Coro Energy - enough potential reward from here for a speculative investment considers Gary Newman

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Coro Energy (CORO) was my pick this year during the Dragon’s Den session I was involved in at the UK Investor Show, and I also hold a small position here myself from around the current share price. Like many smaller companies in the oil and gas sector, it is an investment that I class as being speculative, hence not risking huge amounts of money in it at this stage – but there is also a lot of potential upside. A lot of companies of this type fail to ever really progress, but there are a few who do make it and can be very lucrative if you manage to pick the right ones...

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I’ll be the first to admit that I haven’t exactly been the biggest fan of outfits that non-executive chairman James Parsons has been involved with in the past, but I’m more than willing to overlook that as the CEO, James Menzies, was the co-founder of Salamander Energy, which was sold to Ophir Energy for $850 million in 2015. It gives me confidence that Coro is focussing on the same geographical areas that Salamander operated in and he knows how things work there and is well connected. Coro clearly has ambitions for rapid growth, as we recently witnessed with its audacious bid for Ophir Energy, in a move which would have seen Ophir shareholders receive 40p per share, plus shares in the enlarged group – given that Coro has a market cap of around £14 million, I find it encouraging that a major investment bank was considering providing the bridging finance for this, which would have amounted to over £280 million. That bid was rejected in favour of an irrevocable offer from Medco Enegi which had already been tabled.

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That leaves Coro to develop its existing assets for now, with approval now given for the development of Duyang, offshore Indonesia, in which the company recently acquired a 15% interest for $4.8 million in cash and shares ($2.95 million of which was cash), plus a commitment to contribute $10.5 million towards this year's drilling campaign there. Currently Duyang had 2C gross resources equivalent to 48.78mmboe, and further upside from 69.3mmboe of 3C. There is also an exploration programme to test the potential of the reservoirs above and below the existing find, with the Mako shallow prospect having P50 prospective resources of 100bcf (with a 75% COS); and the lower Tambak target having P50 of 250bcf, and a 45% COS. Nothing is ever guaranteed, but the chances of adding to the existing contingent resources there do look attractive, plus it is close to the existing West Natuna Transportation System that pipes gas to Singapore. It is often too easy to get focussed on what is in the ground, but in this case there looks to be a decent chance of it actually reaching production, especially as a Plan of Development has been approved already. One concern would be that the previously drilled discoveries – Cakalang-1, Tenggiri-1, Mako-1 – have yet to actually be flow tested, but Mako South-1 was flowed at 10.9mmcfd and with no contaminates found. The final investment decision, plus a gas sales agreement, should come after the next round of drilling.

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For small companies like Coro, funding any drilling and development is always the biggest problem, but in this case Lombard Odier and Pegasus have subscribed for, and underwritten, a Eurobond for €22.5 million. Of course, like a lot of these deals the institutional investors should do very well out of it as the bonds were issued at 85% of par value - €19.125 million net to Coro – plus there was a 7% origination fee. They have a three years term, with interest payable at a rate of 5%; 50% of the bonds attract interest payments annually, whilst the other half have accrued interest at the same rate. The bonds also came with 42 million warrants – with each warrant having an entitlement of ten shares at a price of 4p. Additionally, the institutions underwriting the bonds received a total of 6 million warrants on the same terms. It is in Lombard’s interest for the company to do well as it also holds 26.4% of the equity, along with CIP Merchant Capital at 20.97%, and UBS with 4.5%. It would be nice however to see the directors taking a larger stake here.

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The success all hinges on the upcoming drilling and how quickly the field reaches production and actually starts to contribute to revenue, to add to the existing production coming from its fields in Italy – the recent changes to the law there will see costs increase slightly but not be a material amount. However, that production from Italy isn’t sufficient to cover the running costs of the company and it has recorded a net loss. But Indonesia - including its 42.5% interest in Bula, which gives it net 2C resources of 152bcf, plus an approved field development plan - will be what makes or breaks the company. At the moment a lot of the focus is on Duyang, but Bula is just as interesting, having flowed wells at rates of up to 21.2mmcfd, and given potential gross recovery of $100 million in past costs which will be recovered from production revenue. The initial plan for Bula is four wells targeting gross production of around 70mmcfd. Given the relatively low market cap, at a share price of around 1.95p, I can see enough reward here to view this as a speculative investment, with the chance of relatively near term revenue and a move towards profitability for Coro on a net basis.

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Filed under: Coro Energy, Bearcast, Concepta, Julie Meyer, Tom Winnifrith, Adept4, Quilter, David Scott, Malcolm

2019-04-08 11:56:54

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