Aim-traded Chariot Oil & Gas (CHAR:4p), a £14.7m market cap oil exploration company with activities in Morocco, Namibia and Brazil, has been awarded a 75 per cent interest and operatorship in the Lixus Offshore Licence, Morocco, in partnership with state-owned oil company Office National des Hydrocarbures et des Mines (ONHYM) which holds a 25 per cent carried interest.
The licence covers an area of 2,390km2 and is located 30km north of Chariot's existing Moroccan acreage. The area was subject to exploration by Repsol a decade ago. Legacy 3D seismic data covering 1,425 km2 was shot over the licence area and four exploration wells were drilled, including the Anchois gas discovery, located 40km offshore in 388m-deep water. It encountered an estimated net gas pay of 55m in two sands. A new independent audit of this discovery by Netherland Sewell and Associates estimates 307bn cubic feet (bcf) of 2C contingent resources, offering near-term development opportunity.
The reservoirs in the Anchois discovery offer potential for high-rate wells and a material, high-value and low-risk project in a country where gas prices are high. Indeed, Morocco is the largest energy importer in North Africa, importing around 90 per cent of its energy needs and at a cost of $6.6bn in 2018. Energy demand has been growing at around 5 per cent per annum since 2004, thus placing a heavy burden on government finances.
The pressure is showing no signs of abating as industry experts believe energy demand could double between 2015 and 2030. The Moroccan government’s objective is to reduce reliance on imports by targeting renewable energy generation, and in particular solar power, to meet the country’s growing energy needs. The national strategy is for renewable to account for 42 per cent of electricity generation by 2020, rising to 52 per cent of output by 2030, using gas (currently 10 per cent of electricity generation) as a bridging fuel until then. This would require a quadrupling of the country’s gas output by 2025, a very positive backdrop for attracting partners to the project.
The initial licence commitment, for which Chariot is fully funded, includes a $1m technical programme of 3D seismic reprocessing and evaluation to access the additional exploration potential of Lixus. Chariot will then evaluate the gas market, test development concepts through a feasibility study and seek strategic partnerships and alliances to progress towards a development of the Anchois discovery. Given that oil and gas analyst Jonathan Wright at house broker finnCap estimates a total capital expenditure, including abandonment, of $673m (£518m) on the project, Chariot will clearly need a heavyweight partner to fund the project to the next level.
Bearing this in mind, the company has previously attracted majors into its acreage including Petrobras, BP, Cairn Energy, Woodside and Eni. It has potential to do so again given that the project offers potential partners attractive tax incentives (a 10-year tax holiday from Morocco’s 31 per cent corporation tax), and for well depths over 200m the royalty rate is only 3.5 per cent on gas.
Nil value being attributed to Chariot’s licenses
finnCap has a risked net asset value (NAV) per share of 19.6p for the Anchois discovery, and a risked NAV per share of 16.4p for Chariot’s other Moroccan offshore licences: the Mohammedia prospect MOH-B (gross mean prospective resource of 637m barrels); and Kenitra licence prospect KEN-A (gross mean prospective resource of 445m barrels). Chariot ended 2018 with net cash of $19.8m (£15.2m), a sum worth 4.1p a share. This means that the share price is fully covered by cash on the Chariot’s balance sheet, implying that nil value is being attributed to any of its Moroccan acreage.
Part of the reason for the low rating is that Chariot encountered dusters on drilling programmes in both Namibia and Morocco last year, so some investors will be giving the company a wide berth. However, any positive news flow on a partnering process on Anchois would undoubtedly be well received, and supportive of investors attributing at least some of finnCap’s risked estimate of the value of the project into the share price. FinnCap’s time line for news flow on Anchois is as follows: release of the Competent Person’s Report (CPR) in May; development feasibility study in June; Moroccan gas marketing study over the summer; Lixus seismic reprocessing at the end of the year; and potential partnering discussions in late 2019/early 2020 with a view to a field start-up in 2023.
I first advised buying Chariot’s shares at 8.29p in my 2017 Bargain Shares Portfolio, top-sliced two-thirds of the holding at 17.5p ('Bargain Shares on a tear', 3 April 2017), participated in the one-for-eight open offer, at 13p, on the balance (‘On the earnings beat’, 5 Mar 2018), and last recommended running profits at the start of the year (‘A game changer’, 7 January 2019).
So, if you have been following my advice, you will have banked 135 per cent of the original cash you invested and still hold shares worth a further 15 per cent [of your initial cash investment] which you are effectively running for free. This means you are showing a near-50 per cent gain on the investment. However, having bided my time, I now feel it’s time to use some of the cash to buy back into this small-cap play once again and now rate Chariot’s shares a speculative buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
