Description

The main purpose of this write-up is to highlight a significant oil and gas discovery off the South African/Namibian coast and a few entry points which could prove to be very profitable investments.

While it is early days, speculation about the size of this new “oil province” is slowly gaining momentum following the announcement of the positive Venus-1X drill result in February 2022.

“We are excited to announce the results of this world-class discovery, which has exceeded our pre-drill expectations. As Namibia’s second important discovery in recent weeks, it confirms the enormous potential of the Orange Basin as an emerging major hydrocarbon province. We congratulate TotalEnergies, as operator, for safely drilling the Venus-1X deep-water well. 

The speculation in the market is that the recoverable reserve could exceed 13 billion boe of oil and between 10 trillion and 20 trillion cubic feet of gas. This will make it the largest deep water find ever trumping the 11.3 billion Buzios reserve off the coast of Brazil.

https://twitter.com/CapOnePartners/status/1518895089589837824

History of Oil Exploration off South African Coast

The shallow waters off the South African coast were explored extensively in the 70’s+80’s without any major finds. Improved drilling technology and vast improvements in seismic techniques has made it possible for today;s exploreres to move off the continental shelf into deeper waters.THe first few wells are currently being drilled and the results could be transformative for the economies and the region.

(Just found this link with a more detailed history https://seekingalpha.com/article/4494843-orange-basin-opening-buy-africa-oil-stock)

I wanted to make the point that there is no material "oil and gas" industry in South Africa. There are no analysts or experts to guide you through the hoops. It’s the “blind leading the blind.” I include myself in this category. The best I can do in this write-up is to highlight this opportunity and share some local knowledge. Members with experience in this field have a natural competitive advantage. I hope more experienced members will find it profitable to run with this and I look forward to learning how this game is played. .

Entry Points

There are three entry points that I am aware of

• Africa Oil Corp (TSX:AOI) CAD     2.57

• Africa Energy Corp (TSXV:AFE) CAD     0.27

• HCI ZAR 169.00

I have just listened to a call from the Africa Oil where the CEO presented a slide addressing concerns from shareholders that the share continues to trade at a discount to its fair value. But, because of my lack of oil and gas expertise I will focus on the HCI entry point which allows investors to access the oil opportunity for free.

HCI

HCI.JSE is an investment holding company listed in South Africa.

A summarise SOTP calculation is shown below

The current price only trades at a 2% discount to it’s intrinsic value which consists mostly of listed investments. However, the oil and gas opportunity is included in unlisted investments. Valuations, discussed later in the write-up, indicate that the value of the oil opportunity range between R11 700mil and R15 600mil.

The discount jumps to over 45% if one uses these valutions.

Listed Investments

In order not to clutter the focus on the oil opportunity I will discuss the prospects for these listed investments in the Q&A. For now I will highlight that many of these shares are covid recovery plays, eg Casinos, Hotels, Buses.

Unlisted Investments

The unlisted investments are valued at R2 798mil. HCI does not disclose these values seperately. I will only focus on the opportunity presented by Impact Oil and will skip discussing the other holdings because the are not that material and I don’t expect much volatility in the valuation.

Impact Oil and Gas

HCI owns 49% of Impact, a private company based in London.

Impacts strategy has been to build a portfolio of deep-water prospects off the coast of Africa and then sell-down a majority interest in the licence to an industry super-major with the technical and financial capability to operate through the drilling phase. Having built the portfolio and farmed-out most of its acreage, Impact begun the drilling phase for matured and partnered prospects in 2021.

The map below highlights Impact's exposure to offshore oil off the coast of South Africa.

There have been three positive drill results in these waters since 2019

• Block 11B/12B: Two positive drill results, Brulpadda (2019) and Luiperd (2020). Impact has an indirect exposure to this reserve through its 36% interest in Africa Energy (TSXV AFE) which owns 10% of the venture. 

• Block 2913b which contains the very successful Venus-1X drill result. Speculation is that the reserve contains 13 billion boe of light oil nd between 10 trillion and 20 trillion cubic feet of gas making it the largest deep water find ever. This reserve is on the Namibian side of the Orange Basin which is thought to extend south all the way to Cape Town.. 

The Orange Basin

Because the geology is so similar the Orange Basin is thought to be the next major oil province extending from Southern Namibia to Cape Town. 

Impact has three ventures in the Orange Basin.

Block 2913B

Block 2913B, is located offshore southern Namibia and covers approximately 8,215km² in water depths up to 3,000 metres.  Impact entered the licence as Operator in 2014, acquiring 2D, then 3D seismic data which defined the Venus prospect. In 2017 Impact was subsequently joined by TotalEnergies, who bring significant deep-water drilling expertise to the Joint Venture, and in 2019 by QatarEnergy.

TotalEnergies is the operator on behalf of a joint venture group comprising TotalEnergies (40%), QatarEnergy (30%), Impact (20%), and Namcor (10%).

Block 2912

This ultra-deep-water block covers around 7,933km² and lies immediately west of Block 2913B, offshore Namibia (also held by Impact (19%), Total (66%) and Namcor (15%). Total is also the operator.

Orange Basin Deep

Orange Basin Deep lies 220km west of Cape Town and covers approximately 15,474 km² in water depths of between 2,700m and 4,250m. Oil plays identified in this area are similar to those containing large potential reserves in our Namibia licence.

The participating interests in the Orange Basin Deep is as follows: Total (Operator) (77.78%) and Impact  (22.22%).

The Venus Discovery (Block 2913B)

The Venus discovery sits in the Orange Basin, approximately 290 kilometres off the coast of Namibia, in the deep offshore. The well was drilled to a total depth of 6,296 metres, by the Maersk Voyager drillship, and encountered a high-quality, light oil-bearing sandstone reservoir of Lower Cretaceous age, with 84 meters of net oil pay.

The day after Impact announced the find (February, 24), the following news of the discovery broke. The article is clearly well researched and it is obvious that the journalist has good sources. The initial speculation was that the reserve contained 3 billion boe of oil and could produce 250 000 barrels per day

https://www.upstreamonline.com/exclusive/at-least-3-billion-barrels-totalenergies-venus-is-sub-saharan-africas-biggest-ever-oil-discovery/2-1-1174983

In April rumors started spreading that the resource “could exceed 13 billion boe”

https://twitter.com/equivestinvest/status/1518880714359554048

There are also very positive comments from African Oil (TSX AOI). AOI owns 31% of Impact so following their comments will be useful.

Keith Hill, Africa Oil's President and CEO, commented: "The preliminary results suggests that the Venus discovery has exceeded the pre-drill expectations and, along with the recently announced Graff discovery, has opened a new petroleum province in the Orange Basin with huge upside potential. As well as the immediate significance of Venus for our shareholders, both Venus and Graff discoveries also bode well for our exploration efforts on Block 3B/4B, which we operate with a 20% working interest and Impact's Orange Basin Deep Block, both located on trend in the Orange Basin, South Africa. These holdings give us a material interest through direct participation and indirectly through our investee companies in this exciting new play. We can now look forward to the appraisal work on the Venus discovery and the drilling of the Gazania-1 exploration well on Block 2B that is expected to spud by the end of this year."

Comments from Total on Venus will obviously also be very useful.  

Kevin McLachlan, Senior Vice President Exploration at TotalEnergies

"This discovery offshore Namibia and the very promising initial results prove the potential of this play in the Orange Basin, on which TotalEnergies owns an important position both in Namibia and South Africa. A comprehensive coring and logging program has been completed. This will enable the preparation of appraisal operations designed to assess the commerciality of this discovery."

Valuation of the Venus Discovery

Valuation 1

I have seen speculation that reserves are sold between $1 and $5 per barrel. Using a mid-point of $2.5 implies a $32.5bil valuation for the venture. HCI’s share is $3.185mil or R50bil (HCI own 49% of Impact which owns 20% of the venture). 

HCI’s market cap is only R13bil so a R50bil valuation would be a life changing win.  

Valuation 2

Other valuations are based on leaks and rumours in the market. These rumours, which do seem credible, value Impacts 20% share in the venture between between $1.5bil and $2bil. Thats between $750mil and $1000mil for HCI's 49% in Impact. Thats an additional R11.7bil to R15.6bil versus the R13bil market cap.

The extract below sums up the rumours.

(https://www.africaintelligence.com/oil--gas_corporate-strategy/2022/05/24/totalenergies--huge-discovery-pushes-up-bidding-on-venus,109787004-art)

Conclusion

I do not have the expertise or experience to judge these valuations which easily double the share price and this is just for Block 2913B. What happens if Orange Basin Deep is also a hit or if the other prospects which I have not even discussed work out? Maybe this is one of those once in a life time ideas? I am looking forward to input from members who have more experienced in the oil and gas sector,

In the meantime I have justified taking this exposure through HCI because I am getting Impact Oil for free if one ignores the typical holding company discount.

Catalyst

-  More news flow 

- Results from appraisal wells which will be drilled sep/oct 2022.