When the oil price crashed in 2015, opportunities from secondary asset disposals by the larger operators to smaller more focused companies was always going to happen - it’s the normal process in the commodity sector. PetroTal Corp (PTAL) is an example of this, where I can see upside from this business process. The corporate shuffles following the oil price crash saw GranTierra Energy (GTE) spin out non-core assets and in effect put its Peru assets and operation into PetroTal. At the time of AIM listing, GranTierra had a 47% holding, but with voting rights restricted to 30%, and US-based institutional investor Meridian Capital holding a further 14.8% and both represented on the board. A well experienced Peruvian oilman sits in the CEO seat, and the GranTierra operations team transferred with the asset - that’s ticking some boxes for me. I would have to say that a stronger experienced Independent NED compliment would please me and I note GranTierra’s lock in period has ended. So I see some potential share price risk on this front at the current time.
The main asset is Block 95 – Britana, with the company owning 100%. With the oil at 19.5 API, it’s on the heavy side. The CPR states some 330 million barrels oil in place, and a recovery factor on the low side at 12%, but the company sees higher recovery being possible. Regardless 39.8 million barrels on a 2P basis with an NPV10 at $405 million on base deck oil price, is just fine for the time being in my view! Currently produced oil is sold to PetroPeru (the Peruvian state oil company) at 14% below Brent, which is a steep discount, but that does allow for transport costs to the purchasers refinery. Future plans include export via pipeline for which contracts have been signed with PetroPeru. So export capacity looks to be there to ramp-up production. At the time of AIM listing, the Britana field had only been in production for a number of months, with a forward plan to increase production from 2,000 bopd up to 5,000 bopd by end of June this year, moving on to 10,000 bopd by early next year. If the company can increase that recovery factor to be more in line with analogous fields, then 20,000 bopd by the 2020 year end is the stated aim, with a corresponding increase in booked 2P reserves.
Last week the company told us the most recently completed well encountered mechanical issues, so has been completed as a deviated vertical producer, rather than as a horizontal producer as planned. Despite this, the initial flow rates have enabled that 5,000 bopd target to be hit. Current production is constrained by process capacity, which is currently being upgraded and scheduled to be commissioned by the end of the year. Drilling remains on going with a new water injection well next on the list, followed by a re-completion of the existing water injection well as a producer. The first five producers should see 2P reserves on production at 25 million barrels. I think its early days to judge the operational effectiveness of the company, but hitting that end of June production target, despite hitting practical problems is encouraging. Full field development sees the company increasing the well stock to 11 production wells and 3 water injection wells, with a target completion in 2023. Capex costs have been estimated at $66.6 million this year and a further significant capital expenditure estimated for future years (2020: $54 million; 2021: $108 million; 2022/ 2023: $52 million). The company also has two further blocks in Peru - 107 and 133, again owning 100%, but with GranTierra having back-in rights. Block 133 has a commitment to obtain 200 kilometres of 2D seismic by 31 March 2021, with the company looking to undertake this next year. It’s clearly a very early stage asset. Block 107 has wide spacing 2D seismic together with 5 1960’s legacy wells, some with oil shows. There is a commitment to drill two wells by mid-2021 on this block. The CPR on 133, identifies the Osheki prospect with 278 million barrels of 2U prospective resource and a COS of 36%. A further 390 million barrels of 2U prospective resource is described in a number of other prospects, but with only a 6 to 10% COS. The company is seeking partners for these blocks, and I can see the Osheki prospect having attraction with a relatively high COS, for what is effectively a wild cat drill. The remaining prospects on block will need further de-risking before a positive drill decision can be taken in my view. Both these blocks have termination penalties if the work programme is not completed, but only at around $3 million and $1 million respectively.
It is somewhat disconcerting that only 5 months after AIM listing, the company came back to the market and undertook a £20 million placing at 15p at the end of last month. Neither GranTierra nor Meridian Capital took part in the placing and hence have been diluted down to 37% and 11.8% respectively, but we have yet to see TR1 confirmation on this or any details of new institutional holders. Reviewing the accounts of such an early stage fast evolving company does not really tell me much of real value on a profit and loss basis, but I do note there is no debt on the balance sheet and cash as at 31st March of $17.8 million, since increased by the £20 million placing, so around $40 million total cash available. The balance sheet also carries VAT receivables of $10.3 million, of which $7.3 million is expected to be recoverable over the next 12 months against sales. Close to $10 million of capex was incurred in Q1 this year, but most of that appears as trade payables at the quarter end. With revenue now running at some $8.5 million (at $65 oil), I can see this year’s cash capex being funded without reverting back to the markets and with next year holding the potential for over $200 million of gross revenue, the forecast Britana capex should be covered by cash generated. As production becomes established and reserves moving into the producing category, the potential for an RBL facility of scale becomes very tangible, which is fortunate in my view given the capex guidance and the lack of certainty on oil price, and the possibility of exploration capex to add into the mix as well.
In my view further placings cannot be ruled out if there are problems in the field or the oil price significantly turns down, but I can see real potential here to establish a long term profitable business from established assets, with exciting exploration upside as well. The company does need to demonstrate operational progress being maintained and estimates of capex costs are realistic and being realised. With a Canadian listing also, we do get quarterly financial updates and annual reserves audits which I think is essential to gauge changes in risk given the companies projected rapid evolution both operationally and financially. Liquidity on the stock has been low since listing at 15p last December and that is a clear risk. With the share price at 19p middle, giving a £127 million market cap, I can see value here. For me it’s a clear buy and I have, but I will be reviewing those quarterly reports closely to see how operational and financial progress plays out.
Filed under: PetroTal, Bearcast, mid cap shorts, Telit, Woodford, Funding Circle, BigDish, AA Group
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