• Market Watch

ReconAfrica in battle for credibility

- 2022-12-19 00:00:00

Timo Shihepo and Sam Sole - Descending upon Namibia's environmentally sensitive Kavango East region in 2015 was the easy part for junior Canadian oil and gas company ReconAfrica.
After all, the company was valued at N$141 million in 2015. But after it acquired a Namibian oil and gas licence, ReconAfrica's value rose to N$25 billion in 2021 when it began its exploration activities, official government documents show.
ReconAfrica owns 90% of the Namibia oil-exploration project, while state-owned National Petroleum Corporation of Namibia (Namcor) owns 10%.
The licence area overlaps with the Kavango-Zambezi Transfrontier Conservation Area and sits upstream from the Okavango Delta – a unique and ecologically sensitive water course.
Controversially, initial company statements suggested a key part of ReconAfrica's proposal included the search for "unconventional resources" which generally includes shale and other rock formations that require hydraulic fracturing ("fracking") to extract oil and gas deposits.
Fracking injects fluids at high-pressure into a well to crack open deep underground rock formations, allowing previously trapped oil and gas to flow up to the surface.
As a result, fracking is associated with significant environmental and health concerns, including water contamination.
LAVISH SPENDING
ReconAfrica's share tumbled last year after National Geographic and short-sellers Viceroy Research separately published detailed articles questioning the lack of public consultation and whether ReconAfrica was overselling the viability of the project.
Documents obtained by amaBhungane suggest that ReconAfrica has already spent an astonishing N$445 million, raised from investors, to drill three test wells.
ReconAfrica also told amaBhungane that the company spent another N$133 million on donations, which have been dubbed a "PR contribution" by critics.
Yet despite such lavish spending, the results have been disappointing: the three wells drilled at vast expense have not turned up evidence of a commercially viable oil or gas field. With mounting debts and C$77 million (Canadian dollars, N$986 million) left in cash from investors, ReconAfrica management must instead prove to investors, the government and environmentalists that it is not selling a dirty dummy.
The allegation at the core of the New York class action suit is that investors were knowingly misled about the company's Namibian prospects to boost the price. To make matters worse, ReconAfrica has been accused of paying for articles, and YouTube endorsements to drive up the price of its shares.
ReconAfrica management has denied any wrongdoing: "ReconAfrica will continue to remain compliant and apply business best practices in all areas of operation," ReconAfrica spokesperson Ndapewoshali Shapwanale told amaBhungane in November.
She added that "ReconAfrica has not applied for, does not have the intention to, nor been granted or given, permits to allow fracking."
CLASS ACTION
ReconAfrica's latest credibility challenge flows from three class action lawsuits filed by shareholders in Brooklyn, New York. One was withdrawn but the two remaining cases were consolidated into one in April 2022.
The investors allege ReconAfrica issued misleading statements that convinced them to buy shares between February 2019 and September 2021 – shares that have since tanked in value.
The company disputes the allegations and last month asked the court to dismiss the case, arguing that the charges are all speculative and fail to meet the legal standard.
The investors disagree: "This is a straightforward securities fraud case. Defendants concealed material information from the public about the data from their first two oil and gas test wells, and about their plans to frack in Namibia, while selling millions of dollars of ReconAfrica stock to unsuspecting investors," lawyers for the aggrieved investors wrote in papers filed last month.
SHARE PRICE
After acquiring the Namibian exploration licence, ReconAfrica's share price increased from US$0.08 (N$1.39) in 2015 to a record high of more than US$10 (N$174) in 2021 despite finding no oil.
The major increase, from a price of about US$2.76 (N$48) to US$3.54 (N$62), occurred after ReconAfrica announced the results of the first test well in April 2021, claiming to have discovered a "working conventional petroleum system", in other words a body of crude oil.
But the company's shares began falling as more results were published.
The major share price plunge occurred after Viceroy Research published its report on 24 June 2021, a month after ReconAfrica drilled its second well.
The Viceroy report on ReconAfrica was devastating, noting, "[ReconAfrica's] mining assets are not highly speculative: they are borderline imaginary. Despite a C$2bn (N$25 billion) market cap, [ReconAfrica] has a near-zero chance of finding any asset of value in their exploration site, and an even lower chance to capitalise on any find."
CONTROVERSIAL
Viceroy is controversial. The short-seller bets against stocks that are targets of its research and then profits if the share price takes a dive based on its published reports.
South Africa's Reserve Bank governor Lesetja Kganyago has called Viceroy "a hit squad", but it has made some accurate calls, such as its report on Steinhoff, which flagged irregularities just hours after chief executive Markus Jooste resigned.
In its motion to dismiss, ReconAfrica points out that short-sellers are highly conflicted: "Viceroy's research is ... suspect, to put it mildly."
But the report had two powerful legs: raising serious doubts about Recon's reliance on fracking and voicing highly negative expert views about the results of ReconAfrica's first exploratory well.
It quoted Namibia's petroleum commissioner, Maggy Shino, confirming in a recorded interview, "There is no way we will license [ReconAfrica] or any other company to carry out fracking or unconventional hydrocarbon exploration in Namibia."
Shino later made a U-turn claiming that there "there is no truth in that report." In response, Viceroy released audio clips from the interviews, including her statements about fracking.
"Hi there, I will get back to you," she said when amaBhungane sent questions to her this month, but since then she has failed to respond.
FRACKING
Taking fracking off the table is potentially devastating for ReconAfrica.
Fracking was developed to extract oil and gas from terrain that was previously considered impossible to mine. If the company cannot frack, it could mean that it has over-sold the value of its finds.
This is one of the main issues raised by investors in the class action suit: they argue that ReconAfrica should have disclosed that Namibia had never and potentially would never allow fracking in the country.
Despite ReconAfrica's unequivocal comment to us that it "does not have the intention" to apply for a permit to frack, it has taken a different approach in court.
In court papers filed on 29 November, ReconAfrica's lawyers said: "... the risk that ReconAfrica might find oil that could only be extracted by fracking and might be denied permission to extract that oil is speculation and years away from being relevant to investors."
TEST RESULTS
The share-price dropped precipitously after the Viceroy report was released and again as results of further test wells were released.
Announcing the results of the third well in November, ReconAfrica said it has found no commercial oil but still insisted the data confirmed the presence of a working petroleum system.
Following this announcement, ReconAfrica's shares dropped by a further 39% to US$1.41 (N$24) per share on 9 November.
By this point, the Namibian government had already started cashing out of the project: in February, when the share price was still at around US$5 (N$87), ReconAfrica's Namibian partner, Namcor, agreed to sell half its 10% share back to the Canadian company.
Geologist Matt Totten Jr who has tracked ReconAfrica's dealings, said that in his opinion Namcor wanted to maximise the amount they can get from the project before ReconAfrica's share price dropped again.
The deal sees ReconAfrica acquiring 5% of Namcor's current 10% for N$30 million in cash. The rest of the amount will come from consideration shares to the value of N$379 million.
Through consideration shares, the deal sees Namcor forfeiting the 5% in the Kavango project but acquiring 5% in future projects owned by ReconAfrica.
"Namcor's decision to sell its stake is a vote of no confidence in the ReconAfrica (Kavango) project after evaluating geological tests," said Totten Jr.
Namcor spokesperson Utaara Hoveka said they are happy with the deal that gives them direct equity in ReconAfrica, giving it the opportunity to benefit from the company's operations both in Namibia and internationally.
BUYING POLITICAL CLOUT?
Shortly after the government first publicly said, in September 2020, that no fracking activities were planned in the country, ReconAfrica hired controversial businessman Knowledge Katti as a "media consultant".
Katti is widely known for his key role in a prior oil and gas scandal in Namibia and for his close ties to high-level Namibian politicians, including President Hage Geingob.
Katti has previously been exposed boasting of his ability to use political connections to "do the magic" with government officials.
In 2017, a joint investigation by The Namibian and amaBhungane reported on leaked emails from Katti that suggested he used political connections to make a quick buck from the sale of oil exploration blocks. He was able to "do the magic" to ensure the government did not cancel the concessions.
In 2013, Katti and his Brazilian partners in oil firm High Resolution Technology (HRT) announced to Namibians that they had discovered significant oil off the Namibian coast.
That announcement was made at State House in the presence of the then prime minister and now president Geingob – but no oil bonanza ever materialised – and only Katti and his associates profited from the hype, raising uncomfortable comparisons with the ReconAfrica case.
ReconAfrica dumped Katti sometime after the Globe and Mail in 2021 exposed his retention by the company.
In their New York case, the disgruntled investors suggest Katti was hired to "change the Namibian government's" negative position on fracking.
But ReconAfrica's lawyers say there are simply no facts to support this, dismissing it as pure speculation.
RESOURCE NATIONALISM
Yet evidence of the way being smoothed for the company has raised questions about how it has gone about its business, with complaints emerging that the company and the government have taken shortcuts.
At the drilling site in Kavango, which is located 600 kilometres from Namibia's capital city, Windhoek, government officials rarely see what is happening and rely on information given to them by ReconAfrica experts.
The officials from the mines and energy ministry, environmental ministry, Namcor, agricultural and water ministry admitted last year before a parliamentary committee that they rely on information from ReconAfrica.
Further questions have been raised about how the company was allowed to begin its drilling activities without water permits.
ReconAfrica began drilling activities in January 2021, but only got permission to extract water in June. This is in violation of the law that states that anyone extracting water should first get a drilling permit. The extracted water was to be used in its drilling operations.
"They did it illegally. We had called them in. We reiterated that the rule is they should not drill for water without any permit. We threatened not to issue a permit anymore if they carried on like that," minister of agriculture, water and land reform of Namibia Calle Schlettwein said.
When officials from the same ministry visited one of the company's sites in February 2021 to investigate, they were refused entry. They were told that they couldn't enter the site due to high-risk operations taking place at the time of the visit.
The officials only went back four months later, which coincided with the issuing of the water permit.
"I must say the officials didn't do a thorough inspection after issuing the permits," Schlettwein admitted.
OTHER MINISTRIES
Other ministries such as the environment and tourism, mines and energy have also been cited.
The Kavango East Communal Land Board, a critical stakeholder in the area, said it was not consulted before the minister of mines issued an exploration permit to ReconAfrica, nor was it consulted as part of the mandatory public participation process when ReconAfrica was drawing up an Environmental Impact Assessment (EIA).
"The ... ministry ought to have notified the board and the traditional authority of the intention to apply for oil and gas exploration before such applications were brought by Recon Africa," Bernadino Mbumba, chairperson of the Kavango East Communal Land Board, said.
In terms of the Communal Land Reform Act, ReconAfrica should have applied for a lease over the land where it planned to drill its test wells.
It did not, and the land board – its hands tied by the national government – has taken no steps to stop the company.
"Who are we as the land board to stand and say no [to ReconAfrica]?" Mbumba asked.
DESPERATE FOR JOBS
A year-long government investigations report, tabled in parliament in July, states that a large number of local citizens are supporting ReconAfrica because of the hope of getting jobs.
ReconAfrica said it has employed about 300 Namibians – a claim rejected by the parliamentary committee. "The reality on the ground does not reflect that," parliamentary standing committee on natural resources chairperson Tjekero Tweya said.
The report also said the hope of employment and infrastructure development are the main reasons why the local communities are supporting ReconAfrica's oil and gas exploration activities.
In 2021, through its environmental, social, and governance (ESG) programme, ReconAfrica said it committed C$10 million (N$128 million) towards ESG projects.
ReconAfrica said they have drilled 26 water wells at the cost of N$13 million. AmaBhungane could not independently verify this as questions sent to the mines and energy ministry were not answered and referred back to ReconAfrica.
But the promise of jobs and water is only part of the company's public relations strategy.
The disgruntled investors also claim that ReconAfrica has spent at least N$700 000 promoting their stock through YouTubers and other unlicensed stock promoters, according to court papers.
In October, the media ombudsman ordered the Namibian Sun newspaper to apologise to its readers for publishing an article under the headline "This is what we want", while failing to disclose that the article was in fact an advert, paid for by ReconAfrica.
AUDITORS RESIGN
For an exploration company like ReconAfrica, credibility is everything: without productive oil or gas wells, the company it has no real income and needs to raise money from investors to keep operating.
In another blow to ReconAfrica's reputation, the company unexpectedly announced on November 24 that auditors Deloitte had resigned.
The company stressed that auditor reports for the years ended December 2020 and 2021 did not express a modified opinion and there had been no "reportable events", which are generally a flag for issues raised by auditors that could not be resolved.
Nevertheless, the resignation does nothing to help the credibility of a company desperately needs to stay in business.
In its latest interim financial statements to end September, published in November, the company revealed that it had C$77 million (N$986 million) in cash, while also disclosing potential new liabilities of C$73 million (N$935 million) in royalties payable.
RENAISSANCE OIL
The royalty debt flows from ReconAfrica's controversial takeover of Renaissance Oil, a related party in which the ReconAfrica founder and executive chairman Craig Steinke had a major interest.
Buying Renaissance gave ReconAfrica access to a contiguous exploration licence across the border in Botswana, but brought on board significant liabilities relating to Renaissance's struggling Mexican oil interests, including the royalty debt, which has been outstanding since October 2019.
Meanwhile in July, Canada's Globe and Mail reported that the Royal Canadian Mounted Police (RCMP) had launched an investigation into ReconAfrica's activities in Namibia.
The newspaper said that according to Canadian witnesses interviewed by the RCMP, the probe seemed focused on two issues: ReconAfrica's ties to politically-connected figures in Namibia and the company's share promotion activities, including its public statements about the geology of the exploration site.
The story emphasised the police have made no formal allegation of wrongdoing against ReconAfrica, and the investigation could conclude that no charges are warranted. – amaBhungane Centre for Investigative Journalism/Fin24
* The ReconAfrica deal involves many countries and many currencies. To make it easier to follow we have added the rand/N$ value at Thursday's exchange rate for US dollars ($) and Canadian dollars (C$).