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 FreeDigitalPhotos.net

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

Wednesday, 13 November 2013

Today's Bowleven news - won't dress it up

So we got some of the news we were on balance probably expecting. The Final Investment Decision (FID) has been pushed out to mid 2014 and the Expanded Exploitation Application (EEAE) is still pending approval. The farm in on the Bomono permit has stalled as the preferred farminee can't follow through. The search is ongoing for a replacement. Up to this point I'm OK with this, normal delays and dealings in O&G and especially in Africa. Fundamentals still in place and massive value to the upside as we move towards 2016.....

.....Then we got a load of stuff we already know, such as the IM-5 well was really great and the deal with Petrofac is going to be fab, and we have enough gas to meet the fertilizer plant needs blah-de-blah. Yes all good but not really relevant today......

......And then we got some stuff that we didn't know (but others clearly did) and didn't want to know. Namely a fund raise at a whopping discounted price of 45p (25% below recent prices? why I have to ask?) I don't think many were expecting this today or the unfortunate but necessary reference to the "going concern" statements at the end. Which is of course a technicality on the one hand as technically the company don't have enough cash to get them through to production so fair enough that accountants would have to flag this, but reading it at 7am it felt like an extra portion of salt was being applied to some fresh cuts and therefore I'm not going to say I feel full of the joys of spring this morning.......

So where now? Well leaving aside the sickening emotional reaction to the fund raising everything else is still  pretty much as it was before. The gas hasn't evaporated and the delays aren't the end of the world for anyone investing over a reasonable timescale (ie not 2 weeks or months). Bringing these assets to production and fruition are complex and significant operations and the wheels keep turning.

But what sticks in the throat is the placing price and the blatant leak of the details before today. We've seen significant selling for days now and whilst PI's have been buying up and sitting in the dark others in the know have been offloading. The city really is bent as a nine bob note and nothing that we moan about or gnash our teeth about makes one ounce of difference.

"If you can't stand the heat don't sit in the kitchen" and so I reflect on my hobby of investing in oil and gas companies trading on the AIM. Should I sell the lot and buy some nice utility companies? For peace of mind probably yes but then I can't imagine waking at 6am full of anticipation for EON's latest management statement? Can you?

I posted here what I thought about the fundamentals and progress that Bowleven has made to date and my top 2 risks have both been confirmed - FID delays and Bomono farm in falling through. I've just re-read it to see if I was barking mad and I don't think I am. The fundamentals are fantastic. What is in effect a relatively small and short term fundraising to see the company through to FID and the petrofac deal could have been handled differently. But it's been dropped on us at a time when good news was expected, doubling the insult. It will set the BB's alight and form the basis for the bears "told you so" comments for weeks to come - groan - but I guess the score is currently Bears 1 : Bulls 0 so let them enjoy their victory.

The brave or true long term investors may look to add some more at prices now around 45p or less if we don't get news for a while. The old me would have bought more this morning on the bell convinced we're at a new bottom but I'm not so sure so will let the dust settle and reasses.

I still think Bowleven is a cracking investment and the fundamentals are of course still in place. The 30% upgraded P50 resources to 263mmboe are a great reminder of the huge potential still here and in surrounding licences. It makes good reading, especially as it also excludes the IF field volumes from the calculations due to complexities. Tracs have been commissioned to produce an updated CPR which will add to the increase in due time.

I hope anyone riding the rollercoaster that is BLVN isn't too sick this morning. Maybe the utilities would be a less volatile place to park your money? I only jest, I'm pretty pi##ed off this morning too, but let's focus on the positives. If you hadn't sold out before this morning I don't see any point doing so now (unless you're on that 2 week trading timescale - good luck). If you did sell out yesterday, then hats off to you, and good luck getting back in for 20% less than you sold for. I'm sure you will based on those fundamentals won't you?

Good luck and have a great day.

From today's news......VOLUMETRICS UPDATES
In-Place Volumes
The IM-5 well result substantially increases the Isongo Marine (IM) field in-place volumes. Preliminary volume estimates have been updated post the results of testing. The combined P90 WGIIP has increased by over 300% to 531 bscf post IM-5 drilling, confirming that there are more than sufficient gas volumes available on a P90 basis to meet fertiliser plant requirements.  The combined mean WGIIP and CIIP for IM field has increased by 162% and 611% to 1,222 bscf and 135 mmbbls respectively.
The Intra Isongo interval encountered at the successful IM-5 well has provided a material volume addition. Initial seismic and amplitude analysis also indicates significant upside potential outwith the areal extent currently considered in preparing the above-mentioned Isongo Marine field volumetrics. In addition, several lookalike prospects have been identified that could provide further material upside potential. This upside potential has enabled the consideration of additional gas offtake schemes.
Contingent Resource Volumes
The Group's net contingent resource volumes on a P50 basis have increased by 30% to 263 mmboe (2012: 203 mmboe). This substantial increase is following the results of the highly successful IM-5 well outlined above. The significant increase in volumes for the IM field has been partially offset by the removal of IF field volumes from Group resources pending external review, as noted below.
The mapping of the IF field from the original 3D seismic dataset was hindered by the presence of a gas chimney. Recent interpretation by our in-house technical team of reprocessed 3D 4C OBC development seismic data acquired over the field suggests that IF is more structurally complex than first anticipated. Bowleven has commissioned TRACS, the external consulting firm who prepared the current CPR on the IF field, to review our findings and produce an updated CPR. To maintain the technical integrity of the Group's resource reporting process IF field volumes have been excluded from the year end resources report pending the results of this work. 
Overall, and despite the exclusion of the contingent resource volumes for IF (net P50 57 mmbbls), the successful results of the IM-5 have resulted in a substantial increase in the Group's net contingent resource volumes to 263 mmboe.
Further information regarding the Group's updated net contingent resources and the Group's estimates of certain in-place volumes are set out in the preliminary results presentation available on the Company's website: www.bowleven.com.

Thursday, 7 November 2013

#TRIN Trinity looks well set for 2014

Trinity Exploration and Production

Trinity is an independent oil company with onshore and offshore assets in Trinidad and South Africa. The core focus is Trinidad where the company operates producing assets on the West and East coasts. The portfolio includes production, significant low risk near term production opportunities and multiple exploration prospects with meaningful reserves potential. At the end of 2012 Trinity acquired Bayfield energy in a reverse takeover when Bruce Dingwall, a venture capitalist, snapped up Bayfield for what could be considered a bargain price (see below). Institutional investors put additional funds in and the enlarged Trinity Group was born.

Key stats:
  • Largest independent E&P company focused on Trinidad. Operate 12 licences (11 in Trinidad, 1 in South Africa)
  • 270+ employees based in Trinidad and a corporate office in Edinburgh
  • 2012 exit production rate of 3,965 bopd, current production of 4000 boepd, 2013 exit guidance of 4200-4500 boepd.
  • Net 2P reserves of 36 mmbbl, Net 2C resources of 38 mmboe
  • H1 Revenues of US$54.5 million
  • H1 EBITDA of US$15.8 million and cash flow from operating activities of US$11.2 million
  • H1 after tax profit of US$1.8m (Pre-exceptional negative goodwill see below)
  • H1 Cash balances of US$57.4 million 
  • Market Cap of £115m currently
  • Secured additional US$25 million undrawn debt facility with Citibank to fund future growth
  • Trinidad government announced additional capital allowance incentives in 2014 budget which enhance project economics and increases Trinity's core NAV
  • Two major projects completed; Brighton field automatic metering and oil transfer system and MP-8 platform refurbishment
  • Two jack-up rigs secured to drill two 2013 exploration wells
  • Two significant prospects being drilled, with potential to double the company’s value. First one has spud, second one due shortly.

Notable members of the Board have significant experience:

Bruce Dingwall, Executive Chairman: Over 30 years’ experience in oil and gas. Began career with Exxon as a geophysicist in the North Sea. Founded Venture Production in 1997 which grew to produce 45,000boepd and was sold to Centrica in 2009 for £1.3 billion. A Trinidadian national. Founded Trinity in 2005

Joel “Monty” Pemberton, CEO: Became CEO in 2009. Began his career with E&Y where he qualified as a Chartered Certified Accountant with a focus on energy. Moved back to Trinidad working in the energy finance division of RBTT Merchant Bank prior to joining Trinity. A Fellow Chartered Certified Accountant ACCA.

Finian O’Sullivan, NED: An international career in the industry over 33 years with Chevron, Geophysical Systems, Olympic Oil and Gas and Burren Energy. Founded Burren Energy in 1994 and developed its business leading to a flotation in 2003. Expanded Burren and in 2008 was sold to Eni for £1.7 billion. Finian joined Bayfield Group in July 2008.

David MacFarlane, NED: More than 25 years experience in financial control and management in upstream oil and gas. Joined Dana Petroleum in 2002 and was FD of Dana Petroleum when it was acquired by Korea National Oil Corporation in 2010 for £1.87 billion.

Charles Anthony Brash Junior, NED: Involved in the industry for over 25 years and is MD of Well Services Holdings Ltd, the owner of a large drilling rig fleet in Trinidad. Offers a range of oilfield services as well as being a material onshore oil producer. Has directly negotiated and managed service contracts with BP, EOG, Repsol and Petrotrin.

Corporate shareholders:

The total number of ordinary shares in issue is 94,799,986. A good proportion of these are not in public hands.

"Management and the Board own 21% of the company's shares and we take dilution very seriously" quote from Monty Pemberton, CEO

Trinity operates eleven licences in Trinidad with assets onshore and offshore the East and West Coast. Trinity operates approximately 300 producing wells across these licenses.

Onshore Licenses
Trinidad’s Forest Reserve area began production in 1910 and onshore Trinidad has produced approximately 1.6bn barrels of oil to date. This represents a low recovery of estimated OIP, due to under-investment and limited application of modern techniques. Trinity’s onshore assets therefore provide low-risk development opportunities. Trinity’s plan is to pursue a programme of drilling and recompletion to grow production from its onshore assets. Last reported operational update from this area (interim results published September):
  • Average H1 2013 net production for onshore was 1,997 bopd and c.2,300 bopd at the end of July
  • Six wells brought into production in H1, contributing c.500 bopd to June's production. Since the period end a further two wells have been drilled in the WD-5/6 block and one in the WD-2 block. 
  • Trinity's onshore assets have multiple producing horizons creating follow-on opportunities following initial completion. Trinity undertook 52 workovers and recompletions in the 1st half adding c.300 bopd of production. Trinity's most recent wells also offer significant potential as many have not perforated the primary production target with deeper zones initially being targeted.
  • Trinity plans to drill at least five more onshore wells this year and is considering taking on an additional rig to expand the programme
Offshore Licenses – West coast
The Brighton Marine field was discovered in 1951. Nine offshore platforms were installed to access further undeveloped reserves. The field was developed without seismic but in 2009 Trinity acquired 3D over the block. A number of infill drilling opportunities and well defined fault blocks have been identified. Some of the fault blocks extend into the PGB licence. In total 20 drilling locations have been identified with an initial development phase of 6 development wells and 1 exploration well planned.

The PGB licence acreage was acquired in 2012 following Trinity’s review of seismic over Brighton Marine which suggested the play may extend into PGB. Trinity is currently producing from two wells. The licence also holds a heavy oil (16° API) discovery, ALM-22. The recent Jubilee discovery by Petrotrin near the Cluster 6 platform estimated at 48mmbbl demonstrates the potential of the area. In order to delineate the ALM-22 discovery and identify future drilling locations Trinity intends to acquire 3D seismic over the block during 2014. Last reported operational update from this area (interim results published September):
  • Average H1 production from West Coast was 452 bopd and is currently c.760 boepd including gas production from the MP-8 platform.
  • H1 focus was the installation of a new deck on the MP-8 platform ahead of a heavy workover programme which commenced in June
  • Since beginning of July four wells have been worked over adding production of c.160 bopd in line with budget. A further three wells will be worked over in the coming weeks and Trinity is reviewing an additional three candidates. In aggregate, this project is expected to double production from the Brighton field and significantly extend the field's life
  • Given the encouraging preliminary results to date, Trinity is reviewing whether other platforms could be similarly upgraded.
Offshore Licenses – East Coast
The Galeota block is situated within an established oil play of the Columbus Basin in shallow water. The Trintes field commenced production in 1972 and consists of five main reservoirs. Trinity intends to revitalise the Trintes Field and grow production with a series of planned work-overs, side-tracks and modern artificial lift methods as well as infrastructure upgrades. The Galeota block has a number of undeveloped discoveries and exploration prospects. Trinity plans to drill up to 5 exploration wells in 2013 and 2014 to assess the blocks full potential and identify a full development concept once total resource is more clearly defined. Last reported operational update from this area (23rd September):
  • Average H1 2013 production from the Trintes field was 1,075 bopd and is currently c.780 bopd
  • In February Trinity experienced numerous issues including a generator outage at the Alpha platform which adversely impacted production. The team have been working to rectify these issues and restore production from impacted wells. A total of eight workovers were completed which added 350bopd. Trinity has continued to experience issues with electrical supply and pumps and the field is operating at around 80% capacity
  • Drilling operations on B5 began on 8 February. This well was designed to access reserves in the "N" sand with an expected production of 250bopd. During drilling operations a crack was found on the casing with severe corrosion. The well was temporarily suspended pending an engineering design to install a new housing
  • Drilling operations on B11 began on 8 April. After reaching TD it was decided that the well should be side-tracked. Logging resulted in 70 metres of net hydrocarbon pay. Initial gross production was 265 bopd. The well took longer than expected to drill due to issues with rig uptime and people transfer. To rectify these issues, Trinity has temporarily halted operations. The rig is currently demobilised to upgrade the mud systems and will recommence drilling later this year.
South African Licenses
The exploration licence for the Pletmos Onshore block covers approximately 11,000km2 and was awarded to Trinity in April 2012. Trinity holds a 100% interest although PetroSA has a 10% back-in right and Historically Disadvantaged South Africans could also take up a 10% stake. No exploration has occurred in the block since 1990. Trinity has identified potential gas prospects and plans to reprocess the existing seismic and acquire new 2D/3D data during the first exploration phase of 3 years. Last reported operational update (Interims end of July):
  • Trinity has initiated a farmout process to find a partner for the exploration phase on this license.

Outlook & Share price catalysts:

There are some exciting and potentially significant catalysts that if successful could see a re-rate to the share price. Broker targets seem to suggest anywhere between 180p and 280p.

Trinity will continue with the onshore development drilling campaign and drill a minimum of five new wells by the end of 2013. On the West Coast, Trinity will complete the remainder of its workovers on the MP-8 project (three additional wells). On the East Coast drilling will recommence in November 2013 and Trinity expects to complete one development well before the end of the year.

Trinity are looking to broaden their existing portfolio through the upcoming licensing rounds and selective acquisition opportunities. In addition to these initiatives, Trinity is working to further improve the commercial terms on its core licences.

Trinity should drill two offshore exploration wells during the fourth quarter of 2013: TGAL-25 in the Galeota license offshore the East Coast which has already commenced drilling, and El Dorado offshore the West Coast on the PGB license due imminently.
  • The TGAL-25 exploration well has begun with a projected TD of 6,500ft in the Galeota license. Three primary reservoirs are being targeted, the M, N and O sands, all of which are high quality sandstones that offer the potential for high recovery factors. TGAL-25 will be drilled as a vertical exploration well to test nine stacked sands between 300 ft. to 4500 ft. Formation testing will be accomplished by mini-DST rather than a conventional cased-hole DST. Management estimates the GAL-25 well is targeting gross un-risked P50 prospective resources of 32mmbbl (net 20mmbbl) with a chance of success estimated at 64% in the primary reservoirs. If successful TGAL-25 would be a fast-track development of a Trintes NE discovery that would possibly open the area for mid-term 2015 development drilling and satellite exploration drilling into adjacent undrilled fault-blocks.
  • The El Dorado exploration well is planned to spud in the fourth quarter of 2013 with a projected TD of 6,138 feet in the PGB license. The well will test the presence of hydrocarbons in stacked sands. The El Dorado well will be drilled vertically, evaluated, and plugged and abandoned. With success, the proposed well will be tied back to the re-furbished MP-8 facility and could be put onto long-term production as quickly as 4 to 6 months. Management estimates the well is targeting gross unrisked P50 prospective resources of 13.4mmbbl (net 9.4mmbbl) with a chance of success estimated at 51%. This is based on primary recovery only. Trinity is currently undertaking an study to examine whether water-flooding could improve recovery rates which could potentially double the resource potential of El Dorado.

My thoughts and why I rate this a buy:

For Bayfield share holders the reverse takeover by Trinity was financially painful. Bayfield seem to have been financially restricted at the time and short of negotiating power - Trinity picked them off for a price which on reflection looks a bargain. Note they have had to financially account for a $62m goodwill credit for the "bargain" price they achieved. The "10 Bayfield shares for 1 new Trinity" offer at the time means anyone holding at that time is still significantly underwater, further reflecting how good a deal it was for Trinity. That’s tough for investors from Bayfield and it feels like Trinity have spent 2013 to date off the radar dealing with the integration of Bayfield.

But looking in 12 months later, what struck me is how strong the Trinity board are - they are seasoned professionals, they hold 21% of only 95m shares in issue, the CEO states in the below interview that avoiding dilution is of significant importance to the board, and there is plenty of upside on offer here with high impact potential drills underway and a 2014 drill programme that should drive production and profit upwards by some margin. The company remain almost debt free, with cash to cover all planned drills, and an undrawn debt facility. Production underpins ongoing costs and any successful drill result before year end should see significant upside. Even without success, ongoing production and profitability growth should protect downside into 2014. For RBC capital Markets view of this upside/downside potential/risk, see below.

Whilst production costs look high, due to a heavy reliance on workovers and infrastructure upgrades ongoing, the recent government announcements on financial incentives have had no impact on profits yet, but should help Trinity with their economics in coming years. And most developments can be reasonably quickly brought on stream due to existing infrastructure.

This company seem to be coming in from the cold and getting some good coverage. Small buys are shifting the share price as there are relatively low numbers of shares in free float. I will be taking a position here before the drill results and keeping fingers crossed for successful results and a quick profit. In the event it is unsuccessful I will be comfortable to hold into 2014 when I would hope production and profit is well ahead of 2013 levels and the share price is ahead of what is currently still the same price as the start of the 2013.

But DYOR and take your own risks please!

Footnote: The bargain that was the Bayfield takeover

In the interim results the following caught my eye. Negative goodwill was accounted for as an exceptional item to the tune of $61.8m. This arose from the difference between the $40.5m purchase price of Bayfield, and the fair valuation of all of Bayfield’s assets post deal. Whilst this isn’t cash in the bank, it does demonstrate the bargain that Trinity secured, and as the share price at the time of readmission in February is almost the same as it is now in my mind this suggests that this is still not priced in.

From results:
Details of the fair value of the assets and liabilities acquired are as follows:

Purchase consideration (refer to b)
Fair value of net identifiable assets acquired (refer to c)
Negative goodwill (refer to c)

b) Purchase consideration
The purchase consideration is calculated as the fair value of all equity instruments of Bayfield (21,647,945 ordinary shares) prior to the acquisition, based on a share price of GBP 1.20 which was the value of placing shares traded on the day of the admission and the acquisition being unconditional. An exchange rate of USD: GBP is used, being $1.56 on the date of the acquisition.

c) Assets and liabilities acquired

Acquiree's carrying value and fair value
Deferred tax asset/(liability)
Exploration and evaluation assets
Property, plant and equipment
Decommissioning liability
Fair Value of Net assets

At the date of these interims provisional values were included for Property, plant and equipment and Exploration and Evaluation assets as management requires supplementary work to be done to assess the fair value attributable to these identifiable assets.

d) The negative goodwill recognised represents the gain arising from the bargain purchase of Bayfield where the aggregate fair value of the identifiable assets and liabilities as at the acquisition date exceeded the fair value of the consideration transferred. In accordance with IFRS, the gain has been recognised immediately within the consolidated statement of comprehensive income as an exceptional item.

Footnote 2 - RBC Capital Markets broker note on potential upside / downside from current drilling:

Trinity E&P (Outperform, Speculative Risk, 200p Price Target)
Having spud the TGAL-1 well on 30th October, we anticipate a well result from Trinity at the end of November. The well, which was previously called GAL-25, is targeting an up-dip extension of the producing Trintes field and will be drilled vertically to a TD of 6,500ft to test nine stacked reservoir sands. Management estimates TGAL-1 is targeting gross unrisked P50 prospective resources of 32mmbbl with 64% chance of success and the well is expected to take 30 days to drill. We include upside/risk of +73p/-8p per share for the well in our 265p/share NAV, albeit management holds a 64% chance of success.
The El Dorado exploration well may start drilling in November. This 30-day well is targeting the El Dorado prospect on the PGB acreage offshore the shallow water West coast where Trinity holds a 70% working interest. Management estimates gross unrisked P50 prospective resources of 13.4mmbbl and a 51% chance of success. The El Dorado well will test an undrilled fault block on the West flank of the Trinity operated producing Brighton field. We view the well as higher risk and include upside/risk of +30p/-7p per share for the well in our NAV.

Two links to press coverage of Bruce Dingwall, and Legal and General’s ii holding.