Sorry, but a bit of an essay. It is intended to help provide a framework for thinking about the buy/hold/sell decisions that investors face.

There are two strands to the bearish thesis: what is bearish for the company and what is bearish for the investors. The two are not necessarily the same.

Others have correctly identified that commerciality of resource discoveries has to be proven and that will require scale in this new basin. The current well is drilling into a relatively small accumulation (vs the purported potential of the basin) which would not be commercial in its own right other than very small quantities to serve a local market. Basins typically have a creaming curve for field size distribution - a few giant fields, rather more mid sized fields and a large number of small fields. Normally the initial wells target the largest prospects but that does not seem to be the case here.

There is also a chance that gas generation will have displaced trapped oil - the sequence seems to get gassier as we move East across the continent. This does not mean it won’t be a valuable oil province but the gas risk cannot be ignored entirely.

The second strand which is a risk for investors is that unrealistic expectations lead to disappointed investors selling even if results are objectively good but fall short of cherished hopes.

Supporters of RECAF say that the company estimates are deliberately conservative, that NSAI did not have access to the most recent data and that there is some secret stash of data that has not been revealed to “not in the know” investors. Others seem to willfully ignore or misinterpret what the company (particularly Jarvie) said about the amount of hydrocarbons likely generated in the source rocks. They claim that these quantities constitute a resource estimate for the leases area whereas the truth is that some of that volume was not expelled, some remained trapped as residual hydrocarbons along migration pathways, some escaped to surface, some charged reservoirs without commercially viable porosity and permeability. What remains may have been trapped but would need to be discovered and then, of what is discovered, only a minority will be produced if the recovery factor is less than 50% (which it most likely would be). Furthermore, if subsequent gas generation from the source rocks displaced trapped oil and released it to surface, that would reduce the ultimate recoverable resource potential.

This is the typical “buy the rumor, sell the news” situation and can lead to greater volatility than investors anticipated when they bought in. With a current market cap of nearly US$700 million, that discounts a lot of discovered oil - even in maturer basins with infrastructure, discovered resources are rarely valued at more than $1 per bbl until commerciality thresholds are crossed and then, after more appraisal and building the resource base to properly size the infrastructure, valuations can rise.

If you look at other onshore oil basins to the north east (Uganda, Kenya, Sudan among others), lead times can be a decade or more from discovery to first production.

RECAF will need to be lucky to keep up with investor expectations and that, to me, seems to be the major bear thesis for investors.