13/05/2023

The stock market can be an enigmatic place, even at the best of times. What one can say in May 2023 with some degree of certainty is that these are not the best of times for the market. We also know that the transition from minnow to major as far as small cap companies are concerned is not an easy one. Companies can see their shares soar on a just a whiff of an idea, but can take what feels like an eternity to re-rate in share price terms, even when they have hit all their fundamental milestones.

Consolidation

The story in this respect as far as AXL is that the share have consolidated for the best part of a year around and below the 20p level, not being able to get into a new higher trading range. However, it would appear that there is every chance this will now happen in coming weeks. Indeed, from a charting perspective the reason for the delay in a significant rally so far this year, is that from January to May last year the shares rallied sharply from 7p towards 20p. They are now in a rising trend channel on the daily chart heading for 28p over the next 1-2 months, while recent 16p support is held.

2022 Annual Results

Nevertheless, as far as Arrow Exploration has been concerned over the past year, the market has seemed to want perhaps a rather unfair amount of evidence that the high-growth operator with a portfolio of assets across key Colombian hydrocarbon basins, had proven its mettle. There is little doubt that this month has seen the company do just that in the wake not only of spudding the Carrizales Norte-1 well on the Tapir Block in the Llanos Basin of Colombia, but also its 2022 annual results, with the impressive and significant jump in all the key fundamental metrics.

2022 results showed revenues up 400%, EBITDA up 1500%, production up 223% on 2021 numbers.

2023 looks set to be just as successful, $32m of capital expenditure is being spent on an extensive 3D campaign (completed) and ten wells. Three have been drilled and have added over 1000 bopd to production. The whole campaign is being funded from cash reserves and cashflow which is growing well by well. The budget was calculated on a $70 oil price and they forecast doubling their cash balance by year end to $25m.

Cash Position To $60m

2024 also will see more production growth and an extensive drilling campaign. The recently completed 3D campaign is converting leads to prospects which will be drilled out in 2024. One would expect to see more drilling of Carrizales Norte. If / when AXL receives the licence extension on Oso Pardo (of which they own 100%), this will more than likely get its own dedicated drill rig. The cash position is forecast to grow to $60m by the end of 2024.

That said, the key metric in investing is management. Marshall Abbott has established, grown and sold 8 O&G companies, all profitably; this is his ninth ‘rodeo’ and looks like being another winner. Abbott and his management are confident that they can grow production organically to 8000-10000 boepd from existing resources. With such a strong cash position, we should watch out for accretive acquisitions.

Carrizales Norte 1 

Although in current stock market conditions almost excuse can carry as far as being a reason not to re-rate a share price, with the latest news regarding Arrow encountering 148 feet of net pay, the final piece of the technical jigsaw in terms of the valuation of the company has been put in place. Effectively de-risked, there is now no apparent reason for the shares to trade below the 20p former resistance zone again.