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Bahamas Petroleum Company is a small cap throwback, high impact exploration is becoming increasingly rare

Against a thinning pool of capital for petroleum exploration and the rise of ESG, a bone fide ‘company maker’ exploration project is a rare thing to see on the stock market.

Bahamas Petroleum Company PLC - Bahamas Petroleum Company is a small cap oil throwback, high impact exploration is becoming increasingly rare

Bahamas Petroleum Company PLC (LON:BPC) will in the next two months drill a massive exploration target in its highly prospective Caribbean waters.

The explorer’s Perseverance well, with the potential to discover close to 800mln barrels of crude, has been described as one of the “premier prospects” to be drilled anywhere in the world this year.

WATCH: Bahamas Petroleum's Simon Potter hails environmental go-ahead for Perseverance well

As its name hints at, the project has been years in the making – with the company working for a long time to secure permits and permissions to drill.

In fact, as it is finally drilled this spring the well will be a bit of a throwback.

In 2020, binary ‘company-maker’ wells are a rarity.

Moreover, pitched against the moving dynamics of both the investment community and broader societal trends it’s not particularly hard to imagine that such opportunities may soon be a thing of the past.

BPC on Thursday secured an £8mln lending facility to ensure its April well goes ahead regardless of ongoing partnership negotiations.

Farm-out deals continue to be elusive across AIM

The company is far from alone in its position of this almost perennial pursuit of a ‘farm-out’ partner.

Larger, richer, more technically endowed peers are sought across most of AIM’s petroleum sector.

There’s has been a long list of companies that have pinned their fates on securing ‘de-risking’ partnerships.

Indeed, firms have essentially folded because of their inability to team up rather than their failure to find hydrocarbons.

Among those looking for industry sugar daddies Hurricane Energy Plc (LON:HUR), Europa Oil & Gas Plc (LON:EOG), Chariot Oil & Gas Plc (LON:CHAR), Jersey Oil & Gas Plc (LON:JOG) and Providence Resources PLC (LON:PVR) are only a few of the names that flow most easily to mind.

In the absence of deal-making, more and more management teams are challenged to take on higher levels of risk and, in lot of cases, they at least need to look as though they are be prepared to ‘go it alone’.

A glance at the tier above, the independent exploration and production companies which have historically been most likely to partner up with juniors, shows that exploration has been relegated down the pecking order.

Instead such companies are focussed on production, cash flow and debt reduction.

New opportunities, meanwhile, now come from above as the previously called ‘super majors’ divest tens of billions worth of maturing assets.

Firms like Tullow Oil, Premier Oil, EnQuest, and Kosmos Energy are all now mostly dealing with the projects already on the books whilst (hopefully) squeezing down their respective debt piles.

Environmental, social and governance

It is getting harder for small caps to fund ambitious and essentially binary exploration ventures and at the same time simply doing any form of hydrocarbon business in public appears to be increasingly challenging.

The creep of environmental, social and governance (ESG) along with last year’s high-profile Extinction Rebellion protests are likely to be only signal the start of a rising scrutiny towards industry.

The public are increasingly aware of environmental issues, and companies are either proactively or reactively adapting to more eco-friendly PR strategies.

Stock market listed firms are among the most visible and accessible to passionate opposition.

From Unilever acknowledging that its products have contributed to plastics pollution, Coca-Cola promoting sustainable packaging, to even BP’s recent spotlighting of its ‘renewables’ businesses there’s plenty of evidence that the market is seeing a meaningful change in tone.

Companies are under pressure from both consumers and investors to get their ESG ‘in order’.

Now, a wholesale switch out of carbon-based energy is an entirely different proposition than fast-food firms mandating the use of cardboard drinking straws.

Evidently, despite the promise of Elon Musk’s Tesla or the proliferation of wind and solar, market-wide alternatives to hydrocarbon-based businesses presently remain elusive (particularly at scale).

Economic and commercial demand may remain intact for some time to come, but ‘activist investing’ is likely a live threat going forward for public petroleum companies.

Anecdotal comments among industry participants either identify or reaffirm the expectation that ESG pressures are a factor in shrinking pool of capital for natural resource ventures.

According to Goldman Sachs, some larger companies may seek to avoid the ESG issue by spinning off or selling ‘exposed’ assets, meanwhile private companies could avoid going public to avoid additional pressures.

The flipside of the coin will, apparently, be that greater volumes of capital will become available for ventures with sound ESG practices – though one would image a dimishing number of those would involve the identification and exploitation of hydrocarbon resources.

Attentions will skew to quality and high potential

Looking further into the future, one wonders what will become of the public market for junior oil and gas equities.

In the short term, investors are most likely to congregate around a small number of firms with good and/or high potential opportunities.

There was, for example, still US$11.6mln available for Touchstone Exploration, which today got the backing of institutional investors for its plan to accelerate exploration in Trinidad, where two recent wells exceeded expectations.

Again though, Touchstone is no wildcatter.

It has revenue generating production, its new wells will have a quick route to production and therefore the return on investment will begin almost immediately rather than a more uncertain long term.

Eco Atlantic last year had the honour of drilling 2019’s “prospect of the year” and its share price tells a distinct story – jumping sharply on initial results before falling back amid disappoint on the news that its discovered crude was ‘heavy’ and had less value.

Similarly, Hurricane Energy’s 2019 exploration failures overshadowed the successful delivery of its Lancaster field into production. It appears little patience is available for projects that don’t go exactly right first time.

Excitement is high for Bahamas Petroleum. Undoubtedly the potential is very significant.

So, come April, AIM’s oil and gas investors should perhaps pay close attention to this ‘throwback’ high impact exploration project - there may not be too many more like it in the coming years.

Quick facts: Bahamas Petroleum Company PLC

Price: 2.5 GBX

LSE:BPC
Market: LSE
Market Cap: £62.09 m
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