Reconnaissance Energy Africa Ltd (RECAF)

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SHORT SELLERS FACE SIGNIFICANT RISKS IN THE WEEKS & MONTHS AHEAD

Given the size of their short position, there are several high-impact events that could quickly result in share price increases that could put the short sellers in a precarious position. These include the following:

1 – The 8-2 Makandina (P33) well, which is being drilled based on seismically defined traps, was spud on 6/25/22 with an estimated completion date of 45-60 days. Results from this well could be made available any day now.

2 – In his recent presentation at Enercom in Denver, Scot Evans announced that the JV data room will be opened in Q3 2022 (within 37 days of this post). With three more wells, a sidetrack of 6-2, and another round of seismic scheduled for the fall, many in the investor community view this as bullish. The reason for this is that logic dictates that ReconAfrica would not open the data room if they didn’t have anything to show to potential JV partners. By the time the data room is open, ReconAfrica should have the results of 8-2 in addition to the fully interpreted second round of 2D seismic, and they have certainly seen preliminary results that have not been shared with the public at this point in time.

3 – Recent attempts to derail ReconAfrica have failed. A challenge to the permitting process was ruled in ReconAfrica’s favor by the high court on 7/29/22. ReconAfrica has also received a three-year extension to its Environmental Clearance Certificate (the “ECC”), from the Office of the Environmental Commissioner, Ministry of Environment, Forestry and Tourism of the Republic of Namibia on 8/17/22. ReconAfrica now faces no foreseeable obstacles to future exploration, and satellite imagery confirms that preparations are continuing at a breakneck pace on the upcoming 3-1 and 2-7/5-1 well sites (see my previous posts on satellite images).

4 – Short sellers face additional risks if any of the aforementioned events triggers interest from commercial or institutional investors. Currently, retail investors hold the majority of shares, but this could change at any time.

LONG-TERM INVESTORS HAVE SIGNIFICANT PROTECTION AGAINST ADVERSE EVENTS

Negative results from the 8-2 well would certainly have a negative effect on the share price, but there are several factors that provide a cushion to long-term investors. These include the following:

1 – The results from the 8-2 well are not binary. ReconAfrica holds leases in Namibia and Botswana that encompass 8.5 million acres. Following 8-2, ReconAfrica intends to drill three more wells, run a sidetrack on the original 6-2 well, and obtain a third round of seismic acquisition. With significant cash on hand, ReconAfrica is fully-funded for these projects. Furthermore, the Netherland Sewell report issued earlier this year states that “prospective resources” (P50, 18% recovery) are estimated to be 1 billion barrels of oil and 1.4 TcF of natural gas, and this was based on two test wells and the first round of seismic. Regardless of the results, this is a very large basin with significant potential. An adverse result on 8-2 will not cause the share price to drop to zero.

2 – Short sellers still need to cover to make a profit. With 5,523,609 shares shorted, short sellers will find it difficult to repurchase shares to cover their sizable short position without driving the share price higher. Even with negative results from 8-2, they may not be able to cover, with the desired profitably, by the time the next well reaches total depth.

PERSONAL COMMENTARY

At this point, I do not understand what the short sellers are thinking. Selling short is like selling uncovered call options. It has limited upside potential and unlimited downside potential. At the current share price, short sellers hit the point of diminishing marginal returns a long time ago, but they inexplicably continue to borrow and sell. While they have proven that they can cause a decrease in the share price, they have done so at a great cost to themselves (interest expense, risk, etc.). Even if their dreams come true and the stock price falls to zero, the amount they will make is not nearly enough to offset the enormous risk they are taking. As a long-term investor, I believe that they are laying the groundwork for an incredible rebound in the event of positive results.

The stacked area graph below charts the change in short interest since it hit a low point of 94,930 shares as reported on 3/31/21. Since then, short interest now stands at 5,523,609, a staggering 5,719% increase.

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