Equity.Guru podcast: Renaissance Oil (ROE.V) partners with Russian giant in Mexico

Renaissance Oil (ROE.V) is developing a diversified shale and mature fields portfolio in Mexico.  The timing is fortuitous.

For 80 years, Mexico’s state-owned PEMEX was the only energy operator in Mexico. The country’s oil production fell for 15 years, declining from 3.4 million barrels a day (mb/d) in 2005 to 1.9 million (mb/d) now.

PEMEX lacks the technology and capital to unlock the value of shale.  It requires modern techniques to stimulate the gas bearing zones.  Pemex is now collaborating with international Oil & Gas companies.

Russian oil producer LUKOIL chose Renaissance as their partner to explore and develop the Amatitlán block in Mexico. LUKOIL has a market cap of $48 billion, a million of barrels of production and 100,000 employees in 40 countries around the world.

Craig Steinke, the CEO of Renaissance, spoke with Equity.Guru’s Guy Bennett about the opportunity in Mexico, significant 2018 revenues and the company’s international partnerships.

Listen in or read the transcript below!

 

Transcript

Guy:

Today I’m talking to Craig Steinke, CEO of Renaissance Oil which trades under the symbol ROE on the Toronto Venture Exchange. Renaissance has first mover status in Mexico’s energy sector which has recently transitioned from a government monopoly to collaborating with international oil companies or IOCs as they are called. Renaissance is intending to become a major Mexican oil producer, targeting the country’s untapped shale potential in the Tampico-Misantla Super Basin. Inside that basin, the company’s 60000 acre Amatitlan block is estimated to hold over 6 billion barrels of oil equivalent. That’s a lot of oil folks but this isn’t just about drilling and praying in Q4 to 18 Renaissance reported revenue of five point nine million dollars today we’re going to find out about ROE’s strategy to become a major oil producer in Mexico. Craig Steinke, welcome to Equity Guru’s, A Closer Look.

Craig:

Thank you

Guy:

Craig can you start out by giving the Equity Guru readers a bird’s eye view of Renaissance Oil?

Craig:

Certainly. Thank you. Yes. Renaissance is a Canadian listed, Canadian domiciled oil and gas company that solely focuses on developing hydrocarbons in Mexico.

Guy:

Yes

Craig:

We’ve we entered the country right on the heels of reform back in 2014. Yes. And so we’ve been down there for five years. We were the most successful company in the first onshore round of December 2015 where we acquired our three prioritized producing properties down in the state of Chiapas. And that really got us positioned in the country and then thereafter we had we had been analyzing the Tampico-Misantla Basin, which you’ve mentioned previously, for the prospectivity of the unconventionals or the upper-Jurassic shales. And we were very impressed by the data that we acquired as to the prospectivity of these shales. And as a result we were able to negotiate a deal in our favored block in Tampico-Misantla Basin with Lukoil where February 2017, so just over two years ago, we acquired 25 percent interest with options to increase our interest with the current partner interests up to sixty two and a half percent. And we took over operatorship as well.

Guy:

Yes.

Craig:

And that gave us… that position positioned us in the upper-Jurassic shale play that we’re very very confident we can commercialize along with Pemex and other players. Of course.

Guy:

Yes. Equity Guru readers are new to oil and gas investment. So I want to get clear on the story, the wealth creation opportunity without getting too technical. Right now I want to pull back even wider from your bird’s eye view. And ask you about the history of Pemex. Who are they? Why is this an important component of your story?

Craig:

Well certainly if it’s just to touch on Pemex as some people may be aware, the government in Mexico in 1938 nationalized the oil and gas industry and they… and so therefore Pemex was the only explorer, developer, producer in Mexico up until the end of 2013. So for almost 80 years they were the only oil and gas player in Mexico. And just stepping back, Mexico has been endowed with a world class petroleum system, absolutely world class. For example, there is the Cantarell Field offshore in the Gulf of Mexico which is the largest oil producer in the world. And you know a lot… the same play type extends onshore as well, so definitely a premier petroleum system. But… And for one company to be able to develop a whole, you know, a world class petroleum system it’s, you know, it’s quite a challenge.

Guy:

Craig, oil and gas is geopolitically sensitive. On July 1, 2018, Mexico elected a new leftist president nicknamed AMLO and he’s promised to strengthen Pemex. What’s the update on the politics in Mexico?

Craig:

Definitely AMLO wants to strengthen Pemex. His goal is within his term, his six year term, to increase production to two point four million barrels a day. Subsequent to his inauguration, the national production continues to be on decline to the point where I believe the April production was one point six eight million barrels a day. And they have to… The goal is two point four million barrels a day within now five and a half years. So it’s a tall order and Pemex does not have the capital or just the general wherewithal to achieve that lofty goal by itself. That’s my opinion. And you know you’ve seen as of yesterday, Pemex is now being downgraded by Moody’s and S&P to junk bond status and so their cost of capital has gone way up. And I think that the the new administration is now realizing the importance of working with IOCs in order to achieve those goals.

Guy:

Yeah. Yeah. Last week a soccer buddy proudly showed off his new electric car. And we hear a lot about green energy – electric vehicles, solar panels, etc. What’s your assessment of the demand side of oil say for the next 20 years?

Craig:

I’m all for green energy.

Guy:

Yeah

Craig:

But then you also have to be pragmatic. You know renewables are for wealthy nations.

Guy:

Yeah.

Craig:

The wealthier countries will continue to subsidize and develop the technologies for renewables.

Guy:

Yes

Craig:

And I think that’s the… you know that’s the right direction. But practically speaking, you know the underdeveloped, lesser developed countries, they don’t have the capital to, you know, to subsidize renewables to any large degree.

Guy:

Yeah.

Craig:

And they want to drive vehicles they want ambulances to help them when they’re sick. They want, you know, the latest medical devices which are largely or a good measure of them have been or are supported by petrochemicals et cetera, et cetera. You know they want what, you know, what wealthier countries have. And… and the base is hydrocarbons.

Guy:

I couldn’t agree with you more.

Craig:

I think the demand is going to be strong for a lot longer than the renewable pundits suggest that it will be.

Guy:

Yeah, I agree with you. I find it extremely hypocritical when wealthy western nations lecture poor countries about oil consumption. We got rich burning oil. So we have to keep that into account.

Craig:

Absolutely

Guy:

Craig can you tell me more about the Tampico-Misantla Super Basin.

Craig:

Yeah, the Tampico-Misantla Super Basin, it was qualified, as a super… quantified as a super basin by IHS market a couple of years ago. Just due to the fact that it’s a very, very prolific basin and it’s vastly underdeveloped. It has a, you know, a significant source rock in the upper-Jurassic shales. And then you know that’s where all the oil and gas emanates from, is the source rock or the shales. But earlier in this interview we discussed the Cantarell field, the largest offshore field in the world, in the Gulf of Mexico, that is sourced by the upper Jurassic shales. Now the upper Jurassic shales don’t stop at the shores of the Gulf of Mexico, they extend to the west on land supporting the Tampico-Misantla Basin. So you have a world class source rock and a vastly underdeveloped onshore basin called the Tampico-Misantla Basin.

Guy:

Great. Let’s talk about your block within it.

Craig:

Yeah. The Amatitlán, the sixty thousand acre block, is right in the heart of the shale play. Renaissance has assembled a shale team that is… that has had much success. They are actually the shale team… the technical guys or the technical people who are really cracked the code on liberating gas from the shales at the turn of the century in the Barnett Shale. And so they’re the right team to come to a new play. We have spent a lot of time and and capital analyzing the sweet spots of this upper Jurassic shale play and that drove us to the Amatitlán block where we acquired an interest in 2017.

Guy:

Craig with gold mining, you’ll often hear about a geologist with a massive win on his resumé and sometimes you can’t help thinking, maybe you just got lucky. You know, staked some land, drilled it, found a ton of gold. How is an oil and gas technical team different from a gold mining team i.e. how did your team crack the code?

Craig:

Back in in the 90s, early 90s, George Mitchell of Mitchell Energy had a vision where it could be possible to liberate gas from shales and again you know most of the hydrocarbons are in the shales. That’s the kitchen, that’s where it’s all cooked. and then  the oil and gas leaks off or emanates from the kitchen or the shales into more porous, permeable, let’s call it sandstone. But rock anyway, largely sand stones. And that’s what we’ve been… we had been producing thus far up until the turn of the century and producing from the more porous and permeable rock and basically the shales were viewed as more of a nuisance rock. But that’s where all of the gas comes from, so George Mitchell had this vision where you know if we could get to the kitchen, you know, where the bounty is bigger where all the oil and gas is and liberate gas, at that time he was just focusing on gas, liberate gas from the shales. I mean that would be a world class supply of hydrocarbons. And it was his vision to liberate gas from the shales but it was the four technical guys, four key technical guys within Mitchell Energy that were the guys who, they didn’t get lucky, they just figured it out.

Guy:

Craig, you have a partnership with the Russian oil giant, Lukoil, who produce about one point eight million barrels of oil per day in 42 countries around the world. How did you end up partnering with them and how does that partnership work?

Craig:

Yes, well, Lukoil is, you’re right, it’s a very large oil and gas company, I think one of the top 10 in the world.

Guy:

Yeah

Craig:

They had acquired the Amatitlán property prior to Renaissance’s involvement.

Guy:

I see.

Craig:

They came to Mexico largely for the off shore – the Gulf of Mexico. But this you know the Amatitlán property got them positioned in the country. They recognized the opportunity in the shales and that they weren’t set up properly to, within Mexico at that time, you know, to operate the property and they’re not… you know… they’re deep… you know, they’re an offshore player largely. And that’s why they came to Mexico and so to put a whole unconventional or shale team together just wasn’t part of their business plan at the time. Where simultaneous with them acquiring Amatitlán, Renaissance succeeded in round one point three in December 2015, making it a bona fide operator, producer operator Mexico, which is very important. Amatitlán needed an operator. On top of that, they recognized our shale expertise. So the two… if you couple the operatorship and the shale expertise together, we were a natural partner for Lukoil to invite in to help develop the Amatitlán property.

Guy:

What exactly is Pemex’s role in Renaissance energy? Is the Mexican government an active operator?

Craig:

Yes, they’re active operators – onshore, offshore in Mexico. They’ve, you know, they have shale lands around the… or lands around the Amatitlán property of which they’ve drilled some shale wells recently with significant success.

Guy:

What is your current ownership position in the Amatitlán block? And can you increase this position? If so, to what?

Craig:

We currently hold 25 percent of the current partner interest.

Guy:

Yeah.

Craig:

We have negotiated options with Lukoil to increase our interest to sixty two and a half percent of the current partner interest. Pemex will also take a working interest in the Amatitlán property and so we feel that we will have somewhere between 40-45 percent of the Amatitlán property when the dust settles.

Guy:

Craig can you talk about your Q4, 2018 results and the full year 2018 results?

Craig:

Yes. All that production and associated revenue comes from the Chiapas blocks that we acquired in round one point three in 2015. The fact that the production has barely declined since 2015 is a testament to the quality of the petroleum system in this Chiapas area. We have a four-well drilling program as part of our commitment to the Mexican government which we plan to employ… commence the operations in the fall of 2019. And you would see us drilling the four wells in early 2020.

Guy:

I see.

Craig:

That should account for some significant increase production. These are very prolific wells.

Guy:

Last year you drilled 18 wells which accounted for 11 percent of the wells drilled in Mexico. How were you able to be so productive?

Craig:

Well, we drilled the 18 wells on the Amatitlán property, of which 17 were drilled into a more shallow type sand formation called chicontepec. And the 18th well which we drilled the fall of 2018 is called the profeta, a very, very important well, we drilled into the upper Jurassic shales. There’s three formations in these upper Jurassic shales of interest (INAUDIBLE) the Pimienta, that everybody talks about, you know just below that is the Taman and below that is the Santiago. And we drilled the vertical leg of the profetta well and we cored it. And we took the cores to Houston to Core Labs which is the premier core lab in the world and we had an analyzed and it you know, the analysis has come back supportive of our original analysis, along with some pleasant surprises. So we’re very, very delighted with the results of this profetta well. And that’s number 18.

Guy:

Right. Craig let’s say you sell a billion dollars worth of oil in the next five years. What’s the revenue split between Renaissance oil, Lukoil and Pemex.

Craig:

The Amatitlán permit, the sixty thousand acre service contract with Pemex currently.

Guy:

Yeah.

Craig:

Now we’ve received board of director approval in June 2018 to migrate it into a more traditional license contract where each of the players would have a working interest.

Guy:

I see, this as the CIEP.

Craig:

Well yeah. Currently it’s a CIEP which is a form of a service contract. And we’ve received board of director approval to migrate it to a license contract. And we’re just going through that process now

Guy:

Right.

Craig:

To migrate it to a license contract. So exactly what our working interest is going to be you know post migration, we don’t know exactly but, you know, we expect that renaissance will have a very healthy working interest.

Guy:

I see. Is that something you’re working on with Lukoil?

Craig:

With Lukoil and Pemex currently.

Guy:

Sure, all three of you need to agree on a formula.

Craig:

We’re in we’re just going through that process now.

Guy:

I see. Do you have any timeline for when there might be hard news on that?

Craig:

I expect within the next 60 to 90 days, we should have some pretty solid concrete news on the migration to a license contract. You know the… we believe we would have already migrated the contract by now – early June 2019, but with the new administration in place as of December 1st, 2018, there’s been some delays but we appear to have the migration on track and we expect some good results in 60 to 90 days.

Guy:

Great. What is the blue sky story for Renaissance Oil? Where do you see this company in five years

Craig:

Well, we believe that the new administration is realizing the importance of the international oil companies, IOCs, in helping them achieve their goals and that is to increase national oil production to two point four million barrels a day and strengthen Pemex obviously in the process. We feel that we can work well with Pemex. We’ve proven to Pemex that Renaissance is a, you know, an active player and in a real performer in Mexico, by way of the wells that we’ve drilled and the associated costs. So we have proven ourselves to be a valuable partner to Pemex. So I believe, to answer your question, I believe that over the next five years, we will be able to work closely with Pemex to help them achieve their goals, along with Renaissance developing into a major onshore player in Mexico with the focus on the shales. The shales are… we only… we have sixty thousand acres currently gross in the shale play which comprises about eight hundred thousand acres. So we expect not only to to commence the development of the shales on Amatitlán but to acquire more shale lands in the sweet spot of this shale play and develop those as well.

Guy:

Yeah I mean there’s no doubt in my mind that Renaissance Oil has an unbelievably large upside for any investor who wanted to get in now.

Craig:

Yes I agree. We’re just getting started with Amatitlán. As you say, Amatitlán has over 6 billion barrels of oil in place. We believe it’s reasonable to assume that we can recover 8 to 10 percent of those 6 billion barrels of oil. And so that’s approximately a half a billion barrels. Renaissance has 40 percent of that. That represents billions of dollars worth of value to the shareholders. And then further lands that Renaissance may acquire of course just offers more upside.

Guy:

Exactly. Thank you so much for your time today.

Craig:

You’re welcome.

 

 

Full disclosure: Renaissance Oil is an Equity.Guru marketing client, and we own the stock.

Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.

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