I3 Energy (I3E) has been a great example of why past failure doesn’t necessarily point to a continuation of that in the future – in the same way that past success doesn’t mean that a company or management team will manage the same again. Obviously I feel a lot more comfortable investing in a company where I trust the management and operationally it has performed well previously, and when it comes to I3 Energy that certainly hasn’t been the case, having completely screwed up its North Sea operations and having been guilty of being very ‘overly optimistic’ in its internal expectations versus the independently assessed ones in the CPR. But at the same time you would be silly to ignore a complete change in the fundamentals - in the same way as you would if invested in a company that you like and bad news emerges that will have a longer term material impact on the business - and that is exactly what we saw with this company when it completed the acquisition of producing assets in Canada last year, and bought those at a time when oil prices were low.
I last covered I3 back in August last year, soon after that acquisition, when the share price was 5.5p and could see it going higher, although was still cautious until I saw some actual financials of how profitable the new operation would be. Since then it has done well operationally, as well as being well positioned to have taken advantage of the higher oil and gas prices, and now trades at around 14.5p, with a market cap of circa £104 million. The company has seen strong production from its assets, to the extent that it will soon pay out a special maiden dividend equating to around 0.16p per share - subject to a court hearing to approve that - and on top of that is intending to pay out up to 30% of free cash flow in dividends every six months. The company has consistently been averaging production of over 9,000boepd, and as at June 17 was at 9,353boepd following the Noel well coming online. That looks set to increase further as the drill at Clearwater C, on Marten Hills, has just completed and all of the horizontal sections encountered the expected reservoir formations. A second drill at Marten Hills is now underway, and both are expected to be tied into production by the end of this month, with expected rates of around 150bopd from each.
The reserves also look quite impressive, with 53mmboe of 2P and a further 23mmboe in reserves yet to be developed. It is worth bearing in mind that a fair percentage of those are gas, as current production comprises of roughly 59% gas; 24% NGLs (basically condensate); and 17% oil, and not only has the oil price grown strongly, but in recent months gas has also performed very well. In terms of where the company is financially it is very hard to get much of a grasp on that based on the last set of accounts, as those only went up to the end of 2020, and a lot has changed since then, including commodity prices. Previously there had been debt concerns here, as the company had borrowed a substantial amount of money (circa £22 million) to drill its North Sea assets, but the completion of the Gain Energy assets satisfied the terms of the renegotiation of those original loan notes, and new ones were issued with maturity date of May 31 2023, and as at the end of 2020 represented a liability of almost £17.9 million. The fact that the company is already intending to pay out a special dividend, as well as up to 30% of future free cash flows in six-monthly dividends, suggests to me though that there are no concerns about being able to settle its debts as they come due – there is no way that they’d gain approval to distribute cash in this way otherwise and for those loan holders to agree, although the likes of Bybrook do also have a large equity holding here at over 28.5%.
The share price now is a lot higher than when I last covered it, but this is one where I see further potential - especially if energy prices remain strong and reach the sort of levels that many analysts now seem to be predicting - and certainly can’t see any good reason to sell at the moment. I actually regret selling the shares that I held here when the share price hit 10p some time back, and only did so as I’d become over-exposed to oil at the time, and was happy with how it had performed from a sub-5p buy. I3 Energy is now a very different company to the one that I lost money in a couple of years back when the development of Liberator failed, as I know many other PIs did at that time as well, but I wouldn’t let that put you off taking another look at it now, as I’d expect it to continue developing and acquiring further assets.
Filed under: I3 Energy, J Sainsbury, Ocado, Cloudbreak Discovery, Churchill China, TomWinnifrith.com
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