Description

SINTANA ENERGY (TSXV: SEI)

SINTANA ENERGY WARRANTS (TSXV: SEI.WT)

"You miss 100% of the shots you don't take.” — Wayne Gretzky

**(7-10x) return potential over the next 12 months**

Not all value investments screen cheap, pay a dividend, or have a stock buyback plan in place. Sometimes you have to find dollars, or what could be dollars, trading for nickels and take a chance. It is for this reason that Sintana Energy (TSXV: SEI) is worth an allocation to the energy bucket of any value investor’s portfolio.

The Company is uniquely exposed to one the world’s most exciting exploration plays located in the Orange Basin in Namibia – home to two of the largest offshore discoveries in decades made by Shell and Total in February of 2022

Before you run for the hills (Namibia… oil drilling!!!), understand that Sintana is not an operator of any of its energy assets. Think of it more like an investment fund that buys stakes or exposures (in this case carried, and non-carried interests) in attractive properties where Oil Majors are prospecting for major discoveries. The Majors in this case include small “mom and pop” operations like Royal Dutch Shell, Total, and Chevron. Think of this whole thing like a movie set. You have a great director, top actors, a proven production company, and a hot environment for movies. You get to interlope on this set and share in the success of the project. If it is a complete failure, it’s not because of the lack of talent of the participants, i.e. it's as good a “shot on goal” as any.

It is our belief that an investment in Sintana at the current price of 25c CAD offers asymmetric upside (7-10x) over the next 12 months.

• Sintana is the only public vehicle that provides exposure to multiple exploration blocks in the heart of the Orange Basin in Namibia.

• It is possible that Sintana will have at least one well drilled on each of its three Orange Basin blocks by their respective operators, Chevron, Galp and Woodside, over the next 12 months.

• Sintana has no further capital requirements associated with these activities – its is carried.

Energy in Namibia is Heating Up…

Namibia has seen three major oil events over the last year which has led to an massive influx of international upstream companies seeking their corporate residence in Namibia’s petroleum sector. Keep in mind that to date, Namibia is not a fossil fuel producer, although northern neighbor Angola is a major oil and gas producer and a member of the Organization of the Petroleum Exporting Countries (OPEC). The three major finds, which could equate to billions of barrels of oil equivalent, are as follows:

Jan 2022: Graff-1 discovery

Shell made a significant oil and gas discovery at a closely-watched offshore well in Namibia which could spark a wave of investment in the southern African country, three industry sources told Reuters. It is unclear if the discoveries are big enough for Shell to go ahead with the development of the country's first deepwater field, the sources said. The well results have so far shown at least two reservoirs containing what one of the sources described as a significant
amount of oil and gas. According to a second source, the drilling results have shown one layer at least 60 meters deep of hydrocarbons, holding an estimated millions barrels of oil and gas equivalent.

Source: https://www.oedigital.com/news/493767-reuters-shell-makes-significant-oil-and-gas-discovery-offshore-namibia

Feb 2022: Venus discovery

TotalEnergies has made a significant discovery of light oil with associated gas on the Venus prospect, located in block 2913B in the Orange Basin, offshore southern Namibia. The Venus 1-X well encountered approximately 84 meters of net oil pay in a good quality Lower Cretaceous reservoir. “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” said Kevin McLachlan, Senior Vice President Exploration at TotalEnergies. “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.” Block 2913B covers approximately 8,215 km² in deep offshore Namibia. TotalEnergies is the operator with a 40% working interest, alongside QatarEnergy (30%), Impact Oil and Gas (20%) and NAMCOR (10%).

Source: https://totalenergies.com/media/news/press-releases/namibia-totalenergies-makes-significant-discovery-offshore-block-2913b

Again, from WoodMackenzie post the Venus Discovery…

How much is Venus worth?

Given the scale of the discovery, Venus will be developed over multiple phases with several FPSOs to exploit the full resource. Our preliminary model assumes 920 million barrels is developed in the first phase. We value this at US$3.5 billion (NPV10, Jan 2022, US$50/bbl long-term). An initial phase will generate a 22% IRR and break even at US$31/bbl.

Jan 2023: Jonker-1X discovery

After discovering oil and the Graff-1 well in Namibia in 2022, Shell has now made another offshore oil discovery in the country's deep waters. This time, Shell made a discovery at the Jonker-1X deep-water exploration well, along with QatarEnergy and Namcor, Shell's partners in the PEL-39 Exploration License, offshore Namibia. Using the Deepsea Bollsta semi-submersible drilling rig, the Jonker-1X well was drilled to a total depth of 6,168 meters in a water depth of 2,210 meters. The acquired data is being evaluated, and further appraisal is planned to determine the size and recoverable potential of the discovery, QatarEnergy said. The drilling operations started in December 2022 and were completed in early March 2023. Located approximately 270 kilometers off the coast of Namibia, in the deep-water offshore, the  Jonker-1X discovery is the third well drilled on the license held by Shell within a year, Namcor said. The PEL-39 Exploration License is held by a consortium comprised of QatarEnergy (with a 45% working interest), Shell (Operator with a 45% working interest) and the National Petroleum Corporation of Namibia “NAMCOR" (with a 10% working interest).

Source: https://www.oedigital.com/news/503382-shell-strikes-oil-again-in-namibia-with-jonker-1x-deepwater-exploration-well

As recently as late May 2023, Africa Oil divested their Kenyan Oil development to focus on Namibia and Nigeria. “Our strategy has shifted to focus on production and high potential exploration opportunities,” declared Keith Hill, the Company’s President and CEO. Those opportunities include “our Orange Basin portfolio where we are now appraising the exciting Venus discovery, offshore Namibia”.

Source: africaoilgasreport.com May 23, 2023

Namibia’s recent Oil and Gas Conference (May 2023) featured hundreds of attendees and was the most well attended Namibian conference possibly ever.  Several of the oil majors were present (note: Total said it would spend half its global budget in Namibia). Chevron, Galp and Woodside were all in attendance.

How will Sintana Participate in Namibian oil?

Over the next four quarters investors can expect at least three wells, one drilled on each of Sintana’s blocks, by three different operators in the Orange Basin, which Sintana is entirely carried on.

Sintana stands to benefit from FOUR offshore licenses and ONE onshore license, all in (and off the coast) of Namibia.

Keep in mind that three of Sintana’s offshore licenses are located in the Orange Basin – and are directly adjacent to recent and historical discoveries:

PEL 83 is adjacent to the recent Graff-1X oil discovery and directly offsets the massive Kudu Gas Field. A Rig contract was recently awarded for this block and should be in Namibia sometime in early Q4 (it is currently in Norway), and once it arrives, the drilling campaign can commence. The plan is to drill 1-2 wells and move to core log and drill stem testing. In early Q1 we should have results from these results.

PEL 87 contains one of the largest sub-sea fan complexes identified in Africa – the “Saturn Superfan”. Woodside (a AUD $66b company will spend $35m on seismic over the Saturn Superfan. Woodside can elect to take up 56 points of operator-ship of  the block with a view to drilling one or more exploration wells subject to what they see in the seismic. Woodside is moving extremely quickly. A rig moved on to the block in late March 2023, and Woodside should have final data by the end of the summer with well drilling in Q4/early next year. Sintana is carried on all of this activity.

PEL 90 is adjacent to the recent Venus-1X Superfan oil discovery.

The Saturn complex is similar to Venus with the same age and depositional characteristics, mature oil source rocks and regional seal at about the same depth.

Barclays released an epic report on the Orange Basin in April 2023 which reviewed the drilling history of the basin and included Sintana in the report alongside several multibillion dollar majors.  (See below).

This image illustrates the proximity of Sintana’s interests to the majors in both on and offshore Namibia:

Here is a breakdown of each of Sintana’s licenses and their features: 

Image of the various basins:

Which of these projects should we be most excited about?  

Take your pick.  We like our chances on PEL 83 and PEL 90 based on the potential size of these fields.

Graff-1X, with estimates in excess of 2 billion barrels is Shell’s largest commercial discovery in Sub-Saharan Africa since 1996.  

Graff-1x exceeded initial estimates of 700 million barrels and a $2.8 Billion NPV10 @ US$50 Brent – Assuming 35 potential development locations with an estimated production rate of 190,000 BOPD at peak.

Sintana has a 5% interest in the adjacent block (PEL 83).

Venus

Venus has surpassed pre-drill estimates of 1.5 billion to 2 billion barrels – post-drill estimates currently in excess of 3 billion barrels recoverable. First phase of ~920 million barrels has a $3.5 billion NPV10 @ US$50 Brent, assuming 35 potential development locations producing an estimated ~250,000 B/D at peak. 

Sintana has a 5% interest in the adjacent block (PEL 90).

***********************

How should we value Sintana?

As Barclays says in its Apr 2023 report:

“We would expect some of the smaller players to be potential sellers of their minority stakes ahead of development activity, creating an opportunity for other large upstream companies to enter the basin, or incumbents to increase their positions. Any transactions could also provide a mark-to-market valuation of resources in the basin.”

Translation: If any of these projects start to look promising, Sintana will sell its interests to one of the majors for a princely sum.

So how do we estimate what Sintana could be worth?

Here is how Barclays values Africa Oil’s (AOI) exposure to the Orange Basin:

Barclays takes 30% of the recovery rate of the resource, multiplies it by AOI’s stake to get to a net reserves number, multiplies that by $2.50 per boe (heavily discounted of course due to a variety of factors - time - recovery cost - taxes - etc) and divides the result by AOI’s share count.  As you can see above, this results in a 56% uplift to AOI’s share price.

We can attempt to perform the same analysis for Sintana, using each of their projects as “shots on goal” and summing up the total. Note that we will not include PL 82 or PL 103 on this table, as these are earlier stage/onshore.

That analysis looks like this: 

Another way to think about this is to take Sintana’s current market cap of 390m shares x 25c CAD = $97.5m CAD = $72m USD.

$72m USD / $2.50 per boe = 29m boe.

29m BOE is less than the potential carried interest on ANY ONE of Sintana’s projects.

So the market is saying that all of Sintana’s projects will fail.  If any one project works out, the stock is worth more.  If two work out it’s worth a lot.  If more than two work out… it’s’ worth a ton.

Based on even the most conservative of probability analyses, the shares should trade today for 2x the current price (or 50c CAD), with upside to almost $1.50 CAD or better as newsflow on these various projects develops (activity, land sales, drilling, further discoveries).

Namibian Govt Concerns - Debunked

In late May 2023, Bloomberg News reported that Namibia is considering taking minority stakes in mining and petroleum production companies amid increasing concerns over local ownership of valuable resources.

“We are making a case that local ownership must start with the state, which holds ownership of our natural resources,” Mines and Energy Minister Tom Alweendo told lawmakers on Monday. “The proposed state ownership should take the form where the state owns a minimum equity percentage in all mining companies and petroleum production, for which it does not have to pay,” he said.

Sintana shares sold off slightly on the news. However, we think any move was unwarranted, as the statements were really directed at Mining concerns.

Namcor (the National Petroleum Company of Namibia) already gets a carried 10% in every license.  That is policy - the comments made by the Namibian government that pertained to oil and gas were about codifying policy in the statutes - this is nothing new.  The market reaction to this news was unsubstantiated for oil and gas companies, and we added to our position. 

Our intuition was proven correct a few weeks later:

https://energycapitalpower.com/namibia-oil-gas-stakes-minister-paris/

Namibia’s Minister of Mines and Energy Hon. Tom Alweendo debunked statements that the government is looking at raising the state’s interests in petroleum production developments in the country.

Speaking during the Invest in African Energy Forum in Paris in June 2023 – the Namibian Energy Minister clarified that Namibia will maintain its existing stakes in E&P assets, as defined by the contracts established and signed with global players, through the national oil company NAMCOR.

Citing comments Minister Alweendo made regarding equity on Monday, reports state that the government is looking at increasing its stake in various energy and mining developments taking place in the country – such as those led by energy majors Shell and TotalEnergies in the Orange Basin. However, during the Paris Forum, the minister clarified that his statement was centered on the government using royalties from oil and gas – according to existing contractual stakes – to create a fund for local entrepreneurs to enable them to participate in the burgeoning energy and mineral industry.

As such, the government is not considering raising its stake in existing licenses, but is assessing the various ways funds raised through oil and gas can be redirected towards the local community, therefore advancing local participation and capacity building across the growing industry.

Sintana Capital Structure

274m shares out

89m warrants @ 25c

4m warrants $ 15c

23m stock options

*********************

390m fully diluted shares outstanding

$5.2m CAD of cash at the end of Q1 - this is 3 to 4 years of G&A cover at the current clip.

No financial debt

Catalyst

Continued news flow out of Namibia from the majors (Chevron, Total, Woodside, Shell)  - remember, this Namibian field is a very big deal in the context of global energy markets.

Offer by an oil major (a rounding error) to acquire Sintana at a premium or sale of various Sintana blocks in Namibia, one by one.