It’s no secret Argentina has plenty of oil and gas resources, the issue has always been the political backdrop and more recently commodity prices.
On both fronts there has been a marked improvement over the past two years says Philip Wolfe, Chief Financial Officer of Phoenix Global Resources PLC (LON:PGR), an AIM-listed company that has substantial assets in the country.
Reformist government
A new government headed by Mauricio Macri has introduced significant reforms to improve both the domestic economy and the country’s international standing.
For the energy sector these have included floating both the Argentine peso and ending controls on the oil price.
On the commodity side, meanwhile, crude has recovered to over US$70 per barrel from as low as US$30 two years ago.
In short, it means investors can assess Argentina on a global energy resource scale and on that basis it stacks up very well, says Wolfe.
A formation the size of Belgium known as Vaca Muerta is the key.
Largely based on its potential, Argentina has the world’s second-largest shale gas deposits and the fourth largest shale oil resources according to the IEA.
Comparable to US shale plays
That makes Vaca Muerta comparable to the hugely productive US shale plays such as Marcellus, Eagle Ford and Bakken.
At present, production is in its early stages and running at about 90,000 barrels per day, but this is tipped to rise to more than one million barrels within twelve years.
The Vaca Muerta remains the only shale outside the US that is producing commercially.
A host of oil supermajors have already been attracted by the potential including Exxon, Shell, Chevron, Petrobras, Total, Statoil and BP (through its Pan American Energy joint venture).
Chevron has been exploring for five years. Shell has acreage adjacent to Phoenix’s, Schlumberger is heavily involved while Argentine state-oil group YPF has been producing both conventional and latterly unconventional oil in the region for years.
The sums involved are vast. Exploration across the formation is estimated to rise from US$7bn in 2017 to between US$12-15bn in 2018 and more than US$20bn annually thereafter.
Phoenix Global Resources has significant acreage right in the middle of this activity.
Powerful support
Following recent acquisitions of four more licences Phoenix owns 560,000 acres covering a total of 7.5% of the entire Vaca Muerta.
Long-term investors will be aware of the potential for the company in Argentina.
It was known as Andes Energia until August of last year when it changed its name following a merger with PETSA, another Argentine-focused oil business run by oil trading group Mercuria.
That deal really moved the needle for the company says Wolfe.
Andes Energia had great assets but was short of cash to develop them and was a non-operator, but the merger with PETSA has addressed that, he says.
Production from PETSA’s assets is running at about 11,000 barrels per day, with historical pro-forma annual revenues of US$182mln for the enlarged group.
More importantly, the merger also gave Phoenix access to a deep-pocketed backer that is prepared to fund development of the company’s unconventional assets.
Just last month, Mercuria converted $100mln of debt into equity 37p and agreed to lend a further US$100mln through convertible notes exercisable at 45p to help the company ratchet up its development programme.
Exploration to double
Phoenix will use the money to more than double its exploration spending this year to US$190mln and, critically, start its first horizontal drilling programmes.
These will be at Mata Mora and Puesto Rojas, where PETSA’s acreage is situated, to test both Vaca Muerta and another formation Tight Agrio, which might hold as much oil again.
Phoenix’s reserves currently are estimated at 60mln barrels, but it is the unconventional exploration that can add substantially to that number.
Horizontal drilling can boost production from conventional wells by three to five times.
YPF has carried out most of the drilling into Vaca Muerta so far, but having started off with conventional vertical wells it has switched almost entirely to horizontal production due to the results.
The process involves drilling a vertical well down and extending horizontally and then using fracking to stimulate oil production.
Vaca Muerta can be found at depths of more than 3,000m, though Phoenix’s Puesto Rojas targets are shallower at between 1,900-2,500m, while the horizontal wells can extend for over 3km.
Horizontal wells are more expensive but the much higher returns come from the additional production says Wolfe.
A further 6-8 vertical wells will be drilled in the Neuquén Basin (Puesto Rojas primarily) this year to give a better understanding of the formations of acreage.
Wolfe says the strategy is to control and consolidate, then appraise and explore and finally move to full development.
AIM's largest oil and gas company
At 21.7p, Phoenix is valued at £596mln, though the company is nearly 80% owned by Mercuria following a recent conversion of loan notes into shares.
“It’s a very supportive shareholder,” Wolfe adds, but the relatively small free float has meant the shares have been drifting a little.
News from the upcoming drilling and especially the two horizontal wells is likely to be the catalyst for a change of mood.
“If they can do shale in the US, we can do it in Argentina,” says Wolfe.
“The future is about operating, consolidating and bringing all that has been learnt in the US in the last 15 years to bear here.”
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