Orcadian Energy (LON: ORCA) shares are up 65%. ORCA shares are up because the company has announced how it’s going to solve that knotty problem that all successful mineral exploration forms face. OK, so we’ve found something. Oil, gas, lithium, gold, whatever it is. But now we’ve actually got to go build the extraction system. These are not cheap - wells, pipelines, mines, processing plants, they require vast great bogs of capital. Well, OK, that’s what stock markets are for - places where you can raise the capital to then make a profit from. But such capital raises can be dilutive. Further, the smaller the explorer and the larger the find the more difficult it is to raise off a small shareholder base.
Orcadian has taken on particular pathway to solving this problem: “This will enable Orcadian and the Operator to progress the development of the Pilot field, one of the largest undeveloped discoveries in the Central North Sea ("CNS"), with significant upside potential in the surrounding area. The Operator will become operator of the Pilot development and will acquire an 81.25% interest in Licence P2244 and will become operator of the Pilot development. Based upon the Competent Person's Report ("CPR") prepared by Sproule in 2021, the Operator will acquire net reserves or resources of 63.4 MMbbl on completion of the deal, with Orcadian retaining 14.6 MMbbl of 2P reserves, carried to first oil. The Operator and Orcadian will work to deliver a Field Development Plan ("FDP") to the North Sea Transition Authority ("NSTA") for a polymer flood development of the Pilot field with industry leading emissions performance.”
Orcadian energy share price from Google Finance
The two basic and possible pathways. The first is that having found something worth exploiting Orcadian raises the capital to do the exploiting. That means raising truly vast amounts of capital. Then spending it on all the engineers, equipment and knowledge needed. Very little of that money sticks to the sides of the company. And as we all know profits are only ever a portion of costs.
The other way is simply to hand over (well, “agree to allow someone else to farm in”) the project to someone who already has all the equipment, the engineers and the knowledge. And let them have some percentage of the field for doing all the work. Say, let them have 81.25% of the field for doing all of the work.
Rounding it out a bit Orcadian might perhaps have made a 25, 30% (maybe, -ish?) return on capital raised to do it themselves. Here they’re getting a 20% return without having to raise new capital. All rather swings and roundabouts, a lower return but obviously lower risk.
Of course, this isn’t signed and delivered yet but it’s a perfectly respectable and sensible manner of dealing with that problem. OK, now we know we’ve got oil how do we raise the cash to get it out?
