President Energy - a recovery buy? Gary Newman reviews...

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Just because a company has traded at much higher share price levels it doesn’t mean that it will do so again, and that is particularly true of oil companies at the moment. But if you do manage to pick the right ones, then over the coming years you should see a degree of recovery, obviously depending on what oil prices do during that timeframe, but assuming that they don’t stay as low as $40 per barrel or so. Some oil and gas companies have already had a very strong bounce back from the lows we saw when oil prices briefly went negative on futures contracts and the markets were in freefall when Covid-19 really started to take a hold across the world, and in a few cases are already trading at multiples of the lows we saw. But there are others which look to have the potential to ride out the current situation and survive longer term, yet have yet to really see the share price properly recover, and one which I believe falls into that category is President Energy (PPC)...

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I’ll start by saying that this isn’t a company that I’d be looking to invest a big chunk of your portfolio in, as it does carry some geo-political risk from the fact that most of its production comes from several fields in Argentina, with a small amount from Louisiana in the US. Whilst accepting that you have to allow some risk for its operations being largely based in Argentina, I don’t see that as being a huge problem as the company has been operating there for many years, and although the country itself has serious debt problems, it did recently come to an agreement with its creditors to resolve a potential imminent default. Like all companies operating in this sector, President has obviously taken a bit of a hit as a result of the low oil prices, but still managed to perform reasonably well in Q1 – although I would expect Q2 to be bad as oil prices were low for the whole three month period – with revenue of $9.6 million, and that resulted in a net profit of $3.45 million from the Argentina operations once you strip out all general and administrative plus finance costs, but not allowing for depreciation of the assets. Production for that period was 3,000boepd, which was a decent increase on the 2,415boepd it produced on average during 2019 when it faced some operational issues, and in Argentina around 1,000boepd (6MMscf/d) of that was in the form of gas. This was helped by the acquisition of the Angostura field, in Argentina, late last year, for no cash cost. To combat the damage that low oil prices was doing to the sector, the Argentinian government announced in May that it was setting a minimum oil price of $45/barrel through to the end of the year, although that will be reviewed if Brent exceeds that level for ten consecutive days at any point. Gas prices have also been on the rise in Argentina, as it came into the winter, and the price rose from $1.6/MMbtu at the end of April to $2.6/MMbtu by the end of June.

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The company also has a busy schedule for the rest of the year with drilling and workovers at its Argentina fields, with around $5.35 million earmarked to be spent. Two workovers at Estancia Vieja are targeting initial production of 3.5mmscf/d, at a total cost of $750,000, and at Las Bases, the LB-1001 development well is scheduled to complete in late September, with the EVN-x1 at Estancia Vieja set to be drilled immediately after that, at a combined cost of $4.4 million. The success case is a 75% COS for each development well, and with targeted initial production of 5.6mmscf/d plus 188bopd. The EVN-x1 well is targeting a previously undeveloped structure with estimates of 5-14mmbbls of oil in place, plus 11-26bcf of gas. Then in early 2021 it will turn its attentions to two wells at Rio Negro – one development plus an exploration well – with a target of 300boepd and potentially 4-12mmbbls of oil in place at a 50% COS. Obviously, nothing is certain in drilling and it pays to be cautious and not to rely on the best case outcome, but if they are successful in the upcoming drilling it could potentially add significant amounts to the existing reserves of 15mmboe of 1P and 25.9mmboe of 2P. In terms of funding the work, it will come out of existing cash and cash flow generation.

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At the start of June the company raised a substantial amount of cash, as well as reducing debt, via a subscription from offtake partner Trafigura Group for $6 million worth of shares at 1.85p per share which takes its holding in President Energy to 18.3%, the proceeds of which were used to repay outstanding advances previously made. Alongside that the company also announced a placing and a PrimaryBid offer, which raised a combined total of $5.9 million at 1.85p. The company also continued to reduce its debt, and agreed with IYA Global – which is owned by chairman Peter Levine – to convert $4.1 million at a price of 1.85p, plus extend repayment on the remainder until the end of 2024, and overall this takes Levine’s stake in the business to 29.95%. That brings total debt reduction to over $16 million during 2020 so far, and aside from the IYA debt, it only has $3.7 million in borrowing from other sources now. Peter Levine is a bit of an exception when it comes to AIM directors, as unlike so many others, he has actually invested substantial amounts of his own money here, and at higher share prices, and if anybody stands to really lose if the company fails, then it is him. The last set of full year accounts aren’t anything to get too excited about – in fact at first glance they might put people off as they show a substantial net loss for 2019, but that was pretty much all down to the writing down of the value of some of its assets, with non-cash impairments to its non-core assets in Argentina and Paraguay - $88 million in total across these exploration blocks.

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So, looking ahead, there is plenty of potential for increase to both production and reserves from the already funded work which will be carried out in the coming months, and success at these drills offers upside potential near term – although failure also presents the risk of further share price weakness. The company is also in a financial position where it appears to be able to weather a period of oil price weakness until the world starts to return to normal again, and what debt it has is largely held by an incredibly supportive chairman. Having a large oil trading group like Trafigura onboard and with a substantial stake and interest in the company, as well as being the offtake partner also bodes well. Currently the shares are trading at around 1.65p mid-price and with a market cap of around £33 million, and that is only around circa 25% above the lows that were hit in mid-March. It certainly isn’t the most liquid of companies a lot of the time, often with very low volumes of shares traded apart from the odd occasion when it gets a bit of interest from private investors. This is one that I have been wrong about in the past, having covered it as a buy earlier in 2019 when the share price was around 4.5p, and prior to it experiencing some operational and production problems, plus of course Covid and the oil price crash. If you’re looking for something that will rocket overnight then this probably isn’t the share for you, but if you are searching for shares in a relatively cheap oil producer that has growth potential and is carrying out drilling operations in the near term, then at the current share price I would suggest that there is value, and decent risk versus return. I also like the fact that Peter Levine has so much skin in the game and is aligned to shareholder interests. To the extent where I am seriously considering buying some myself to tuck away and see where it ends up in a year or two.

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Filed under: President Energy, Synairgen, Purplebricks, TalkTalk, KRM22, IQE, Bidstack

2020-07-21 11:50:08

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