Interview with Eytan Uliel, CEO of Challenger Energy Group PLC

Recording date: 26th March 2024

Challenger Energy Group (LON:CEG) offers investors a speculative and lucrative opportunity to gain exposure to Uruguay's nascent offshore oil industry. The junior explorer has secured a leading acreage position in the South Atlantic country and recently brought in oil major Chevron as a deep-pocketed partner to fund exploration.

Uruguay is emerging as a potential global oil hot spot, spurred by massive finds in geologically analogous Namibia. The discovery of the Venus and Graff fields offshore Namibia in 2022 confirmed the presence of working petroleum systems along the margins of the Atlantic, related to the time when Africa and South America were joined together in the Gondwana supercontinent.

Challenger was an early mover in Uruguay, securing the OFF-1 and OFF-3 licenses covering a vast area off the country's coast in 800-900m water depths. The company has since shot 2D seismic and identified a series of large prospects with multi-billion barrel potential. This was enough to attract Chevron, which farmed into OFF-1 in late 2022 and agreed to fund a 3D seismic survey and exploration well.

The Chevron deal is highly favorable to Challenger. The U.S. supermajor 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, leaving Challenger with a 40% fully carried interest.

3D seismic acquisition is slated to begin in late 2024 or early 2025, with processed results expected around mid-2025. Assuming the results are positive, the joint venture will have until August 2026 to decide whether to drill a first exploration well or relinquish the license. Challenger is seeking to replicate its OFF-1 success on OFF-3 by bringing in another partner after completing initial technical work.

CEO Eytan Uliel, an experienced natural resources executive and deal maker, estimates Challenger's chances of drilling at least one well in Uruguay at 75% or greater. While exploration is inherently risky and there are no guarantees of success, the prize on offer is huge. A commercial discovery would be highly profitable to develop given Uruguay's attractive fiscal terms, including low taxes and royalties.

Despite the potential upside, Challenger trades at a market capitalization of just £15 million (~$19 million), implying investors are heavily discounting the company's chances of success. The main risks are exploration and financing. And as a small company, Challenger will likely need to raise additional funds or sell down its stake to support future activity. But Uliel, who owns 10% of the company, sees this as a normal part of the business and is unromantic about asset sales if they maximize shareholder value.

In summary, Challenger Energy Group provides a timely and high-leverage bet on Uruguay's offshore potential. If the drill bit proves kind, this £15 million minnow could soon be swimming in a sea of black gold.

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