President Energy (PPC) has taken a hit recently based on the fact that the bulk of its current oil and gas production comes from Argentina – but longer term that could present a buying opportunity. The situation in Argentina looks bleak currently with the economy in trouble and the value of the Peso collapsing at a rate of knots - keeping my left over currency after a visit to Buenos Aires looks like it was the wrong move! - but I still find it hard to believe that the country won’t ultimately recover, nor that oil companies operating there won’t prosper in the future.
As recently as May shares in President had been trading at over 9p, but today are just 4.5p on the bid and with a market cap of just over £50 million, so over £50 million has so far been wiped off of its valuation as a result of the ongoing problems in Argentina. These are nothing really new as the economy has been struggling for several years, but recently the rate of that decline has sped up, and on August 15 it led to the government invoking an old law giving it control over oil prices. It froze prices with Brent at $59/barrel, which doesn’t look too bad, but also with an exchange rate of 45.19 Pesos per US$ compared to the current rate of around 56. These measures will be in place for at least three months but have already met widespread opposition and legal action, including by a number of states. Argentina also brought in currency controls, although this is purely designed to prevent currency flight, rather than having an impact on trade. The company has stated that the changes won’t have any impact on its business, but it is impossible to know just how true that is and it is understandable why some investors are taking a cautious approach. That being said though, the sell-off seems to have been overdone considering the progress that the company has been making operationally and the way that it has been growing, with net production for H1 coming in at around 2,500boepd, and full year EBITDA still on target to hit $20 million as at the last update in early August.
For the full year 2018 there was a net profit of $120,000, although that was largely as a result of deferred taxes, as pre-tax profit had stood at more than $6 million. At the end of 2018 the company did have nearly $30 million in debt and servicing that has been expensive, but it has been substantially reducing it - having paid off the $4 million high interest (12.5% plus six months of US LIBOR) bank loan which was taken out to acquire the Las Bases and Puesto Prado assets - and is left with $4.8 million at 7.5% which it expects to have repaid by next June. All remaining debt is owed to Chairman Peter Levine, who unlike so many others on AIM, has actually put large amounts of his own cash into this company and owns 29.9% of it, so he can only ever hope to get his money back if the company succeeds. Cash balances will have been unaffected by the problems in Argentina as they were held in US Dollars. Currently a lot of its production, as well as quite a bit of its reserves, come from the 90% owned Puesto Flores/Estancia Vieja and Puesto Prado/Los Bases fields in Argentina, and work is ongoing to increase production via further drilling, as well as work to open up more of the gas wells which are present on some of these licence areas – as well as a gas to power project to supply all of President’s fields and then to sell surplus electricity generated. It also has producing assets in the US, including East lake Vernet which has been generating free cash flow of $180,000 per month.
Based on the amount of potential supply that President has waiting to bring online - up to 1,100boped - it looks likely to me that production is going to continue to grow strongly. Overall, it has in excess of 15mmboe of 1P reserves and more 25mmboe in the 2P reserves category (which does of course include the 1P figure), so the current market cap of circa £52 million plus outstanding debt means that the company is valued somewhere in the $3.5-4/barrel range for 2P reserves, which seems low considering it is in production. Of course there are risks here currently as the situation in Argentina could deteriorate further, but I still view it as being a fairly low risk country to operate in and would expect the economy to recover. The share price could well go lower in the coming months, but I would still view the current level as offering good longer term value, and without the Argentina problems I doubt you would ever have got a buy in price of anywhere close to this – especially given it has been trading at some sort of discount based upon this risk for a long time now.
Filed under: President Energy, ShareProphets podcast, Bearcast, Altitude, boohoo, Woodford
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