Sunday, 22 December 2013

Weekly Review 21st December

Monday saw Bowleven announce that their FD has resigned. He is moving on to be CFO of an oil services co in the UAE from the New Year. He will be replaced by Kerry Crawford, currently deputy FD. It’s reassuring to know there won’t be a period of disruption whilst we wait for a new FD, but I did sigh when I read that she has been head of investor relations since 2008. So not much change likely in that area unless there is a subsequent new Head of IR? Bowleven also held their AGM this week. Big thanks to the likes of Guernsey81 and TimKempster who made it there and took time and effort to post their notes and reflections on the meeting – thanks for your trouble. To see Guernsey81’s full notes made on ADVFN click here
It sounds like it was a very good meeting, in that investors got the chance to ask challenging questions and there were some real reflections by Kevin and the board. Whether the audience found Hart sincere & professional or on the ropes there seems to be mixed views but overall it seems clear that they do recognise mistakes have been made and that this had had a severe impact on investors. I remain bullish on Bowleven, more so now, as the valuation of oil and gas in the ground is so small that at the very least someone will take a sniff if Bowleven don’t develop it themselves. I believe environmental approval will come in the first quarter of 2014 and with that I would hope for some of our costs to be reimbursed by Petrofac. We know that Ian Suttie and ii’s were prepared to subscribe for shares at 45p and yet the market is currently valuing Bowleven at only 36p. There doesn't seem to be any reason for this unless there is more bad news to come. Considering the market didn't know there was a placing coming, I can’t see that it can know there is more bad news, so a price below 45p in my opinion is all just about sentiment and nothing else. I know that some believe that the FD moving on suggests there is more bad news to come, but the RNS is clear that he has another job in the UAE and maybe it’s really just the case of him moving on after 9 years or maybe he has even been given the push?

This week saw good news from Xcite energy in that they have refinanced their US$72m loan notes which were due early next year, removing another small piece of uncertainty and providing a clear path now to farm out and RBL. The new loan notes have a slightly lower rate of 12% and a term of 360 days, extendable by another 360 days with the consent of the holders. Xcite also issued the same investors 1m shares at 98p immediately, and further warrants for another 1m shares exercisable for up to 3 years at 98p. I don’t know about you but that struck me as a little golden handshake for the deal – a “take some loan notes from me and I’ll let you have a million shares in my company at today’s cheap price and then you know you’ll get 3 or 4 times that back in 3 years or when we’re taken over” type sweetener. But what do I know, I’m just happy to see another piece of the jigsaw fall into place. 

Range Resources announced two lots of news this week, both focusing on Trinidad. The first was that they had formally executed their farm in with Niko Resources giving them exposure to another 280,000 acres on Trinidad. Range will earn 50% of Niko's existing interests in the deep and shallow areas. They will drill two onshore wells to test c.22% of the 100MMbo prospective resource estimate. The first well is targeted to spud in early 2014. Range will fund the cost of the two onshore wells and one appraisal well (if successful), and will share costs equally with Niko thereafter, including the cost of drilling an initial offshore test.  The offshore well will target the 33MMboe best case prospective resource. The second piece of news was that Range has received environmental clearance for up to 40 wells on their Beach Marcelle license in Trinidad. Final project plans can now be submitted and operations are due to start in Q1 2014. The intention is to develop Range’s currently undeveloped 12.8m barrels of 1P reserves.

Is it only me that was left scratching their head when reading the following from Range’s RNS on Thursday..... “The Company is also evaluating the option to deepen up to 8 wells.....successful deepening of existing well bores is expected to recover up to 90MMbo per well at approximately 80 bopd per well of initial production, and at costs significantly lower than drilling and completing new wells". By my calculations 90MMbo of oil at initial rates of 80bopd will take over 3065 years to extract. It might be cheap but it’s very slow! Probably why Range takes so long to do things, they are working on a timescale beyond any of our lifetimes! And then there was the usual issue of shares to accompany the RNS. This time 10m shares and 2m options in lieu of finance fees.

St Peter Port Capital Ltd (SPPC) caught my attention on Tuesday. They released their half year report. A small AIM investment company, they have investments in 39 companies, many of them pre-listed resource stocks, including Oil, Gas, Mining, Uranium etc. According to their report their NAV is 100p per share, but they trade at 55p. They reportedly have several investments looking to deliver “liquidity events” in 2014 including potential IPO’s. The Chairman stated “There are good prospects for sizable transactions in 2014, which we expect generally to occur at a significant premium to our current carrying cost” whilst their investment adviser said  “We remained primarily focused on bringing forward the crystallization of value in the portfolio, particularly in our major holdings.  These offer the possibility of very large further gains if progress continues as it has recently." The liquidity is hopeless but at 55p there could be upside if one or two of their holdings manage to deliver some of these “liquidity events” in 2014. I’m not buying as I have enough on my plate but thought it was of interest.

Wednesday I noticed Edge Resources’ (EDG) drilling update. This oil and gas company focused on Canada has a number of 100% owned interests but had struggled with debt in the past and had to refinance in September. Shares were 22p not long ago but are currently just under 7p which gives a market cap of only £11m. They confirmed this week that they have successfully drilled and cased 4 wells in their Eye Hill license with all 4 wells expected to produce at commercial rates. Production testing should commence before Christmas. The wells should lead to increases in reserves and add significant cash flow and margin. Brad Nichol CEO, sounded very excited, even thanking “mother nature” for rewarding them with a couple of nice surprises! A new reserves report is due in the spring and 3 of the 4 should be producing before the year end. It seems like they could be another Nighthawk in terms of a turnaround story moving forwards in 2014 but DYOR as I have only skimmed across their details. Read the RNS here

Rockhopper (RKH) announced their interim results for 6 months to the end of September 2013. They have resolved their capital gains tax argument with the Falkland Government and continue to move the Sealion development forwards. Interestingly they reported that ongoing technical work has provided them an even more positive view of the scale of Sea Lion. The latest modelling has led the joint venture parties to increase the estimate of the field's 2C resources from 321 million barrels to 337 mmbbl, with a further 57 mmbbl contributed by the satellites. If there is no gas cap this could rise further by another 65mmbbls. They will be making decisions on concept selection in 2014 as well as moving towards the next round of exploration drilling across their licenses targeting almost 800m (net to Rockhopper) barrels of oil initially in place. Nothing like a bit of Falklands Fever for 2015 eh?

Berkeley Minerals (BMR) have been on a long journey. News of a step forward came this week in the shape of the construction being completed of the copper cementation plant at Kabwe in Zambia. A dry test has been run and they are now wet testing, in advance of copper, lead and zinc processing being on stream in 2014. Most investors seem to be stuck in BMR from years ago, sitting on losses and awaiting news of the various operational developments which have been sketchy for so long that it’s hard to believe that the journey will ever get to the destination. In fact investors actually see this lack of clarity as part of a determined cloak of secrecy from their Chairman Masoud Alikhani. Maybe there is a huge master plan about to unfold? Hmmmmm. Like Beacon Hill Resources 2014 should be the year when all the patience for investors in BMR is paid back. Let’s hope so.

In other news, there was a pretty solid corporate update from 3 Leg’s, and a disappointing update from Gulf Sands Petroleum (GPX) who announced that the first two wells in their first phase exploration in Morocco had found gas but in sub commercial quantities. This is part of a 9 well programme, 4 in phase 1 based on 2D seismic, and 5 in phase 2 based on newer 3D seismic. So the odds might suggest success at some point, albeit this week’s uncommercial gas news was met with a 15% drop in the share price. Victoria Oil and Gas released a video of the Cameroon president visiting Douala, Cameroon as he marked the inauguration of VOG’s gas plant in Douala. He commented on the importance of domestic energy to the development of Cameroon’s economy – take note Bowleven investors!

And finally we had “pointless RNS of the week” which this week I have awarded to Max Petroleum. who released an RNS containing nothing except to tell us they will release another RNS in 10 days which will contain their interim financial results and also an updated CPR, currently being prepared by Ryder Scott. I hold Max shares, and don’t look forward to what they will report. Good news has only ever seen a drop in the share price and bad news still more. In theory this end of year release should contain good news – news of production increased, an increase in 2P reserves, and an outline of positive cash flows in advance of debt repayments starting next year. If they stuff this RNS up then there is nothing left to hold for in my opinion. But unless something has gone seriously wrong this should be a positive update. They've confirmed there are only 10 days to wait, so pencil in 30th December for my early morning twitter whoop or yelp........

Have a very great Christmas everyone. I’m collating views on the best AIM prospects for 2014 so feel free to leave a comment below or tweet me your thoughts @timpronkster here and I’ll compile some sort of medley of top tips for an end of year blog........ 

Saturday, 14 December 2013

Weekly Review 13th December

It looks like the prospect of a recovery in any AIM oil companies before Christmas is about as likely as Thamsanqa Jantjie being asked to do the sign language for the Queen’s Christmas speech. I thought I’d share a few thoughts on this week’s news across a few shares I follow.  

First of all, I was mightily surprised to see Tom Winniforth go long on Range Resources. Reading his comment it seems he’s changed his mind about Pete Landau following a chat he had with him. Landau sounded contrite about overpromising and seems to have said he will take this on board from now on and will focus on delivering what he says. My only problem with this is that Pete sounded very contrite on a video about 18 months ago when he said he would focus on delivering what he said he would. At the time I think he was going to have drilled about 50 wells in Trinidad by the year end (was this 2011 or 2012?) and I think investors are still waiting..... So I’m not convinced. Can a leopard ever change its spots?

On the subject of leopards changing their spots, Nighthawk has done just that, and continues to make
progress on production and cash flow. This week they announced that two new drills were flowing at commercial rates and production was at 1497bbls/day for November. This is despite the Silverton and Snowbird wells being off line for a number of days. Nighthawk has been quite a turnaround story since the founder and MD quit under a shadow, and the share price crashed to just over 2p on finance and operator worries. Since then they have refinanced, ditched the operator Running Foxes, made several new discoveries, and turned cash flow positive. The share price has risen to over 10p and everything looks rosy with plenty more to come in 2014. So maybe all is not lost for those current lost oil companies out there.

The week saw Edison produce two highly insightful reports. One about Xcite Energy and the other about Gulf Keystone. Regarding Xcite Energy, they informed us that farm out discussions were delayed, but that value remains in their discoveries for the future. Regarding Gulf Keystone, they told us that production was going to ramp up more slowly, but that value remains in their discoveries for the future. Blow me over you don’t say! I do agree with them of course.

Nevertheless, the Xcite SP ebbed away all week - there is once again a period of time where people can’t be bothered waiting and move money out on the assumption that there is unlikely to be any further news before Christmas. I did consider temporarily selling up at £1.05 after the interims, but couldn’t be bothered / was nervous. “But what if news breaks when I’m out” I said to myself. Having waited a few years I couldn’t face missing out on a rise. Like playing the same lottery numbers every week and then missing the week they came up. Anyway, my personal free insightful research on Xcite goes like this: Assuming that a Farm Out will eventually materialise, the current valuation is completely disconnected to the future valuation. But with no “industry valuation” as yet we have to let the stupid market value the company and they can’t add up.

The other insightful Edison report was about Gulf Keystone, who received the news that Excaliber are not appealing in any form and have already paid an interim payment of £17.5m as security to the court.  Further payments are likely and that has got to be good news for the future. Presumably the move to the main listing will proceed quickly now and I would expect the SP to move up pretty consistently in the short term as PI’s buy in just for this move let alone other production news. The week saw the SP move back from 172p to 188p.

On Monday Trinity Oil announced they had discovered somewhere between 50 and 115 million barrels of
oil in the ground. It’s an extension to their producing Trintes field, and could eventually double their 36m 2P reserves. Pre the drill brokers valued a discovery at a 75p upside. The market cap of Trinity ended the week just £10m higher (12p) than it was before the announcement which proves that the market can’t add up. Heaven help us if Mondays’ announcement had been a duster as whilst the market can’t add up they can certainly add down! Meanwhile Trinity are drilling another exploration drill which could add another significant volume of oil if successful. One to watch for their 2013 production exit rates which should be moving in the right direction.

Bowleven were painful this week, ending at 37p and drip drip dripping away. They’ve been a nightmare recently. Poor Ian Suttie is already down 17% on his £8.7m investment in Bowleven. Makes you feel kind of better! I can’t believe that Petrofac will walk away neither can I believe the government won’t give them approval.  What we need is an Edison report! I believe it would say that the FID and environmental approval has been delayed, but that significant value remains in the oil and gas they have discovered. I’ll be buying some more if I can sell my kidney.

Ithaca looked good value slipping in the week to the low 140’s before finishing at 147p. Considering they announced in September that their first Stella development well flowed at over 10k boepd (limited by the test equipment), are aiming to increase production to 25k bopd next year, had revenues of $114m in Q3 (up from $41.6m LY) and cash flow per share of $0.25c (double last year), their future looks positive to me and could be a nice investment for 2014. Then again I thought that about Bowleven and Beacon Hill and look where that got me.

So, the Santa Rally is nearly upon us! Only this year it looks like Santa is heading south and hibernating with Momby Pemberton (Trinity) in sunny Trinidad and Tobago. Like the lovely John Lewis advert I think a few CEO’s need an alarm clock to wake them up from their hibernation.

All I want for Christmas is an alarm clock for Rupert Cole (XCITE), a claxon for Rowan Karstel (BHR), and bloody great big spud missile up the backside of Kevin Hart (Bowleven)

Here’s to a real Santa rally next week....

Thursday, 5 December 2013

#XEL #BLVN #BHR Three unwanted jumpers!

image courtesy of imagerymajestic.
So in the space of a few weeks I’ve had three early Christmas “presents”, all of which are the kind you’d happily give back if you weren’t so polite. Sort of like those nice jumpers you get from relatives that don’t quite fit and in any case aren’t the right styles. Too nice to throw away but rarely taken out and worn, they sit there in your wardrobe making you sad every time you see them because they weren’t what you expected or hoped for.

Ok so the analogy doesn’t quite work but I’m reflecting on the news from Beacon Hill Resources, Bowleven and Xcite Energy recently. Three massive small investor stocks, with massive short term trader followings, and all of which were expected to announce positive share-price-changing news over the last few weeks. What we got instead were some crappy unwanted jumpers and now all three are looking embarrassingly forlorn. It was indeed share price moving, only the wrong way.

Let’s take the unwanted jumpers one at a time......

Beacon Hill.
The share price was over 3p at the end of June and had been over 5p earlier in the year. In late June, news reports of local rebels threatening to blockade the main railway line in Mozambique knocked the price down to 2.3p, despite the fact that we aren’t even using the Sena railway line until 2014! Then, in September, an updated reserves report confirming an economic mine life of 15 years knocked the share price to under 2p. Logical no, but sentiment was damaged as investors were expecting higher reserve numbers based on previous resource numbers. At the beginning of October the news that BHR would issue unsecured convertible loan notes to Darwin and others then kicked the share price to 1.25p. Unexpected dilution of the most painful type. Finally, simultaneous legitimate shorting by Darwin (eh? conflict of interest surely?) killed the SP to 0.8p. 

Whilst all this value destroying negative sentiment has been going on, the fundamentals remain largely the same; in fact have continued to move forwards. Economically recoverable reserves are confirmed in place. Production is underway. Phase 2A wash plant is installed and being commissioned. Various operational issues are being resolved. Rail offloading site is being developed and the environmental report is due to be submitted any day. Port access plans are progressing, rolling stock will arrive imminently, a first test train has arrived, senior debt due diligence is under way. And finally we heard that we have entered into an agreement to acquire up to 70% of a licence with potential for Pig Iron mineralisation and magnetite supply, potentially improving margins and integrating the business “vertically”. Not earth shattering at this stage, but hardly the news you’d expect from a company going down the pan, which from the share price collapse you might expect to be the case. 

The market capitalisation is now under £18m. This compares to a potential takeover offer for Beacon Hill in 2011 which was reported to be at £120m, six times the current mcap and 2 years (of operational progress) ago. Unless BHR go bust, I can’t see how this £18m valuation can be sustained through 2014 and I would have thought that a return to a mcap of somewhere around £75m (over 4.5p on current share numbers) should be achievable if confirmation of Tier 1 FOB status comes next year. So a rotten jumper for Christmas but maybe wearable with pride next year?

I’m not going to repeat what has been said many times on the BB’s. Suffice to say investors were expecting confirmation of the major Etinde development’s FID (final investment decision), or perhaps environmental approval, or even just confirmation of a farm in Partner for the Bomono license. Turned out we got none of these and instead moderate dilution but at 20% below market price. Certainly a Christmas jumper you’d happily give back. 

Since then we've heard that 3 institutions have bought shares (including previous sellers Blackrock), have heard that Ian Suttie, one of Scotland’s richest men, has taken over 19m shares in the placing, and heard of another 3 (modest) Director purchases. We got a 30% increase in P50 resources to 263mmboe, and (as far as I am aware) we still have a substantial funding arrangement with Petrofac in place. Finally today we heard that Bowleven have been awarded 3 blocks in Zambia to explore, and that the geophysical survey is complete in Kenya. Now call me crazy but the 2013 IM5 well result was so successful that Bowleven have had to reconsider their production plans, we have significant upside potential for reserves upgrades, are already sitting on a major discovery, and yet the market cap at £124m is 6 times less than it was in 2011! Another sentiment destroyed share price. Another Christmas Jumper to stick at the back of the wardrobe, but next Christmas will we get it out with pride and tell everyone how little it cost and how much it is now worth?

Xcite Energy. 
And to complete the trio of festive crap jumpers, we have my favourite Xcite energy. No-one seriously expected news of a farm out, even less news of a takeover, yet the faithful were shocked to discover discussions were ongoing and MM’s took the opportunity to drop the price 20% before bouncing it back to near open prices. How many stop losses were hit goodness only knows. The market cap is now back under £300m. That’s only just over £1 per barrel of proven oil. (without accounting for anything else of value). Last month we heard that Statoil think the Xcite technology is so valuable that they have shelved their existing plans for their Bressay FDP. Read my comments here on how valuable I think this news is.

We’ve also had confirmation that the environmental statement for Bentley has been submitted to DECC, that we have a memorandum of understanding in place with Amec, that our 2P reserves have doubled to 250m barrels, that we have agreed refinancing of the outstanding unsecured loan notes and that we still have £22m in the bank. Long lead items have been identified and are being sourced through strategic alliances. A number of discussions on farm out are ongoing. “Significant interest” has been expressed by new and existing banking institutions to reassess and increase the existing RBL which “has progressed satisfactorily” (note the past tense here, not “is progressing satisfactorily”). I believe they probably already have confirmation of how much the increase is, which would likely be conditional on all the other factors coming together.

So I have 3 Christmas Jumpers now, none of which I can wear with pride. All of them are tucked away in the back of my wardrobe. I believe they are all 100% cashmere, but unfortunately are cunningly disguised as polyester V necks from Primark.

One day I'm sure they will all be taken out of the wardrobe and worn with pride. I expect everyone will want one and wonder how I managed to afford all 3. But by that time they will be very expensive to buy, if they are even still available in their current brands.

Here’s hoping for some more welcome Christmas presents.

Previous comment on BHR here
Previous comment on Xcite here
Previous comment on Bowleven here

Wednesday, 4 December 2013

#MXP Max Petroleum holdings

Three holdings RNS' in the space of three days and it looks like UBS have been buying again. This time they have been swapping debt for equity to the tune of 113m shares. That takes the overall number of shares in MXP held by ii's to around 85% assuming all are updated on time (unlikely) and it also includes some holdings which I assume are on behalf of private investors eg Halifax and TD Direct.

Meanwhile the share price still languishes at below 4p, not far off the lows when the very future of MXP was in question. Since then debt has been rearranged, the drill bits are turning, production is well up and should exit 2013 higher still. Although of course debt repayments start next year and due to low levels of communication around this we aren't sure how the finances are looking. The drilling campaign on the shallows is mid flow, and we eagerly await the results of an updated CPR to include recent well data up to the end of September, expected sometime in the new year.

I asked the question why ii's were still buying MXP in such volume here and a helpful investor tweeted me suggesting that maybe the whole company will be taken private at some point - PI's lose out of course - the deeps are then sorted and drilled, and then the company eventually successfully returns to the market making millions for whoever took it private. Oh joy. There's something to look forward to. I have no idea whether this is likely, I suppose it could be possible, and would be a good result for the ii's, but a disaster for all long term MXP investors.

I am waiting for the CPR and potential news on the deeps in 2014 before reassessing my position in MXP. For now I hold, but am not adding.

Updated ii holdings as of 4th December 2013: (click on image to expand)

Definition of a debt for equity swap courtesy of investopedia
"A debt/equity swap is a refinancing deal in which a debt holder gets an equity position in exchange for cancellation of the debt. The swap is generally done to help a company continue to operate (after all, an insolvent company can't pay its debts or improve its equity standing). However, sometimes a company may simply wish to take advantage of favorable market conditions."

Tuesday, 26 November 2013

#XEL Xcite the suspense is killing me!

The following is my opinion only and based on nothing more than conjecture. I'm just laying out my thought process. So please make your own decisions on whether to buy, hold or sell. Thanks.

Image courtesy Stuart Miles

Last week we heard that Statoil were indeed the mystery $15m buyer of data from Xcite Energy’s extended well test last May. The story is here and has since been carried by Reuters and elsewhere, so I’m certain we would have had a denial by now if it had turned out to be just an inaccurate Norwegian translation!

As a holder of Xcite Energy (previous comment here) I was delighted to hear this news and thought it was very significant. Why? Well imagine the following story being suggested a year ago.... A super major, and a specialist in heavy oil are developing a field development plan for their large heavy oil field called Bressay. They have operated this field since 2007 and have spent many years considering the best way to extract the oil. In March 2013 their concept selection plans are approved. They’ve spent millions of pounds developing these plans which are ready to take forwards. However, they hear about a small independent company called Xcite Energy who are making a lot of noise about their “revolutionary” approach to extracting oil from their nearby Bentley heavy oil field which was discovered in 1977 but abandoned because no-one had the ability to get the oil out.

Incredibly Xcite prove they can flow the oil from this field. They are in fact so successful with their drilling, testing, flowing, and technical approach that the super major decides to investigate further. They like what they see, and agree to cough up $15m to have a proper look at the well data. They decide it is so significant to them that it is worth shelving months of work, costs, and man-hours on their Bressay plans and instead decide to go back to the drawing board to incorporate the new knowledge they have acquired. This will save them hundreds of millions of pounds. They agreed as part of the purchase that the intellectual property remains the ownership of Xcite so they start to discuss with the board of Xcite about a deal which will see them able to copy Xcite’s IP directly into their Bressay field development plan. Without this they would be compromising the IP but they hope to come to a sensible agreement with Xcite, especially as there are several other majors such as BP and AMEC involved in the arrangements.

Sometimes I find we can’t see the wood for the trees and I think we’re all staring an obvious fact right in the face. Maybe we’re too tired with the waiting and the games to realise what we have in front of us. Now of course I don’t know how the IP issue will play out but checking back on Cole’s comments at the time of the data sale he said:
We are very pleased to have completed this agreement, which is complementary to the recently commenced farm-out process, and further validates the quality of the information collected from our two well programmes. This has been done without compromising the company’s intellectual property and is a good commercial outcome that provides additional working capital."
Now the free dictionary defines intellectual property as: “A product of the intellect that has commercial value, including copyrighted property such as literary or artistic works, and ideational property, such as patents, appellations of origin, business methods, and industrial processes.”

That’s why I’m delighted with the news last week. Not that they sold the data, we knew that, but that a super major has confirmed it is worth millions to them and have changed their plans on the back of this insight. And if we believe the above, Xcite have retained the intellectual property rights to this knowledge. Won’t Statoil therefore have to come to an arrangement with Xcite to use their IP at Bressay? A royalty arrangement? Licence arrangement? Joint venture? I might be well off the mark but what does “without compromising our IP” really mean?

Since this news broke, there has been speculation that Statoil might buy Xcite outright. I personally am not so sure. A takeover by Statoil is not what I am expecting as I believe this would release the Xcite team to pursue other opportunities and it’s this knowledge that Statoil need to help with the Bressay plans.

I am still of the opinion that Xcite will do what they have said they plan to do all along. Which is, and which has been repeated many times, continue to production with an increase in their reserves based lending (RBL) facility and a farm in to raise the remaining funds needed for development. Then explore and appraise their other licenses and prospects. And so they go on....

With regards to the RBL they announced in 2012 that they had secured a $155m facility with Royal Bank of Scotland, Societe Generale, GE Energy Financial Services, Nedbank Limited, and Britannic Strategies Limited (a subsidiary of BP). The $155m was secured against only 22m 1P reserves at the time. The increased 1P of 198m should see them able to arrange a much increased RBL facility, especially as the mix of institutions is quite wide. But I’m sure it won’t increase in the same proportion as reserves have increased. So let’s speculate that they secure $400m RBL on their 198m 1P reserves. Now let’s assume that they farm out 25% of Bentley, and for this example let’s base that on an ultra conservative $5 barrel for 2P reserves in the ground. 25% farm out would be 63m 2P, and at $5/barrel that would give Xcite $315 from the farminee plus hopefully some back costs which may conveniently cover the West Face loan.

That would give them the $700m they need to get to first phase production. If we then value their remaining 187m barrels at just $5/barrel fully funded oil in ground then that would come to $935m. At an exchange rate of US$1 to £0.66 that would equate to £623m. That’s nearly twice our current market cap of £323m (in reality it should be far more than $5/barrel. Edison suggests $8/barrel as fair if funding and farm in is in place). That ascribes no value for enhanced oil recovery. No value for the conversion of our prospective resources to reserves. Nothing for the $800m tax loss allowances. Zero for Intellectual Property. Zilch for other licenses. Nada for looming production potential now fully funded. Just a $5 per barrel valuation for oil in the ground, proved and development ready, in a politically safe region, with proven technology. And now fully funded to first production. Once the production starts the valuation for oil in ground and being produced should easily rise to $12 per barrel if not more. That’s another doubling of the market cap (assuming all else equal)

So I’m very happy with the news last week. I’m happy with the validation of all the hard work that Xcite have done to date. And I’m happy to sit on my hands for as long as it takes. I know that things may still come “left field” and that the above could be a rose tinted view of how things will play out. We could see some dilution added to the farm out and RBL, potential for further delays, changes to plans etc, but that’s the reality of oil and gas. It’s a risky market to invest in and there will be ups and downs along the journey. But the last year has seen Xcite prove they have the knowhow to extract their oil, confirm they have 250m barrels of P2 oil, describe it as “of significant strategic importance” and now a super major has validated their technical ability without compromising their IP.

I believe that the final jigsaw pieces are being put in place and that we will see the bigger picture emerge in the very short term. But I see value here and am happy to wait for the picture to come clear, as long as that takes. But I have to admit the very well orchestrated news blackout with just the occasional emergence of significant pieces of the jigsaw is killing me! I’ll leave you with a closing line from Edison’s April 2013 report talking about the negotiations that Xcite management will be undertaking in 2013:

We do not expect much public visibility of these discussions given their confidential nature

Now that is definitely the most accurate prediction an investment analyst has ever made in my opinion! Here’s hoping we get the rest of the pieces soon......

Thursday, 21 November 2013

#PMG What's Pharos worth to Parkmead?

There was a fair bit of excitement on Tuesday as Parkmead announced that the Statoil operated “Pharos” drill, targeting up to 500 bcf of gas originally in place, has been successful and that a discovery has been made in the Rotliegendes sands. It was suggested by some that the share price could jump to the mid 20’s on confirmation of a discovery (from 13.75p prior). Not sure about you but I can’t remember the last time a share jumped 100% on a discovery of oil, let alone gas!? Nevertheless I am slightly surprised to see no reaction at all. After an initial half pence rise the shares have remained pretty much unchanged since Tuesday and now sit back at under 14p.

In October I had a good look at Parkmead as I am a previous Lochard holder and wanted to know whether to hold or sell at breakeven. My overview of findings is here. I decided on balance to hold, but was nervous about the upcoming Pharos drill because I felt success would see little price impact, but failure would no doubt result in a savage drop down (in this lovely market) to around 10p and nothing much to bring it back up again until 2014’s Perth drill.

But the market hasn’t reacted at all to the Pharos success. Despite volume of over 7 million on Tuesday, the SP remained static. Just shows how many PI’s were waiting to get out on a successful drill result. Aim Oil and Gas is basically heads you lose, tails you lose at the moment. But leaving that aside, how important is the Pharos result and what does it mean to Parkmead’s value in the medium term?

A multiple-prospect development opportunity:

Pharos is one of 4 assets geographically close which Parkmead has interests in:
  1. Platypus (15% interest) - commercial discovery. A 2012 horizontal appraisal well flowed 27 million cubic feet of gas per day (4,600 boepd) and Parkmead’s best estimate of gas initially in place for Platypus is now 147bcf. 
  2. Pharos (20% interest) - new discovery awaiting confirmation of commerciality, estimated 80% chance of success
  3. Possum (15% interest) - same reservoir and trap type as Platypus but not drilled yet, estimated 50% geological chance of success, 80% commercial chance of success
  4. Blackadder (20% interest) - 14kms away from Pharos - estimated 24% geological chance of success, 80% commercial chance of success
Pharos has potential for up to 500 bcf of gas-in-place. This is equivalent to 86m barrels of oil equivalent (and therefore c.17mboe net to Parkmead). Crucially, the structure is just 14km away from the Platypus gas field. Parkmead’s current best estimate for gas in place is 305 bcf, of which 60% should be recoverable (182 bcf). There are potentially significant synergies possible in the development and production from both Platypus (which is already financially viable) and Pharos (if it proves commercial). Dana have not yet confirmed if Pharos is commercial, but this should be relatively low risk as there have been a large number of successful wells drilled in the area around Pharos and it would be produced by horizontal wells so the bar for commerciality should be relatively low.

So if the discovery at Pharos is confirmed as commercial it will be very valuable to Parkmead as it would then be possible to develop it jointly with the Platypus field (which is already viable). Data from Pharos will also give insight about other prospects in the area. For example, Parkmead have the Blackadder gas prospect to the south of Pharos which is currently given no value by brokers as it is reliant on a discovery at Pharos to proceed (tick!) Parkmead’s upside estimate is that Blackadder may contain up to 430 bcf of gas originally in place. Their best estimate of gas originally in place is 311bcf, of which 60% is again expected to be recoverable (186 bcf). If Pharos is developed, it is also possible that another discovery, the 47/10-8, southeast of Blackadder, would be developed which is estimated to contain 86 bcf of gas in place

Development plans

Charles Stanley suggests that the Platypus and Possum fields could be developed from the same platform and that the Pharos and Blackadder fields would be developed together, but from separate platforms. One option could be to tie them into the West Sole or Babbage facility which is 40% owned by Dana. Mr Cross “knows his onions” in this area and this gives me confidence that he is developing interests in areas he is familiar with. The recent success at Pharos (assuming commerciality) should help to unlock the development value for Blackadder. So whilst the relative value of Pharos is not significant on a stand-alone basis, what is hopefully coming together is a combined development and cost saving opportunity to exploit multiple gas prospects through shared production facilities and a single supply pipeline (West Sole Easington which has excess capacity).

Valuation of Pharos and Blackadder

Charles Stanley estimate that if successful the net value of Pharos will amount to 2.3p per share and that drilling the Blackadder prospect will then be game on (and valued at 2.2p per share assuming success). That gives at least 4.5p upside to the current shareprice. I don’t expect we’ll see it in the short term but how nice to think that our core NAV is increasing all the time.

So what do I think about this weeks news?

I’m positive about Parkmead’s long term prospects and more so now that Pharos has been a successful discovery. Whilst the share price hasn’t moved this week, Parkmead’s last 3 years have seen strong developments and growth. Without doubt Mr Cross is a great CEO and deal maker, and the acquisitions to date have been canny and value enhancing. Importantly they have all been production and cash flow positive - none of this San Leon “let’s-buy-some-more-acreage-and-develop-it-at-some-point-in-the-future-whilst-we-pay-ourselves-several-million-pounds-per-year” type nonsense. I’m sure we’ll also see some more deals in the not too distant future. 

There are far fewer PI’s who buy and hold in the current market. Most have seen big losses since 2010 and are wary of buying any more dud E&P oilies. Many PI’s are left with no choice but to hold their loss making shares and hope for a sentiment change in the O&G market. Meanwhile the market is dominated by traders and ii’s, both of whom manipulate prices in the short term for their own gains. My strategy has changed to find companies with reputable boards, who are on growth trajectories for the next 3 years, and where possible for this to be underpinned by production, or at least debt underpinned by proven assets. I believe Parkmead meets these criteria, and whilst the share price is not currently cheap relative to current proven reserves, I am happy that with the board we have, the prospects which are shaping up nicely, and the likelihood of a few more canny deals along the way. The future will reward patient investors in Parkmead I’m sure. One day sentiment will turn and that’s when the real gains will be made.

Couple of useful links:

BBC news of recent discovery : here
Charles Stanley detailed company note : here
My previous comments on Parkmead : here

Sunday, 17 November 2013

#GKP Gulf Keystone : The Kozelcoaster

The Journey so Far

2007 : GKP awarded two Production Sharing Contracts for Shaikan and Akri-Bijeel blocks in the Kurdistan region of Iraq
2009 : Shaikan-1 announced as a major discovery
2010 : First well on the Akri-Bijeel block Bijell-1 announced as a discovery
First Shaikan domestic oil sales commenced. Sheikh Adi-1 exploration well spudded
2011 : 420% P90, 181% P10 increase in gross OIP estimate for Shaikan with range of 8.0billion (P90) to 13.4 bn (P10) barrels
Sheikh Adi preliminary resource evaluation by DGA of 1 billion (P90) to 3 billion (P10) barrels of gross OIP
2012 : 14 wells drilled across the four blocks. Second exploration well on Sheikh Adi announced as a discovery.
Shaikan appraisal completed with Shaikan 5 and 6. DGA upgrade gross OIP volumes to 12.4 (P10), 13.7 (mean) and 15 (P90) BILLION barrels. Declared as a Commercial Discovery
Placement of senior unsecured convertible bonds due October 2017 for the amount of US$275 million
2013 : Shaikan Field Development Plan approved in June
Bakrman-1 exploration well on the Akri-Bijeel block announced as a discovery
Ber Bahr-1 exploration well on the Ber Bahr block announced as a discovery
Appointment of Non-Executive Chairman Simon Murray. Appointment of five new Non-Executive Directors
Deutsche Bank appointed to help GKP move to the main market
Excalibur Court Case successfully defended.

Summary of Licences and developments to date:

Shaikan GKP 75% & Operator
Shaikan FDP was approved in June 2013 and commercial production began mid-July. Production had reached 12,400 bopd by early September. The upgrade of production facilities at PF-1, and planned PF-2 (early 2014) will enable GKP to increase this to 40,000 bopd. The plan is then to grow this to 150,000bopd by 2016 and 250,000bopd by 2018 but this will need additional facilities and a pipeline. Shaikan 10 development well is currently drilling and the first deep exploration well Shaikan-7 also spudded this year (June) and will take 9 months. The potential is to add between 1 and 5 billion barrels of gross OIP to already discovered resources. Progress has been made on the development of a regional independent export infrastructure, expected to be completed by the end of 2013

Sheikh Adi block - GKP 80% & Operator / Regional Government 20% carried interest
The Sheikh Adi block lies to the west of Shaikan and was declared a commercial discovery in 2012. GKP believes that the Shaikan field shows signs of a significant extension into the Sheikh Adi block. There could be important synergies across the acreage. The first evaluation of the block had a range of 1.0 billion (P90) to 3.0 billion (P10) barrels of gross OIP. The second exploration well Sheikh Adi-2 was successful, achieving stabilised flow rates of 4,235 bopd from four zones. Construction of the drilling location for 2014 Sheikh Adi-3 appraisal well is ongoing. 70km of additional 2D seismic data has been acquired and two additional exploration leads are targeting potential extensions of the Atrush and Swara Tika discoveries.

Ber Bahr - GKP 40% / Genel 40% & Operator / Regional Government 20% carried interest
The Ber Bahr block lies to the north-west and is also on trend with Shaikan and the Sheikh Adi blocks. The first Ber Bahr-1 exploration well encountered a 300m oil column! Two drill stem tests failed to flow however. The original well has been successfully side tracked and achieved a sustainable flow rate of 2100 STB/day of 15 API oil. The operator's estimates of recoverable reserves are 50-100 million barrels. Appraisal and early production is expected in 2014.

Akri-Bijeel - Kalegran 80% & Operator / GKP 20%
The Akri-Bijeel block is situated to the east of the Shaikan. The Kurdistan Regional Government has an option to nominate a 3rd party interest of up to 20% and a further option to nominate a government interest of up to 20%. Two discoveries have been made to date, firstly the Bijell 1 discovery in 2010 - announced a commercial discovery with 2.4 billion (P50) barrels of gross OIP. Secondly the Bakrman-1 discovery in 2012 - announced a Triassic discovery Feb 2013. Initial results indicate a significant reservoir. Construction and commissioning of an EWT facility for the Bijell discovery is complete, although a sidetrack will be required before production can recommence. This is due in Q1 2014. The EWT will have a capacity of 10,000bopd, expected by the end of 2014. An appraisal well Bijell-2 is ongoing and will be tested in Q1 2014, and 2 further appraisals are planned in 2014. A sale of the GKP’s 20% working interest in the Akri-Bijeel block is being sought and would add important cash towards GKP’s cost of capital in 2014.

Other Recent Developments

GKP have been locked in a lengthy legal battle with Excalibur Ventures who were claiming ownership of part of GKP. On 10 September 2013 all claims by Excalibur were dismissed. This was an important ruling. The court set a date (13 Dec) for handing down its judgment and for any consequential matters, including compensation to be paid to GKP. Importantly the hearing will also clarify whether Excalibur will seek to appeal. Until this matter is closed, a move to the main listing for GKP is on hold. Deutsche Bank AG was confirmed as appointed in connection with this move but frustratingly investors were not told of the likely delay because of the Excalibur uncertainty. This was a sloppy omission as it must have been clear at the time but an RNS this week has finally spelt out that.. “the board of Gulf Keystone expects conclusion of the proposed admission to trading on the Main Market to be as soon as practicable in 2014” rather than “by the end of 2013” as they initially stated.

As if a very public court case isn’t bad enough, earlier this year there was significant mudslinging between the board and institutions, which were unhappy with the corporate governance of GKP. This got very public and very messy. Finally it was agreed to split Todd Kozel’s role to allow him to concentrate on the CEO role, and a non-executive chairman, Simon Murray C.B.E. was appointed. After the public trashing by the board of some of the NED nominations, they were then appointed! Makes you wonder how they now work with each other.

Future potential share price catalysts:
  • If the 13th Dec Excalibur hearing confirms compensation and if there is no right to appeal the way will be open to a full market listing
  • Potential for confirmation of increased stable 20,000 bopd production from Shaikan PF-1 by the end of 2013
  • Confirmation of Shaikan PF-2 work being finished, commissioned and producing. Completion of the connections between PF-2 and the Shaikan 2, 5 and 10 wells to increase production by an additional 20,000 bopd during 2014.
  • Confirmation of a cash-neutral approach to further development wells, including up to eight on Shaikan in 2014 and decisions on additional Shaikan production facilities (PF-3 and -4)
  • Confirmation of a sale of the 20% interest in the Akri-Bijeel block and discovery.
  • A move to the main listing of the stock market from AIM and potential for funds buying in, hoped for in early 2014.
  • Results from the Shaikan-7 exploration well, targeting deeper Triassic and Permian horizons in the Shaikan block - likely May onwards 2014
  • Results of the appraisal of the Sheikh Adi discovery and additional exploration prospects on the block

Funding and Valuation matters

According to the Financial Results, as at 30 June 2013 GKP made a loss after tax of $26.4 million (2012: $31.4 million). At the end of June they had cash and cash equivalents of $141.2 million and by the 16th September this had decreased to $101million. Significant capital is required for the 2014 work programme and funding remains an important consideration when investing here. According to Edison cash could be tight by the end of 2013. Capex, G&A, debt servicing and operating expenditure for the remainder of 2013 is expected to cost around $180m and GKP may therefore need more funds before the year end. There are a number of ways which this could be provided and GKP have indicated that dilution should not need to be one of them. Then again we’ve heard that before from many AIM companies so proceed with extreme caution is my opinion. However, non dilutive options include:
  • Compensation from Excalibur for the court case. Edison estimate this could be in the region of c.$30m.
  • Back-in rights compensation from a 3rd party could account for $100m, although timing on this is not clear.
  • A sale of the Akri-Bijeel 20% interest is sought. GKP assigns a book value of $70m to the block. Edison expect the block to sell for well above this and estimate a risked value of $220m for Bijell and Bakrman, using a discount factor of 12%.
  • GKP could instigate a corporate debt facility. The company estimates $150m may be possible. This could be higher if Shaikan production is running at a stable 20,000bopd by the end of 2013.
In the September half year report the financial summary gives a medium term goal of financing activities from production cash flows. What medium term means is not clear and in the short term GKP will either need to secure a debt facility, one or all of the above to happen, or will surely have to raise funds through equity.

Cash required for 2014
Cash outflows in 2014 are estimated by Edison to be around $550m, with a capex bill of around $500m. The vast majority of this will be spent on Shaikan in order to increase production to 150,000bopd by 2016. Costs to achieve this are assumed to be c$380-400m (net) for every 40,000 increase in capacity. This leaves the rest for the drilling at Sheikh-Adi, Ber Bahr and Akri-Bijeel. However, if the 3rd party and KRG do not back-in to their licences in 2013 then the capex bill for Shaikan could rise from $380m to around $520m.

Prices achieved for Shaikan crude
GKP have estimated a relatively pessimistic $20 per barrel discount to Brent. Once blended with lighter crudes a lower discount should be achieved nevertheless Edison assume a 20% discount (for both Bijell and Shaikan) in their valuation. If this was changed to 10% the value of the Shaikan development increases by around 9% so it is important to hear more about this discount as production builds.

Based on all of the above, Edison’s core NAV stands at 218p. They have included a more smoothed ramp-up to 2018, an increased discount to Brent, and increased capex costs, all of which decrease their valuation of Shaikan. Ber Bahr is included in their core development NAV alongside Shaikan and Bijell. They do not include any rebate from Excalibur as a result of GKP’s victory. With further exploration happening at Sheikh-Adi for potential extensions of the Swara Tika and Atrush discoveries and the deeper Permian horizon potential being tested by the Shaikan-7 well GKP is still exposed to potentially significant upside in the coming 12 months. Edison arrive at a full exploration NAV of 249p/share and a fully unrisked value for the company of around 390p/share.

Broker targets are generally north of the current share price and range from 170p to 283p:
DateBroker nameNewPriceOld price targetNew price targetBroker change
14-Oct-13Goldman SachsBuy182.75p283.00p283.00pUpgrade
10-Oct-13Westhouse SecuritiesSell181.00p170.00p170.00pReiteration
23-Sep-13Canaccord GenuityHold202.00p210.00p216.00pReiteration
19-Sep-13Westhouse SecuritiesSell200.00p170.00p170.00pReiteration

To buy or not to buy, that is the question

The sense I get from watching all of the shenanigans unfold is that to invest in GKP is to accept that you are an irrelevant part of the rollercoaster story. You therefore ride the rollercoaster most of the time blind. Regular and clear shareholder communication and good corporate PR seem to be some way down the list of priorities and in my opinion investment here involves handing your money over to a group of people who you know nothing about, who move in circles that an average small time investor has no understanding of, and who probably work in ways which no doubt sail quite close to the edge of acceptability. GKP are no doubt literally sitting on a sea of oil and the operations and discussions must be highly complex. Add to this the considerable and uncertain political risk of the regional government’s position in Iraq. Now also consider the substantial capital and other costs that are required to bring the production up to self financing levels. To this, add the likelihood of Excalibur winning the right to appeal. Consider the lengthened move to the main market as a result of this. Add to this the significant infrastructure which is needed to bring all this oil out to export. And through all this, be aware that PI's are likely to have relatively infrequent and potentially selective investor communications, and you may conclude that there are is a compelling list of reasons to leave GKP well alone.

On the other hand, here is still an independent oil company, surrounded by NOC’s and majors. Sitting on somewhere around 20,000,000,000 (that’s 20BILLION) barrels of oil!!! Producing somewhere towards 20,000bopd by year end and planning to increase this by 40,000bopd every year until 2018 when they will be pumping a whopping 250,000 barrels per day. That’s 5 times what Xcite Energy plan to produce by the same time.

The heady days of GKP rising from 20p to 420p are over, and yet the share price is languishing back around the 155p mark and is underpinned by substantial resources which someone is going to produce. If GKP get to their 2016 targets and remain independent, the share price will be many times north of here. And if they are not, then someone will have come along and bought them out, which will no doubt be for more than 155p a share. There are many shareholders who have been in GKP for years, waiting patiently for pay day. Is it possible to join the ride at this late stage and reap significant returns over a much shorter timescale?

But risk in my opinion is substantial. Just like the warnings before joining a rollercoaster, sorry Kozelcoaster, this is not one for those of a nervous disposition, the pregnant, elderly, widows or orphans, those with back problems, sleep disturbance, heart conditions, or financially insecure. Potentially a white knuckle ride with plenty of upside but with a few more twists and stomach lurching turns along the way no doubt. Enjoy the ride if you get on board.

To see Mr Kozel's style in action, watch this video of him on CNBC in September 2013  click here