ANDES ENERGIA - Small cap pick of the year I am more convinced that this is a stock that could generate some very large returns this year given their position in the World Class Vaca Muerta Shale in Argentina. The first thing to point out is that THIS IS NOT ANOTHER POLAND. The Vaca Muerta is the world's third largest shale oil resource and the only producing shale oil outside of the USA - it is primed for development: flat, accessible plentiful water, no animals, vegetation, cities or community issues to meander, intrastructure in place, excellent geology (of course) and it has already been proved up and is producing - and Andes has +6million acres of the stuff which is enormous. Why invest now? Activity is gearing up - 400 wells were drilled between 2011 and 2014 and yet 500 wells are being drilled this year alone. Large Industry players continue to make their move - many were caught sleeping in the US and ended up buying their way into the shale and they don't want to miss out this time. Recent investors include Shell, Petrobras, Total, Exxon, Chevron, Wintershall with more wanting access - however nearly all the land has already been licensed... Political situation is improving - with the 'pro business' government being the front runner to win the elections in Aug this year, arguably never has there been a better time to invest in the country. ASSETS - Andes have 6 licences, 4 discoveries, 2 producing wells in the shale. IMPORTANTLY they have optionality as they hold 2 blocks 100%, 1 block with 40% WI and the other three remaining blocks 20%-27% WI with YPF their partner. Their blocks are surrounded by existing infrastructure, services companies and pipelines and geologically it looks excellent. ECONOMICS - ROI are around 15% today but this is expected to rapidly increase as costs continue to drop hard. The shale is naturally over pressured so opex is only ~$10/bbl. The shale is still in its relative infancy wrt Horizontal drilling, but that is the opportunity that Andes has - economics are good now, so with Horizontal drilling, it is expected to be significantly improved. CAN COSTS FALL? - absolutely. The country has been producing oil for over 100 years so technical knowledge is high. Competition is increasing as more and more Services companies expand their operations, unused equipment and rigs are coming down from the US, timing per well is reducing rapidly and the number of fracs per well is also increasing. NEXT STEPS - Andes has a stable production base of around 2,500 bbl/d (from Conventional production in Colombia and Argentina) to pay for G&A, business development and to provide the company a base with which to grow their operations. Given the scale of the resource that they have, the company plans to enter a series of farm-outs to accelerate the work program. Sure it is small cap but the company will have a valuation materially larger than it is today.
As people know AEN has a joint venture with YPF (and in torn Soros has invested in YPF) and it's interesting to see what happened yesterday which clearly shown an appetite to invest in YPF and conversly the Vaca Muerta: Argentina's state energy company YPF expanded its planned bond sale to $1.5 billion from $500 million, the company said on Thursday in a letter to local market regulators. Results of the 10-year debt sale are expected to be announced later on Thursday. Reuters' IFR reported the issue was launched at 8.625 percent, down from price talk of 8.75 percent. "There was a lot of demand, about $4 billion, which is why the company decided to widen the offer," a local market source, who asked not to be named, told Reuters. YPF needs to raise cash to invest in its vast but barely tapped Vaca Muerta shale oil and gas formation in order to reverse Argentina's energy sector trade deficit that is pressuring foreign reserves. (Full Story) In February YPF sold $500 million of bonds, a third less than it had offered as many bids were for higher yields than it would accept. Since then investor sentiment has improved as the October presidential election draws closer. The next government is expected to be more market friendly than that of outgoing leader Cristina Fernandez, whose government's sweeping currency and trade controls are cited by economists as factors weighing on the economy. She is barred by law from seeking a third term in October.
If you have a look at my post here from 16 March I'm of the opinion that from a technical perspective the share price has in the past always rallied from the 17p lows. If you couple this with the fundamentals of a solid company, elections in Argentina which could change the landscape, broker ratings with target prices up to 90p and limited share liquidity, plus other reasons unknown to me, I would suspect that this is just the beginning. Have also a look at the posts on Malcy's blog on AEN and see what he mentioned in the past. Bear in mind that Soros has invested a lot in YPF and they are also involved with AEN, so maybe this cheap Vaca Muerta AIM listed play is also attracting other institutional investors or competitors. Let's just sit back and enjoy as I think that things are just starting to get interesting.
For those folks who want to see some other Latin American producers that operate right next to Andes' Colombian properties:
Petroamerica Oil (PTA.V in Toronto, PTAXF in the US listing) with four different producing oilfields in Colombia and 4,600 bopd in Q1 2015 currently has Enterprise Value at US$60 million.
PTA.V is Debt Free as of April 2015. Zero Debt.
According to the latest news, PTA.V pays the CAD notes (US$28 million) this week (19 April) and once these notes are paid, Petroamerica will hold a remaining cash of US$38 Million, including the restricted cash.
Excluding the restricted cash, Petroamerica will hold US$27 million CASH after paying the CAD notes.
Datafeed and UK data supplied by NBTrader and Digital Look.
While London South East do their best to maintain the high quality of the information displayed on this site,
we cannot be held responsible for any loss due to incorrect information found here. All information is provided free of charge, 'as-is', and you use it at your own risk.
The contents of all 'Chat' messages should not be construed as advice and represent the opinions of the authors, not those of London South East Limited, or its affiliates.
London South East does not authorise or approve this content, and reserves the right to remove items at its discretion.