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Hitting pay dirt: Chariot on fire

An African-focused energy group has announced yet more positive drilling news for its low-cost flagship Moroccan gas development
March 31, 2022

•    Anchois-2 well encounters high-quality gas reservoirs with net gas pay upgraded to 150m
•    Quality dry gas confirmed with more than 96 per cent methane
•    Gas composition allows gas to be processed through single processing facility

Chariot (CHAR:17.6p), an African-focused energy group, has announced yet more positive drilling news for its low-cost flagship Anchois Gas development, offshore of Morocco.

Firstly, the gas samples taken from the Anchois-2 well contained gas with greater than 96 per cent methane in all seven discovered reservoirs. Importantly, the gas doesn’t contain any hydrogen sulfide or carbon dioxide (which in the presence of air and moisture can form acids that are capable of corroding equipment and pipelines). This means that the gas is 'pipeline spec', so should be able to be transported and processed through a single gas processing facility. The implication being that initial capital expenditure of $300mn (£228mn) and ongoing operating costs could be lower than originally planned.

Secondly, the Anchois-2 well encountered multiple high-quality gas reservoirs with a calculated net gas pay far higher than originally envisaged. Net gas pay is a key parameter in reservoir evaluation as it identifies penetrated geological sections that have sufficient reservoir quality and interstitial hydrocarbon volume to produce commercial quantities of hydrocarbon. The new net pay estimates for Anchois-2 well have been raised from 100m to 150m. It should have a positive impact on the size of the resource and the project economics.

Investors reacted positively, marking the share price up 25 per cent to 17.6p, well up on the 10.1p level when I last reiterated my buy call (‘Bargain Shares: Hitting pay dirt’, 10 January 2022). The price could go materially higher still given that analyst James McCormack at house broker Cenkos Securities has a conservative looking 51p a share target. This is based on first gas from Anchois coming onstream in 2024 and only takes account of the 40mn standard cubic feet (scf) per day 20-year off-take provisional agreement (under a Memorandum of Understanding) with a leading international energy group.

Simon Thompson's 2017 Bargain shares portfolio performance
Company nameTIDMOpening offer price on 3.02.17 (p)Bid price on 31.03.22 (p) or exit price (see notes)DividendsTotal return (%)
Kape Technologies (formerly Crossrider)KAPE47.93873.55715.3
Chariot Oil & Gas (see note one)CHAR8.2917.50477.6
BATM Advanced Communications (see note seven)BVC19.2552.50192.8
Avingtrans AVG20046511138.0
H&T HAT289.7533843.931.8
Cenkos Securities (see note two)CNKS88.4251069.530.6
Manchester & London Investment Trust (see note three)MNL291.653773.028.4
Management Consulting (see note five)MMC6.18360-3.0
Bowleven (see note four)BLVN28.95.515-6.1
Tiso Blackstar (see note six)TBG5520.40.54-61.8
Average    154.4
FTSE All-Share Total Return  64858466 30.5
FTSE AIM All-Share Total Return 9771212 24.1

Notes:

1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Simon subsequently advised participating in the one-for-eight open offer at 13p a share ('On the earnings beat', 5 Mar 2018) and buying back the shares sold at 4p ('Chariot's North African adventure', 17 April 2019). Simon then advised taking up the one-for-six open offer at 5.5p ('Exploiting margins of safety', 1 June 2021). Total return reflects these transactions.

2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 Apr 2017). Please note that Simon has since included the shares in his 2020 Bargain Shares Portfolio and rates the shares a buy.

3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price.

4. Simon Thompson advised banking profits on half your holdings in Bowleven at 33.75p (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and the balance of the holding was sold at 5.5p ('Taking stock and profits', 9 December 2019).

5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price.

Cenkos assumes production will be sold under long-term gas sales agreements to the domestic power and industrial sectors, at $7 per mcf and $9 per thousand cubic feet (mcf), respectively. Any additional production will be exported to Spain at the MIBGAS weighted average gas price. However, fellow Aim-traded explorer SDX Energy achieved realised gas prices of $11.3 per mcf in Morocco last year and European gas prices have risen by more than 50 per cent since the start of 2022. Moreover, the EU has stated that it is looking at both the US and Africa to meet the short-term shortfall in supply as the region reduces its reliance on Russia.

I also note that Chariot and Total Eren, a France-based renewable energy independent power producer, have recently entered a partnership with First Quantum Minerals, the CA$30bn (£18bn) market capitalisation global mining and metals group, to advance development of a 430 MW solar and wind power project for its mining operations in Zambia. Last autumn, Chariot announced a new partnership with the Government of Mauritania for the potential development of a large-scale 10GW green hydrogen project, further underlining the group’s ESG credentials.

The holding has produced a 477 per cent total return if you have been following my recommendations since I included the shares in my 2017 Bargain Shares Portfolio, contributing to the portfolio’s 154 per cent total return. Buy.

 

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous 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 £3.25 [UK].

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They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.