Challenger Energy Group Chases Oil Riches in Uruguay with Chevron in Tow

• Challenger Energy Group is a junior oil and gas exploration company focused on offshore Uruguay
• Challenger secured two large offshore blocks in Uruguay in 2020 through good timing, foresight and "luck"
• Chevron farmed into one of the blocks, agreeing to fund seismic and drilling costs in exchange for a 60% stake
• 3D seismic is planned for late 2024/early 2025, potentially leading to an exploration well decision in 2026

High Risk, High Reward Oil Play: Upcoming Seismic and Drilling Catalysts

Challenger Energy Group presents an intriguing high risk, high reward investment opportunity for those looking to gain exposure to a potentially major new offshore oil province. The AIM-listed junior explorer has strategically acquired a leading acreage position off the coast of Uruguay, attracting oil major Chevron as a deep-pocketed partner. With 3D seismic and drilling catalysts on the horizon, now may be an opportune time for risk-tolerant investors to take a closer look at this little-known story.

Interview with Chief Executive Officer, Eytan Uliel

Experienced Leadership

Challenger is led by CEO Eytan Uliel, a veteran of the natural resources sector. Uliel started his career as a corporate lawyer in Australia before transitioning to investment banking, where he specialized in financing resources and energy projects across Asia-Pacific. This included co-founding Arrow Energy, which was acquired by Shell and PetroChina for A$3.5 billion in Australia's largest ever corporate transaction at the time.

Since then, Uliel has continued to create value for investors, including selling assets to UK-listed companies. He joined Bahamas Petroleum, Challenger's predecessor, amid the COVID pandemic and repositioned the firm to focus purely on Uruguay's emerging offshore play. As Uliel puts it, "I come from a background in private equity. I'm not romantically attached to any of our assets. I'm about trying to deliver a solid return to shareholders within the framework of high risk, high reward."

Alongside Uliel is an experienced board with decades of experience at oil majors like Shell and BP. Challenger operates a lean technical and commercial team, but one with, in Uliel's words, "a lot of bench strength and big company experience, which has proved invaluable" in attracting partners.

Securing Prized Acreage

In 2020, Challenger saw an opportunity to pick up a highly prospective license offshore Uruguay. "It was a mixture of timing, foresight and good luck," explains Uliel. Uruguay was preparing to launch its first offshore licensing round in early 2020, but the process was disrupted by the onset of COVID. With no competition, Challenger was able to secure the OFF-1 block "that in ordinary circumstances we wouldn't have a chance of getting."

OFF-1 and the adjacent OFF-3 license subsequently awarded to Challenger cover a massive area off Uruguay's coast in 800-900m water depths. The blocks are surrounded by acreage snapped up by industry heavyweights like Shell, YPF and Apache.

The key to unlocking Uruguay lies in its geological similarity to recent prolific discoveries offshore Namibia by Shell and TotalEnergies. The two continents were once joined together and share related petroleum systems and source rocks. Uliel calls it "the geological mirror." Those Namibian finds sparked a flurry of interest in Uruguay's potential, but Challenger was already in pole position. "We were the only license holder at that point in time and in less than six months all the majors piled in," Uliel recalls.

Landing a Major

With its first-mover advantage secure, Challenger went to work appraising the OFF-1 license. The company reprocessed existing 2D seismic and delineated a series of large prospects with multi-billion barrel potential. It was enough to attract a big fish partner in Chevron.

The U.S. supermajor farmed into OFF-1 in late 2022, agreeing to fund a 3D seismic survey and exploration well. The deal terms are highly favorable to Challenger. Chevron will pay $12.5 million in cash and carry Challenger's costs for a $40-50 million seismic program. If the partners proceed to drilling, Chevron will pay 80% of the first well, estimated at $80-100 million, for a 60% stake. That leaves Challenger with a 40% fully carried interest.

Commenting on the transaction, Uliel states:

"The reason why you bring in a company like Chevron as your partner is they are not scared of drilling multiple wells. They can handle $80 million 10 times in a way that a small company can't."

3D Seismic and Drilling Catalysts

With Chevron on board, Challenger is preparing for a catalyst-rich period. 3D seismic acquisition over OFF-1 is slated to begin in late 2024 or early 2025, with processed results expected around mid-2025. Uliel sees limited technical risk in this phase:

"There is a reasonably low risk on 3D. You've already seen what you see on 2D. The overwhelming likelihood is when you do 3D, what you're doing is getting better definition of what you already knew and using it as the basis for picking a drilling location."

Assuming the 3D results are positive, the OFF-1 joint venture will have until August 2026 to decide whether to drill a first exploration well or relinquish the license. Chevron would operate the potential well and cover 80% of the costs under the terms of the farm-in.

Additional Upside

In January 2023, Challenger was awarded the OFF-3 license adjacent to OFF-1. The company holds a 100% stake and is seeking to replicate its OFF-1 success by bringing in a partner after completing initial technical work. In contrast to OFF-1, OFF-3 already has 3D seismic data from prior surveys. "It just needs to be reprocessed and that kind of cuts a few years out of the cycle until when you get to an initial well," explains Uliel.

Between its two blocks, Challenger has a shot at participating in two high-impact exploration wells in the coming years, either of which could be a gamechanger for the company. Longer term, any exploration success would be highly profitable to develop given Uruguay's attractive fiscal terms, including low taxes and royalties.

Managing Risk

Frontier oil exploration is not for the faint of heart. Uliel is direct about the risk:

"There is a chance you drill a well, there's nothing there, and you lose everything. But there is a chance you find multi-billion barrel oil fields and then you're seeing 100-to-1 on your investment."

Challenger has a market capitalization of just £15 million ($19 million), implying investors are heavily discounting the company's chances of success. But Uliel claims "it is just chronically undervalued" based on the metrics of the Chevron farm-out alone, which he says imply a value four times the current share price.

As a small company in a capital-intensive industry, Challenger will likely need to raise additional funds or sell down its stake to support future drilling, even with Chevron's backing. But Uliel, who owns about 10% of the company, sees this as a normal part of the business. "I'm not romantically determined to the be the guy who found the next biggest oil field in the world," he explains. "If there comes a point in time where the right thing to do is sell, you sell."

Conclusion

Challenger Energy Group offers a timely and high-leverage bet on Uruguay's offshore frontier. While not without risk, the prize of a potential multi-billion barrel discovery is alluring. With an experienced team, blocks in the right zip code, and a global oil major as a partner, Challenger has smartly positioned itself to maximize its chances of success while mitigating downside. If the drill bit proves kind, this £15 million minnow could soon be swimming with the whales.

The Investment Thesis for Challenger Energy Group

• Exposure to massive resource potential in an emerging oil province with Chevron as partner
• Near-term catalysts with 3D seismic in 2024-25 and potential exploration drilling in 2025-26
• Highly experienced management team with strong track record of value creation
• Potential 4x re-rating if market ascribes full value to Chevron farm-out metrics
• Consider building a starter position ahead of seismic and drilling newsflow and be prepared to take profits on success

Macro Thematic Analysis

Uruguay represents the latest potential global oil hot spot, spurred by massive finds in geologically analogous Namibia. The discovery of the Venus and Graff fields in the Orange Basin offshore Namibia by TotalEnergies and Shell in 2022 opened investors' eyes to the possibilities along the margins of the Atlantic.

The confirmation of working petroleum systems in this region validated long-held theories that the conjugate margins of Africa and South America share related geology, having once been joined together in the Gondwana supercontinent over 120 million years ago. While Namibia was the first to achieve a commercial breakthrough, the oil industry is hoping that success can be replicated in places like Uruguay.

As Challenger Energy CEO Eytan Uliel explains: "Once upon a time, 120 million years ago when the Earth was one big continent, Uruguay was exactly adjacent to Namibia. Then as the continents pulled apart and the source rock that is producing today's oil was laid down, what is in Uruguay is the same as in Namibia. It's the geological mirror."

That "geological mirror" has spurred a land grab in Uruguay as oil companies race to secure acreage, the first step in the long campaign to turn frontier prospects into commercial oil flow. Since the Namibian finds, majors like Shell, Apache and APA Corporation have piled into Uruguay despite it being relatively unproven. The upside is simply too large to ignore — a sentiment pioneers like Challenger are banking on.