Eco (Atlantic) Oil & Gas (CVE:EOG) is in an enviable position compared to the likes of other junior oil explorers. After a series of transactions designed to bolster its balance sheet, the Africa-focused company has more than $10 million of cash in its till, most of which is not required to be put to work anytime soon.
With oil prices plunging more than 50 percent last year, many oil and gas exploration companies have had to slash staff and halt programs in order to stay afloat, or just falter completely.
But Eco Atlantic realized early on it needed to get creative in order to maintain its dominant position as a license holder offshore Namibia, ensuring it is both cashed up and carried on license obligations through a series of merger and farm-out deals.
Executive VP and co-founder Alan Friedman says Eco Atlantic understood from the beginning the potential of its assets, of which it owned a large part. “We realized we can use them as currency to bring in a significant industry leading partner.”
The first move was a deal with oil major Tullow Oil in October for the company’s Cooper block in Namibia, under which Eco Atlantic agreed to reduce its ownership interest, in exchange for Tullow paying for 3D seismic and drilling (the most expensive part of oil exploration) for a total stake of up to 40 percent.
The 1,100 square kilometre 3D seismic survey on Cooper, a block located in the prolific Walvis basin in Namibia with 4.5 billion barrels of estimated prospective resources, was immediately undertaken and completed last November, and results are expected imminently.
The company now owns interests in five offshore license blocks in Namibia, covering 41,500 square kilometres in the Walvis and Luderitz basins that hold 25 billion barrels of prospective resources, next door to major farm-in activity by BP, Tullow, Repsol, Murphy Oil and Shell, among others.
A number of transactions were also carried out with partner AziNam on these licenses over the past few months, with Eco Atlantic farming out an additional 10 percent interest in each of its Sharon and Guy licenses in exchange for full carry on 2D seismic work and partial carry on 3D seismic for 18 months. It also sold AziNam another 12.5 percent of the Cooper block for over $4 million in proceeds.
Eco Atlantic then agreed to purchase Pan African Oil, solidifying its position as the dominant license holder in offshore Namibia. Through the deal, the company acquired about $3.1 million in cash before transaction costs, again improving its balance sheet while also bringing in “some very good assets,” says Friedman, adding that these benefits outweigh the modest dilution that came with the acquisition.
Indeed, Pan African operated two licenses covering almost 13,000 square kilometres in offshore Namibia, which had already seen the completion of their first term work commitments. “The Pan African assets compliment what we already have, and diversify our assets in offshore Namibia, with one of the licenses located in the Luderitz basin.” Prior to the acquisition, Eco Atlantic owned and operated four licenses, all in the Walvis basin.
The oil junior has also had to cut general and administrative expenses like the rest of the industry, providing for a low G&A that will allow the company to sit comfortably on its more than $10 million cash buffer for at least the next 18 months.
Herein lies the opportunity for investors: the stock is trading below its cash value. Shares closed at 9 cents on March 2nd, leaving it with a market cap of nearly $8.3 million, $2 million short of its cash position.
“Not only has the company presented to the world that it can survive in a bad environment,” says Friedman, “but it has proved that it can execute transactions with oil majors in one of the worst oil environments yet and find creative ways to raise cash.”
He explains that in many cases where the stock is trading below cash, it is because the cash is planned to be used up in the short term. But this is not the case for Eco Atlantic.
“We don’t need to put the cash to work. We don’t have a significant burn. We don’t have to drill wells either,” the executive VP affirms.
The recent Tullow and Azinam transactions only provide further proof of the quality of Eco Atlantic’s assets and management’s abilities, thereby validating the African portfolio. In the final quarter of 2014, the company not only completed the 3D seismic program on the Cooper license, but also executed on a 1,100 square kilometre 2D seismic on its Guy block and a 3,000 square kilometre 2D seismic at Sharon, all of which were fully carried by its partners.
Because of its survival instincts and resolve to look beyond dried up equity markets, the company now has enough cash to look at other assets in Africa. Friedman certainly has the experience in navigating the continent, as he is the co-founder of Auryx Gold Corp, whose Namibian assets were sold to B2Gold for over $150 million.
“We have very strong relationships in Africa and we do have the ability to access assets cheaply and through direct negotiations as opposed to bidding rounds. We will certainly keep our eyes open for the right jurisdictions that make economic sense, even in this bad environment,” says Friedman.
“We’re not looking for commitments or big obligations, but rather distressed opportunities that are both easy and cheap to access.”
The company is already completing a technical review and analysis for its Deepwater Cape Three Points West block in Ghana, where it will own just over a 50 percent stake. The block is located only 15 km southeast of the 2 billion barrel Jubilee light oil field owned by Tullow, which currently produces more than 110,000 barrels of oil per day and is the biggest producing field in Africa.
But Eco Atlantic’s main goal for now is to focus on having cash and pulling through the current period of weak oil prices, which Friedman believes will improve substantially over time, back to prices that justify exploration spend.
Though uncertain of when this will happen, he points to the fact that oil is a cyclical business.
Friedman’s optimism is also seen through the company’s recently announced $6 million share buyback program via a normal course issuer bid. Management and the board of directors currently hold around 35 percent of the company’s issued and outstanding shares: “We believe it’s a great investment opportunity,” Friedman asserts.