast depletion rates, et cetera. And it's why I sort of got out of the oil space in the, I don't know, 2012, 2013 timeframe. I didn't see all this money that was being thrown at it sort of coming back. And we've seen that with the bankruptcies in the oil space materializing here recently. So it's a bit different when you're a tiny player in your position owning the rights to an entire basin. That's why I was content to take a look at Recon Africa, and that's why I'm excited about seeing how this drill program develops.

Craig, I'm content to leave it there for this first interview between you and I. It was a great introduction to the story, and I hope to have many more of these conversations in the coming months as you ramp up toward spudding that well. Is there anything else you'd like to add before we end our conversation this morning?

Craig Steinke: No, I would just like to say, Nick, thank you for your interest. I think you're looking at Recon Africa at a very good time and look forward to talking to you more about it.

Nick Hodge: Appreciate it, Craig. Thanks.

Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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