I wrote positively about PetroTal Corp (PTAL) in June and could see real potential for a business of significance to be established. I saw the largest risk being the technical risk associated with ramping up production to plan and even general social unrest in Peru did not seem to impact the investment case. However, now we've been provided with news that the cash position had been miss-stated in an operations update on 21st October. The implications draw me to now call this a sell. At an operational level the production appears to be ramping up ahead of plan at its Bretaña oil field in Peru - we are told the last 30 day average production is 8,500 bopd. With a target of 10,000 bopd by year end this is impressive. The well stock appears to have capacity, even post initial flush flow, to achieve this. All good. I previously commented about the potential for social unrest to interrupt progress, but the company appears to have overcome any resulting issues without material impact to the operational targets. All good. Now to the bad...
The operations update on 21st October told us the cash and cash equivalents was $40 million at that time. Yesterday we were told this was wrong, and that the true figure was $20.5 million. When I reviewed the investment case in June, I noted this year’s capex guidance was $66 million and I could see how this could be funded from available cash and production cash flow. The results to the end of the 3rd quarter revealed yesterday confirmed Property Plant & Equipment additions of $61 million. On 21st October, when we were told the cash position was some $40 million, we were also told the board had approved a further $19 million of capex for this year. The result would be an acceleration of production next year. All sounded very positive. Only 2 weeks later, on the 4th November, we were told the Chairman stepped down as a non-exec director and became the company CFO but non-board level, while the encumberant CFO took a long walk off a short plank. Looking back, that was clearly a very big red flag.
To me the latest RNS makes it clear, on balance of probability, what happened. The company’s board took the decision to authorise the additional $19 million capex and instructed the drilling contracting team to proceed to poke more holes in the ground on the basis of the $40 million cash figure. The sedar (Canadian stock market RNS system) published Q3 provides some stark numbers. At Q3 end (30th September) cash was $20.5 million and trade receivables stood at $2 million with oil inventory at $8.5 million (carried as net sales value), which we are told by the company was realised shortly afterwards. The VAT receivable was at $9.9 million, but had increased from $9.3 million at the prior quarter end – so not really a current asset in my view, as the company acknowledges in prior account notes. Meanwhile trade payables increased to $41.8 million, from $30.5 million at the half year. I think it is reasonable to assume the trade and VAT receivables will be maintained around the current levels. So we are left with cash at $20.5 million and trade payables of $41.8 million at end of Q3. At the end of Q2 cash stood at $33 million, so the trade liability was covered by cash at the time - invoices could be settled as due from cash at bank. We are also told the cash positon was $21.1 million at end of October, but not the trade payables at that date – so that declared cash position does not mean anything by itself.
I would allow for production for the current quarter to be around the 8,500 bopd on average with a net back of around $26 million, prior to G&A of around $1.6 million. Allowing for the contracted Q4 capex of $19 million, I do not see enough net cash being generated to get the trade payables down to a reasonable level relative to cash by the year end. I would suggest, on balance of probability, this company has not complied with the AIM rules – it knew the 21st October statement on cash was wrong at the time of the change of CFO RNS on 4th November, but failed to inform the market for some 2 weeks. That is more than poor – it is just wrong. I noted back in June I was not convinced by the non-exec’s independence and quality – perhaps this illustrates my concerns being valid? I am very concerned the company has played fast and loose with the AIM rules to disclose price sensitive information in a timely manner – I would suggest on balance of probability, the company has not complied with this obligation. In my view the company will need to raise further cash PDQ to sort its balance sheet out prior to the year end – perhaps around that $20 million apparent accounting cock-up level?
With two very significant institutional shareholders on the register, who appear to have been happy to be diluted in the last equity raise, I can see any such raise not being supported in part or at all by them. With the need to raise appearing to be the direct result of the company cocking up the finances, I can see other institutions being unimpressed. I would conclude a placing discount of significance can be expected. It is such a shame for the operational performance to exceed my expectations, but for the finance control and corporate governance of the business to be so poor. With a market cap of £150 million (at 22p mid price), this company is not expensive compared to other UK quoted oil companies with similar production and prospects, but I just do not trust it. I do not need to hold oil companies shares where the company has lost the plot on finance and corporate governance and AIM rule compliance and will be selling my holding. I will likely re-purchase after the dust has settled and the balance sheet is cleaner – and I can have proper assurance of AIM rule compliance.
Filed under: PetroTal, Bearcast, Image Scan, Blackmore, Chris Bailey, Blue Prism, gold
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