There is often an argument for letting your winners continue to run, but in the case of many natural resource stocks listed on AIM you are often better off taking a healthy profit whilst it is on offer. I believe that to be the case with Block Energy (BLOE) which I covered as a speculative buy roughly a year ago at a 3.5p share price, and a profit of in excess of 200% is now on offer as the shares are trading at around 11.3p to sell. During that period the market cap has risen by far more though, due to the extra shares now in issue, having gone from £8.7 million to around £45 million, equating to an increase in excess of 400%. Whilst this Georgian focussed oil and gas company has enjoyed some degree of success during that time, I now find it hard to see the risk versus reward pay-off being in your favour...
It is a favourite with PIs and most seem to be focussed solely on the levels of production, following a flow test of its Rustavi 16aZ well which exceeded expectations when it was flowed at 1,100bopd, and then choked back to 700bopd which could be handled by the existing infrastructure in place. At the start of July it signed an oil storage deal for up to 90,000 barrels to be kept at Georgian Oil and Gas Corporations nearby facility, and this means that the well can be flowed to its full potential. On paper, based on the cash that this well will generate, with operating costs of around $29/barrel, the $1.1 million of operating cash flow (based on 1,100bopd and the current Brent price) looks very impressive, but like with any natural resources outfit the real value is in the longevity of its operations and not just headline figures over a shorter period of time.
Currently West Rustavi only has 2P reserves of 0.9mmbbls, which would equate to a little over 800 days of production at current rates, and it will all come down to how much of the 38mmbbls of unrisked 2C contingent resources can be converted into reserves, otherwise the operations will have a limited life span. On top of the oil there is also 608bcf of 2C gas (unrisked) and funding is in place to drill a well to target that sometime in the next year, following a placing to raise £12 million gross at a share price of 11p in May – along with paying for other work, including horizontal sidetracks and upgrading production facilities to handle up to 5,000bopd. On paper that gas is worth a lot of money, but you have to remember that Block managed to originally increase its interest from 5% to 25% by paying just £377,000, plus 18 million shares worth £751,000, which then increased to 71.5% on completion of the workover and sidetrack. Last week it announced that it had completed the acquisition of the remaining interest in the field via the payment of $250,000 in cash and $500,000 worth of shares to Georgia Oil and Gas Ltd. You could argue that GOG may have sold the asset as it couldn’t afford to carry out work itself and has retained an interest via its 7.6% stake in Block, but it still seems to have changed hands very cheaply given that the current reserves and resources were already known at that time, and the gas discovery dates back to the Soviet era yet has never been developed.
It also has the Norio and Satskhenisi fields, but production from those is so low that they have little impact on the value of the company and it is all about the success of West Rustavi. We also need to consider the share of any production that goes to the government of Georgia, and although 2P gross reserves stand at 907,000 barrels, Block only actually effectively owns 464,000 barrels of that. Before I have a herd of PIs baying for my blood, I’m not saying that the company doesn’t have value nor that it hasn’t made good progress, I just feel that £45 million is a very high valuation for West Rustavi as it currently stands – especially considering what it previously changed hands for and the news flow since then. For instance, at the end of 2018 its licences were valued at a total of £1.42 million in the accounts, so although the flow test was a great result, I don’t see it justifying such a large premium. For me, until such time as the company is able to convert a significant proportion of resources into booked reserves I find it hard to see value at this share price level – although past history suggests that there will be spikes along the way whenever news that is deemed to be positive is released, and the price will likely overreact. There will be a fair bit of drilling to come - following a rig agreement with JSC Norio this month - so traders will probably see a number of swings over the coming months. For anyone who bought back when I recommended this as a speculative buy, it has been a great ride, but I would now seriously think about derisking as a fair bit of future potential is now being priced in and the longevity of the operations is key.
Filed under: Block Energy, Atlantic Carbon, RM2, Woodford, PZ Cussons, Motorpoint, Optibiotix
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