These days it often seems to be the case that if you are interested in a new IPO, it is better to wait until that company has listed and the dust has settled, as often you will get a chance to buy in cheaper than those taking part in the initial fundraise. Block Energy (BLOE) looks to be one such outfit and the timing of its listing looks good, with the oil sector showing strength, plus there is plenty of potential from gas as well. The company operates in Georgia, and whilst that may set alarm bells ringing for some who are wary of investments in that part of the world – Frontera Resources (FRR) is one such example that springs to mind - there is no doubt that the country has a track record in this sector and there is interest from some larger players, such as Schlumberger.
That is of course no guarantee of success, and although Schlumberger is targeting similar plays in a neighbouring field, I am always very wary of ‘success by association’, especially with smaller companies where some think the mere mention of a large multinational being in the region is enough to justify a higher share price based on that alone. Block holds 100% of the Norio field, having acquired the remaining 31% from Georgia Oil and Gas for $310,000 cash last September when it exercised an option to do so. The same deal also saw the company acquire 90% of the neighbouring Satskhenisi field, plus it has 25% of the West Rustavi field (increasing to 75% on an earn-in basis), having recently acquired 20% for $500,000 plus $1 million in shares. I’m always a bit wary of small companies in the natural resources sector that have acquired assets cheaply, and you have to question why, if they are worth a lot, they have been sold cheaply and suddenly make the buyer worth multiples of what it paid for the asset. That is even more the case when the assets in question, although producing, have seen a dramatic decline over the years – Norio has been producing since the 1970s, and overall Block’s three fields are now only churning out around 15bopd, and that oil has typically sold at around $10 below Brent. It also isn’t the first time that a deal has seen Block Energy acquire assets from another company in which CEO Paul Haywood has an interest – he was a director at Georgia Oil and Gas. Block previously traded as Goldcrest Resources and back in 2016 it announced a deal to acquire all of the shares in Taoudeni Resources, another company where Paul Haywood was a director, and its gold projects in Ghana, although that was purely for a consideration in shares. It eventually sold those assets for $600,000 back in February to focus on its interests in oil and gas.
But that wouldn’t put me off, as the limited companies in which the assets were originally held didn’t have the funding to really do anything with them, and the amount paid to move them into the PLC certainly doesn’t look expensive to me. Currently the company is valued at around £8.7 million at a share price of 3.5p on the ask, and based upon current production you certainly wouldn’t be rushing to buy shares. But what you are paying for here is for the potential for that output to increase rapidly and the fact that the company has the funding in place to achieve that, having raised £4.27 million net from a placing of 125 million shares at 4p, with both Amati Global Investors (14.5%) and Miton Asset Management (9.19%) having taken significant amounts of shares in the IPO. This means that the company is funded to recomplete ten wells at Norio and Satskhenisi, along with three sidetracks, and the aim is to increase production to over 900bopd via that work programme. Initially that will target production of 250bopd from the first phase. Currently these two fields have 1.1mmbbls of net 2P reserves, and plenty of potential to add more to the reserves category from the 2C contingent resources of 32mmbbls that it also has. With oil prices at current levels, the company would expect net back to be in the $30-35 range.
On top of that, West Rustavi has the potential to be a real game-changer, and although it only has 0.4mmbbls of 2P reserves, it is the 456bcf of 2C net contingent gas resources (assume 75% earn-in is achieved) which is the real interest here. Initially the focus will be on reactivating and sidetracking several wells, with the aim being 650bopd production, but the company will also be putting together a field development plan for the gas, and the area already has infrastructure in place, such as a gas pipeline. Any production from the gas will be at least a couple of years away, assuming that all goes to plan and it tests and flows as the company expects – which certainly isn’t a given – and it will then need to finance the development of the field which is expected to involve capex of around $1.10/mcf, but could potentially be worth hundreds of millions.
I know some of you will be reading this and thinking that it all sounds great but that you’ve read similar before with countless other AIM outfits and most of them have failed to deliver anything close to what they were targeting. You would of course be right to be cautious, but I do think that the risk is largely being priced in at this level and is you are interested in the more speculative plays, then this one if definitely worth a look, as even if it only achieves part of what it is targeting, there would still be plenty of upside potential. There is also likely to be regular news flow here as the workovers are carried out and potentially production is increased with each one, so that alone should maintain interest in the shares. I view this as a speculative buy and can see value when compared to its peers, especially given that the work it is carrying out in the short to medium term is already funded.
Filed under: Block Energy, Folli Follie, Woodford, Immunocore, Worthington, Doug Ware, Julie Meyer
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