Looking at the chart for Pharos Energy (PHAR), I wouldn’t blame you for coming to the conclusion that it is best avoided as it has been on a steady downwards trajectory for several years and with little sign of any relief. Operationally, things haven’t been brilliant largely as a result of declining production at its TGT and CNV fields in Vietnam, as well as it looking likely that it paid a high price for its acquisition of Merlon Petroleum and its producing assets in Egypt, which completed last April. Pharos paid $136 million in cash, along with the issue of 65 million shares, and with its market cap now standing at just £144 million, that pretty much equates to a similar amount. Whilst I accept that there are good reasons why it has fallen from previous highs, I also now think that the share price is far too low at a little over 36p per share, and the more recent decline has come as a combination of weaker oil prices alongside a, possibly two, larger investors selling shares into what is generally quite an illiquid market for this stock (although that is largely guesswork as there haven’t been any holdings notifications)...
However, so far this year the shares have dropped around 30%, and that wasn’t exactly helped by a trading and operations update which showed that production for 2020 in Vietnam would be lower than the 7,000bopd or so achieved last year. Alongside that came news that the dividend for 2020 would be slashed to 2.75p, although at the current share price that still represents a rather attractive yield of circa 7.6%, and is well worth holding for that level of income, given that there aren’t many oil producers of a similar size that pay similar. In Vietnam, production averaged 7,081boepd for 2019, and guidance for 2020 is 5,500boepd to 6,500boepd, but with further drilling later this year - the TGT H1-15X well which will also target deeper sands which aren’t currently being produced from - plus plans for a six well programme in 2021.
The acquisition of Merlon and its Egypt licence added 24mmbbls of 2P reserves and a further 37mmbbls of 2C contingent resources, and the company has already seen improvements on the 5,692bopd that was being produced at the time the deal was approved, with just over 6,000bopd achieved at the end of 2019 compared to an average rate of 5,055bopd between April and the year end. That was still lower though than it had been expecting, with 6,500bopd having been the target, but to make up for that it is currently using three rigs to drill - as well as three workover rigs - after which it will revert back to two. For the full year 2020 overall net production is expected to average 12,000-14,000boepd, so not dissimilar to last year, assuming actual production comes around the middle of that target. This drilling activity at Egypt is ongoing - although the focus will remain on production rather than further exploration - and is all part of its targeted 15,000bopd net by 2023. Its operating costs are low, at under $10/barrel, and although it receives a discount to Brent in Egypt, in Vietnem its oil attracts a similar premium to balance that out.
The last accounts show that the company generated revenue of nearly $92 million during H1 2019, albeit at an average oil price of $69/barrel, and operational cash flow of over $54 million. It did make a loss during that period, as a result of the fees associated with the Eqypt acquisition, plus taxes due from production, and finance costs of $5.5 million. At the end of last year it did still have $58 million in the bank, and although debts total around $100 million, that isn’t exactly a high amount for a producing company that has recently spent a sizeable amount on an acquisition. In fact, its largest liability is $139 million in deferred tax. I know you can never take a balance sheet purely at face value, but Pharos' showed net assets of $516 million as at the end of June 2019, and only $15 million odd of that was intangibles. So even allowing for some discount to NAV, it would still seem like good value to me at a market cap that equates to around $185 million.
It would also seem to be fairly cheap compared to many of its peers, if we look at it from an EV/boepd and EV/2P basis, and certainly enough to suggest upside potential even at these lower oil prices if you are taking a longer term view. Rather than being panicked by the low share price and recent drops, I would see this more as an opportunity to buy at what I view to be a price that represents good value compared to its peers, and although you aren’t going to see much, if any, production growth during 2020, it is still producing enough to make it interesting at this share price level. It could still go lower yet, depending on how much more the seller has to offload, but I’d be happy buying at anywhere around this level, or even below if you do get the chance to. I have added to my existing position to hopefully take advantage of what I would view as a blip, rather than being a sign of continuing falls in share price. Sometimes a distressed seller dumping into low volumes on these less liquid shares can present a good buying opportunity that you wouldn’t otherwise get.
Filed under: Pharos Energy, Versarien, NMC Health, Jupiter, Merian, Laura Ashley, Finablr
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