The next focusIR Investor Webinar takes places on 14th May with guest speakers from Blue Whale Growth Fund, Taseko Mines, Kavango Resources and CQS Natural Resources fund. Please register here.
If you want to know what Trinity’s tax losses are all you have to do is look at page 91 of the 2023 Annual Report - see https://trinityexploration.com/wp-content/uploads/2023/06/Trinity-EP-2022-Annual-Report.pdf. There you will find this:
“Taxation losses at 31 December 2022 available for set off against future taxable profits amounts to approximately $227.5 million (2021: $234.6 million), with tax losses recognised of $24.9 million at the end of 2022. These losses do not have an expiry date and have not yet been confirmed by the Board of Inland Revenue (“BIR”) or His Majesty's Revenue and Customs (“HMRC”). Tax losses carried forward by companies engaged in petroleum production business in Trinidad and Tobago are restricted to set off against 75% of the otherwise chargeable profits in a year.”
Profit tax in Trinidad is 50%. Touchstone are about to get their hands on $225 million of tax losses that have the potential to protect 75% of their profit from that tax for the foreseeable future.
And they get $7 million or so in cash.
And they get cash flow of $1 million per month (more when they start cutting costs).
And they get reserves that Trinity had invested over $250 million over the past 14 years.
Touchstone are getting a bargain.
Trinity doesn’t have cash problems: it’s expected to end the year with over $10 million (it’ll be more once the senior managers are sacked).
Its problem is that it can’t utilise its $225 million of tax losses by expanding its business. If it can, Cavendish value it at 346p per share (as it is, even without being able to fund expansion Cavendish’s current NAV is 76p per share).
Touchstone will do very well out of this (Trinity shareholders less well as we’re being asked to trade potential 280p of share price growth for a 20% share of that growth).
I own 2.6% of Trinity and will be taking a 50% loss on my investment by accepting this offer (which at least is better than the 75% loss I’m currently sitting on). However, it seems to me that the expanded Touchstone should quickly see its share price double: it can use the tax losses, there’s plenty of room for cost cutting (just getting rid of Trinity’s senior management will save over $1 million per year; the CE alone has been picking up $500,000 or so), and the increased cash flow will drive investment.
Trinity is spending millions per year on five non-executive directors and two director executives (https://trinityexploration.com/about-us/board-of-directors/) and a chief operating officer and five other senior managers (https://trinityexploration.com/about-us/executive-management-team/). That cost will be quickly cut, adding to the bottom line.
Trinity’s biggest asset is $225 million of tax losses.
They exempt the holder from paying 50% profit tax on 75c of every $1 of profit.
Touchstone is getting a bargain on the basis of just the tax losses. The cash, cash generating assets and reserves all come for free.
The takeover price is ridiculously low (although we have the advantage that Touchstone is trading at longtime lows), but the broker forecast is both better and worse than 203p. The other week they cut it to 76p, but also stated that with funding for Trinity’s various projects it would be 347p (Trinity’s enormous tax losses are only of benefit if it can generate some additional profit).
In early January, Cavendish (Trinity’s broker), observed that Trinity is “A FCF Generative Business Trading at a Significant Discount. In an already undervalued sector, Trinity is trading on an EV/Sales of 0.2x, EV/2P of US$0.9/bbl and an EV/boepd of US$5,687/boepd – significantly below that of its peer group. With recent investor attention focused on the Jacobin
well, we believe investors have lost sight of Trinity’s core fundamental value.” I agree.
With a core net asset value of 201.8p (a valuation which places no value on 48.8mmbls of 2C reserves or the new Buenos Ayres licence), there’s little doubt that Trinity is seriously undervalued. Cavendish’s reports, setting out the valuation, are available free of charge on Research Tree and Cavendish’s website.
In the new blog, I’ve argued that Trinity is potentially worth at least $166.3 million (£131 million or 336p per share). That sounds like a lot compared with the current £18.5 million market capitalisation/47.75p share price, but: (i) it’s based upon prices offered for two of Trinity’s three asset groups within the past 8 years; and (ii) is dwarfed by the $226 million of additional funds that shareholders have poured into Trinity since 2012.
If my estimate is wrong, it’s because oil assets have fallen significantly in value since 2016 (which seems unlikely in Trinidad given the fiscal reforms - which are now worth between $7.5 to $8.5 million per year to Trinity, and much more if we get some production from Galeota) and/or because management have squandered it (there have been several unsuccessful drills, but that’s part of oil exploration and there hasn’t been $226 worth of failed drills or for that matter $226 million worth of payments to managers - the combined salaries for senior management have been between about $1.2 and $1.8 million per year for years).
If my estimate is wrong, I’d be surprised if it’s out by more than 50%, which would still give a share price of 168p.
Obviously, it would be helpful if Trinity or its brokers set out their opinion on asset value and I’ve asked them to do that.
What’s Trinity worth? At the moment, the stock market says £18.5 million. However, over the past 12 years $226 million has been poured into the company. I think most of that value remains (at least $166.3 million) and set out why in this new blog: https://andrewbyles.blogspot.com/2024/01/trinity-exploration-and-production-plc.html
…An additional 20% to account for the SPT reform lifts the potential value to $4.1 million and the significant reduction in costs (worth just over $2 million per year) could potentially double it (to $4 per barrel).
Considering the above, Trinity’s cash, onshore and West Coast assets have a likely minimum value of $43.43 million (cash of $5.8 million, onshore $34.18 million based upon the 2015 valuation of $5.69 per barrel of 2P, and West Coast $3.45 million based upon the 2017 valuation of $1.72 barrel of 2P). Taking account of the SPT reforms, reduction in costs, business developments and the higher oil price, that valuation could easily increase to $54 million.
Between $43.43 to $54 million amounts to between £34.16 and £42.5 million or between 88p and 109p per share.
In addition to cash, Onshore and West Coast, Trinity also has the Galeota assets. In my recent blog (see hTTps://twitter.com/AndrewPByles/status/1745396252659929563 ), I argued that they could be worth between £68.15 million and £75.37 million. That valuation was based partly upon Trintes being worth at least $2 to $3 per barrel of 2P. The $2 to $3 valuation may be too low as Trintes, with production costs of $23 versus West Coast’s costs of $30, is arguably more valuable than West Coast, but not as valuable as Onshore (where production costs are $17), suggesting a possible value of around $5 per barrel - adding another £14.46 million to the valuation. Sticking with t£68.15 million as the lower figure and increasing the higher figure to £89.83 million, Trinity has a potential break-up value of between £102 million and £132.33 million or between 262p and 340p per share.
The lower figure is based very much upon the prices at which offers were previously made for two thirds of Trinity’s producing assets and a relatively modest valuation of Galeota, where as the higher figure is more speculative. However, on the basis of the lower figure alone there’s plenty of value in Trinity and it’s only a matter of time before it’s realised.
Over the past four years, Trinity’s share price hasn’t closed higher than 175p. An ambitious competitor that wanted to get its hands on Galeota could, at the moment, probably succeed with a £2 per share bid, which would cost about $97 million (less if bought shares in the market before making an offer). Trinity’s cash would reduce that cost to $91.2 million and the cost could potentially be reduced by at least a further $37.63 million to $53.57 million by selling Onshore and West Coast. It would then find itself the owner of Trinites (producing 900 to 1,000bopd, with 2P reserves of about 9mmbls), the significant tax losses and Galeota (exploration costs of about $30 million, 2C reserves of just over 37mmbls, over 770mmbls of oil in place, and potential near-term production of 7,000bopd).
I remain confident that Trinity’s management can unlock the value in the business, but if they can’t it’s only a matter
What’s Trinity Exploration and Production’s potential break-up value?
Trinity’s owed $4 million by the government in VAT refunds, but has offset this with a $4 million overdraft. They cancel each other out, so there’s no asset or liability here.
Trinity ended 2023 with cash of $9.8 million, but owes about $4 million in drilling fees. Therefore, it effectively has cash of $5.8 million.
On October 21st 2015, Trinity announced the sale of its Onshore assets for $20.8 million (a sale that was subsequently abandoned). At that time, Onshore had 2P reserves of 3.59mmbls and so that potential sale was worth $5.69 per barrel of reserves. Also at that time, production costs were $17.40 per barrel, oil prices were $45.50 per barrel, and Supplementary Petroleum Tax (SPT) was payable when the oil price was between $50.01 and $75. Onshore’s 2P resources were around 5.9mmbls at the end of 2023 (assuming similar production to 2023 and no other adjustments; it’s unknown at the stage whether Jacobin will result in any increase to reserves). If those resources are worth $5.69 per barrel (as they were in 2015), Onshore is worth at least $34.18 million. There’s no reason to think that the per barrel value has decreased. Rather, in all likelihood it’s value has increased as consequence of the significant reforms to the SPT (worth at least a few million dollars per year), slightly lower production costs ($17 per barrel) and a higher oil price. On the strength of the SPT reforms alone, Onshore is likely to be worth at least $40 million (ie, an additional 20% or $6.78 per barrel of 2P) and perhaps more. A great deal of work has gone into the Hummingbird prospects, there is a proof of concept for deep oil and Trinity won the bid for the Buenos Ayres licence.
On August 11th 2017, Trinity announced the sale of its West Coast assets for $4.55 million (a sale that was also subsequently abandoned). At that time, West Coast had 2P resources of 2.64mmbls and so the potential sale was worth $1.72 per barrel of reserves. Also at that time, production costs were $48.60 per barrel and the SPT was payable when the price of oil was between $50.01 and $75. The West Coast’s 2P reserves were around 2.05mmbls at the end of 2023 (assuming similar production to 2023 and no other adjustments; however, the reactivation of AMB-151 might result in an increased). If those resources are worth $1.72 per barrel (as they were in 2017), West Coast is worth at least $3.45 million. Again, there’s no reason to think that the per barrel value has decreased. Rather, in all likelihood it’s value has increased as consequence of the significant reforms to the SPT (worth a few hundred thousand dollars per year to this asset), significantly lower production costs (now $30), a significant increase in production (from 190bopd to 365bopd) and a higher oil price….
Trading at little more than one times likely cash flow for 2024 ($16 million following the recent SPT reforms), Trinity is woefully undervalued. There are four steps that the company should take:
1. Promptly release the 2024 cash flow/production projections (according to the December presentation they’re due in January).
2. Pay an immediate special dividend of 1p. It’ll cost about $1 million (so less than the $1.33 million of cash flow due to generated in January) and prove both the commitment to returning 15% of cash flow to shareholders and their believe in the projections.
3. Provide details on the likely value of Galeota and set out a plan for realising it (ie, selling it or selling a chunk of it) this year. Galeota is likely worth multiples of the current share price. Nearly 37 million barrels of oils have already been discovered and established as 2C reserves, at a cost of about $30 million. See https://twitter.com/AndrewPByles/status/1745396252659929563 for my detailed view on the potential value.
4. Further improve communications with shareholders. They’ve improved at lot over the past few months, but there’s still room for more improvement. For example, more detailed information in RNSs and more opportunities to ask questions.
And with that post you reveal so much about yourself.
Trinity, the largest small producer in Trinidad (it produces about 5% of Trinidad’s oil), has been a leading member of the campaign to reform SPT. It’s expressly argued for reform on the basis that it will enable Trinity to invest in expanding its own onshore and offshore production. As significant incremental reform has taken place over the past three budgets (reform now worth millions of dollars per year), Trinity has lobbied for more (here’s Jeremy Brindglalsingh’s response to the September 2023 budget: “Whilst we believe this is a positive development, and as such is to be welcomed, Trinity will continue to champion tax reform to make investment in Trinidad competitive in an international context as we continue to build our business in the coming years.”).
Obviously there’s no contract mandating that Trinity must invest its SPT windfall, but anyone who thinks that Trinity, having persuaded the government to enact such reforms on the basis that it’ll invest in boosting production, can instead spend the windfall on dividends is delusional. It would be thoroughly dishonest and, since Trinity is dependent upon the government of Trinidad in so many ways, shortsighted. Not only could it result life being made difficult or the reforms being reversed (indeed more might not have been implemented if investment hadn’t started to increase in 2021), but also prevent the next lot from being implemented. And the next lot could be particularly useful.
Here’s the Energy Minister on December 13th: “I am hoping that within this fiscal year, we will come back with some more. I can indicate at this stage because I know that those in the energy sector is looking on and listening very closely.
“Another area that I intend to take to the Ministry of Finance for us to address will be the capital cost recovery. I have listened very carefully; we have heard what they have said. We are not going to go the kamikaze way that took place in 2014 that almost crashed the revenue stream for Trinidad and Tobago and allow a full 100 per cent write-off in one year. But we are looking, I would be speaking to the Minister of Finance and attempting to persuade him and the Cabinet for us to change from the current 2020/2020 write-off period, 20 per cent over a five-year period to get 100 per cent to front-load the write-off period. We have not come up with the figures and the formula as yet, but I prefer a front loading at this stage with a provision that says you have to reinvest the money saved right back into exploration and production.”
“There is an industry wide call for more fundamental SPT reform to encourage greater investment in the energy sector, and we remain at the forefront of discussions which we hope will result in further significant changes in due course.” Bruce Dingwall, October 11th 2019 - https://www.lse.co.uk/rns/TRIN/trinidad-and-tobago-budget-highlights-5pdwy4q3dx8ox8q.html
“We are keenly focused on improving the investment climate in the energy sector through a review of the Petroleum Taxes Act with a view to simplifying the existing oil and gas fiscal regime and making it more competitive to investors. We are also reviewing the application of the Supplemental Petroleum Tax (SPT), particularly for small producers and mature fields with a view to encouraging investment and job creation….” Minister of Finance, page 26 of 2021 Budget Statement (https://www.finance.gov.tt/wp-content/uploads/2020/10/Budget-Statement-2021-1.pdf).
“Meaningful reform to the SPT regime will enhance the economic returns to all stakeholders; the T&T Government, Heritage, the supply chain and the people of T&T. Through such reforms, which are happening globally, incentivising increased activity and greater oil production will lead to maximising recovery from our reservoirs - which in turn will lead to enhanced employment opportunities and a step-change in potential cash generation levels and returns for operators.” Bruce Dingwall, October 7th 2020 (https://www.lse.co.uk/rns/TRIN/trinidad-and-tobago-budget-highlights-nik5avsc6sx323o.html).
“To incentivise new production, particularly new oil production we have decided in the first instance to adjust our Supplemental Petroleum Tax Regime to motivate oil companies to produce more oil.” Minister of Finance, page 10 of 2023 Budget Statement (https://www.finance.gov.tt/wp-content/uploads/2022/09/Budget-Statement-2023-E-Version.pdf).
“We believe that these reduced rates of for new oil production in the marine areas will allow companies to access the required financing to increase their drilling and get approval for new exploration and production programmes thus increasing the production of much needed oil… We are also looking at adjustment of other oil and gas taxes and other innovative fiscal incentives to encourage new investment in the sector.” Minister of Finance, page 45 of 2023 Budget Statement.
“This will encourage smaller oil producers and lease operators in small and mature marine oil fields to incentivise further their production.” Minister of Finance, page 49 of 2024 Budget Statement (https://www.finance.gov.tt/wp-content/uploads/2023/10/Budget-Statement-2024-for-web.pdf).
“…this particular measure is to encourage the small producers, the Trinity's, the Touchstone's”. The Energy Minister discussing the Finance Bill 2024 , which reduces marine SPT, in the House of Representatives on December 13th.
There have been plenty of disappointments this year PipeDragger, the most obvious one being the fall in the share price from 120p on January 24th to just 41p today. However, there have been successes, including: (i) further tax reform that’s worth millions of dollars per year (as the the largest small producer in Trinidad, Trinity has been at the forefront of the campaign to amend the SPT regime and were expressly named by the Minister of Energy, along with Touchstone, as a beneficiary when the Finance Bill was debated in the House of Representatives last week); (ii) the award of a new licence on much more favourable terms than the existing sub-licences (there was competition for Buenos Ayres, but Trinity won and have to hand a smaller carried interest to the state oil company than Touchstone had to for their new licence - 15% versus 20%); (iii) the payment of their first ever dividend; (iv) a moderate share buy back; (v) cash generation at the top end or slightly above expectations ($12 million or slightly more); and (vi) an oil discovery (exploration is inherently risky and all too often new wells fail to find any resources, but despite Jacobin falling very short of what was hoped for Trinity have found oil and proved their geological model).
As for payments to the key management, in 2022 they were about a third lower than in 2021 ($1,185,000 v $1,669,000 - see page 110 of the Annual Report).
With regard to Galeota, the reserves are proven as a consequence of past exploration. Trintes has about 9.26mmbls of 2P reserves and Galeota has about 36.83mmbls of 2C reserves. Along with tax losses of $166 million (which can be used to offset 50% profit tax on $125.5 million of profit - so $62.25 million of tax), Galeota alone is worth multiples of the current share price.