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Spending $10 million on a dividend was never an option.
The government of Trinidad and Tobago has, through last year’s and this year’s reforms to the SPT, handed Trinity millions of extra dollars per year. The deal is that Trinity will invest that windfall in boosting production. If fresh drilling works out, both Trinity and the government win from the extra profit and tax revenues generated. If it doesn’t work out, the cost to Trinity is largely covered by the annual SPT saving.
Obviously Jacobin hasn’t been the success that was hoped for (although it should still eventually pay for itself; but it’ll be over several years, not the 12 months or less aimed for), but Trinity had to try. The government isn’t going to give up revenue just so that oil companies can pay large dividends.
The “current silence on Jacobin”?
Just a week ago we were told in the interim results that:
1. “Final testing of equipment is currently in progress and initial production is anticipated within days. Oil produced will immediately be sold to the state oil company, Heritage.”
2. “The increased facility will provide Trinity with the flexibility to follow-up on the play-opening Jacobin-1 well, targeting further onshore activity.”
3. Our “Jacobin-1 well successfully intersected multiple oil-bearing sands. Success with Jacobin increases our confidence in the portfolio of Hummingbird prospects that forms a cornerstone of our revitalised onshore strategy.”
We’ve also been told, via Twitter, that a retail investor event is expected in the second half of October (presumably after the Jacobin production results are known and can be discussed) - see https://twitter.com/Trinity_PLC/status/1707796258314768427
I’ve posted the following on the Trinity board. It’s possibly of interest to Touchstone shareholders too, so I thought I’d share it here too:
The Budget Statement’s been published at https://www.finance.gov.tt/wp-content/uploads/2023/10/2023.10.02-2024-Budget-Statement.pdf
There’s this on page 60:
“To assist this process, in the Finance Bill 2023, I will make further appropriate adjustments to the supplementary petroleum tax regime for small oil producers in the shallow water areas, similar to what we have done for small onshore producers. We will also re-examine the capital expenditure write-off regime to determine what changes can be made without sacrificing too much revenue.”
It’s followed up on page 128:
“I propose to increase the Sustainability Incentive from 20 percent to 25 percent with respect to the rate of supplemental petroleum tax for any mature marine or small marine oil fields. This will encourage smaller oil producers and lease operators in small and mature marine oil fields to incentivise further their production. In the Finance Act 2023, I also propose to introduce adjustments to the SPT regime for the shallow water areas, similar to what we have implemented for small onshore producers, introducing a new threshold of $75 per barrel for SPT for small shallow water producers. Where feasible, we will also make suitable adjustments to the capital expenditure allowances for small shallow water producers.
“These measures will take effect on January 1, 2024 and will require amendments to the Petroleum Taxes Act, Chap. 75:04.”
Also note page 59, where the Minister states: “I am confident with the near-term outlook for oil production, which is expected to increase from the aggressive drilling programme of Heritage, our largest producer; new production by EOG and Trinity, recent discoveries by Touchstone; and the general fiscal incentives made available to onshore producers and shallow water marine areas in recent times.”
The Budget Statement’s been published at https://www.finance.gov.tt/wp-content/uploads/2023/10/2023.10.02-2024-Budget-Statement.pdf
There’s this on page 60:
“To assist this process, in the Finance Bill 2023, I will make further appropriate adjustments to the supplementary petroleum tax regime for small oil producers in the shallow water areas, similar to what we have done for small onshore producers. We will also re-examine the capital expenditure write-off regime to
determine what changes can be made without sacrificing too much revenue.”
It’s followed up on page 128:
“I propose to increase the Sustainability Incentive from 20 percent to 25 percent with respect to the rate of supplemental petroleum tax for any mature marine or small marine oil fields. This will encourage smaller oil producers and lease operators in small and mature marine oil fields to incentivise further their production. In the Finance Act 2023, I also propose to introduce adjustments to the SPT regime for the shallow water areas, similar to what we have implemented for small onshore producers, introducing a new threshold of $75 per barrel for SPT for small shallow water producers. Where feasible, we will also make suitable adjustments to the capital expenditure allowances for small shallow water producers.
“These measures will take effect on January 1, 2024 and will require amendments to the Petroleum Taxes Act, Chap. 75:04.”
Also note page 59, where the Minister states: “I am confident with the near-term outlook for oil production, which is expected to increase from the aggressive drilling programme of Heritage, our largest producer; new production by EOG and Trinity, recent discoveries by Touchstone; and the general fiscal incentives made available to onshore producers and shallow water marine areas in recent times.”
The Finance Minister has just announced his intention to reform off-shore marine SPT in the same way that he did on-shore last year. If the onshore provisions are applied to off-shore marine, Trinity will pay no SPT on their off-shore production when the realised oil price is below $75. In the first half of this year alone that would have saved them $3.3 million in SPT. It’s excellent news.
Although our attention for now is on tomorrow morning’s interim results, Trinidad and Tobago’s Energy Chamber have today published an article on what they’d like to see in Monday’s budget. You can find it at https://energynow.tt/blog/what-we-would-like-to-see-in-the-national-budget and there’s a slightly longer version at https://trinidadexpress.com/business/local/driver-eyeing-oil-and-gas-tax-reform/article_35023112-5cd9-11ee-b23a-6f53675e473f.html
Following the $2.1 million share buy back earlier this year, Trinity’s Chairman and Chief Executive announced on June 1st 2023, in the annual report, that:
“Going forward, the Board intends to aim to distribute 15% of operating cash flow to shareholders, for each calendar year when the realised oil price is USD 80/bbl and below, and at least 20% of operating cash flow for each calendar year when the realised price is above USD 80/bbl. This is expected to include a total dividend (split 1/3 interim, 2/3 final) of 1.5p per share, provided the realised price is at least USD 50/bbl. It is expected that the maiden interim dividend will be declared following publication of the 2023 interim results, in Q3 2023, followed by a final dividend being declared following publication of the 2023 preliminary results in Q2 2024.” (See page 4 of https://trinityexploration.com/wp-content/uploads/2023/06/Trinity-EP-2022-Annual-Report.pdf).
Nothing’s happened since June 1st 2023 to suggest that the interim dividend of 0.5p won’t announced in the forthcoming interim results (they’re due before the end of the month).
Cenkos, Trinity’s broker, reckons that Trinity’s existing wells experience natural decline rates of 10% per annum. However, “net sales for 2022 were 2,975 bopd (2021: 3,006 bopd). Trinity managed to substantially mitigate natural production decline through a programme including; 3 new wells, 17 RCPs, 120 Workovers, swabbing across its asset base, including the recently acquired PS-4, and improved production monitoring using automation and revised completion strategies” (page 4 of the Annual Report). Those mitigation measures continue into 2023 and in the presentation that accompanied the results Trinity’s management set out their plans to increase production, excluding Galeota, to 5,000bopd by 2026 (see page 18 of https://trinityexploration.com/wp-content/uploads/2023/06/TRIN-Investor-Presentation-June-2023-vF-2023-06-13.pdf).
Trinity’s management have repeatedly provided optimistic information about Jacobin. During the May 2022 presentation (at about 15:00 of https://www.investormeetcompany.com/investor/meeting/results-and-company-update-8 ), the CE said, “if the well is successful you can see what that looks like in a success case where it sort of takes production from 1 times to 1.3/1.4 times existing production [of around 3,000bopd]”. 1.3 to 1.4 times existing production would result in Jacobin production of between 900 to 1,200bopd. During the June 14th 2023 presentation he stated that Jacobin has “the potential in a success case to be a very valuable project for us because the payback for Jacobin success is one year” and was supported by the Finance Director. Payback within a year likely means production of at least 704bopd.
I’m optimistic these things will happen, which is why I continue to hold my shares. If you’re not, don’t buy and if you hold sell. Don’t invest or remain invested in
Trinity have maintained production at around 3,000bopd for years, despite normal depletion rates of 10%.
They have low costs, which have only recently crept above $30 per barrel due to the significant inflation brought about by Russia’s invasion of Ukrainian.
They’ve benefitted from significant fiscal reform in Trinidad over the past couple of years.
Last year they generated operating profits of just over 20% of turnover ($19 million - unfortunately there was then a $10.4 million deduction for hedge losses as a consequence of the oil price spike, but fortunately there’s no hedging for 2023).
Once the realised oil price averages $75.01 or more during a full quarter, Supplementary Petroleum Tax applies (until recently it was $50). That means that the initial gains on a realised oil price over $75 are lost in tax, but as the price rises higher gains start to be made again. I can’t say for sure, but between a realised price of about $75 and $85 you probably won’t see much difference in profit ($75 is still pretty good though).
Note that producers have to sell their oil to Heritage, the state owned oil company. It pays about a $10 discount to WTI (it doesn’t distinguish between heavy and light oils, but pays one price and blends everything together selling it on at a discount to WTI),
The incentives were set by Trinity’s remuneration committee, which until recently and at the time these awards were issued included Angus Winther and David Segel. Those two own 18.6% of Trinity. You can be confident that they were planning for company growth and shareholder returns, not intending to reward failure. In any event, these are exciting times as we await the next Jacobin update and find out how much it will increase production by.
Jon Cooper looks like a good addition to the board. He replaces Angus Winther, who resigned at the AGM and who also had a financial background.
One of the differences between Trinity and many other AIM companies is the depth of its board. We’re now back to having four non-executive directors and a non-executive chairman. They all have extensive oil and gas management experience (James Menzies and Mr Cooper are chief executives, Derek Hudson was a Shell Vice President and Country Chairman for Trinidad and Tobago, and Kaat Van Hecke was an interim chief executive for 9 months as Nostrum), and two are also geologists (Mr Menzies and Mr Hudson).
Here are some of the local reports on Trinity’s “very significant and material achievement” of discovering oil at Jacobin, in both the primary targets and the secondary target (“adding to the commercial attractiveness of the well”), that validates the “geological model and are within pre-drill range for a commercial discovery”:
https://trinidadexpress.com/business/local/trinity-discovers-virgin-oil-onshore-trinidad/article_6fc20406-358a-11ee-8fca-871b7bc91da6.html
https://guardian.co.tt/business/trinity-discovers-virgin-oil-in-new-well-6.2.1770855.3d6f141de1
https://newsday.co.tt/2023/08/07/trinity-confirms-palo-seco-onshore-oil-find/
https://tt.loopnews.com/content/trinitys-jacobin-1-oil-discovery-confirmed
Trinity have been confident about Jacobin for some time. They’ve made that confidence clear, including by going as far as to describe it as an appraisal well rather than an exploration well (see the box on the right hand side of page 12 of https://trinityexploration.com/wp-content/uploads/2023/06/Investor-Technical-Presentation-June-2023-Hummingbird-Buenos-Ayres-vF.pdf) and by stating that the 63% chance of success was about as good as it gets in the oil industry. Jacobin was never a speculative drill, but rather the result of years of careful analysis and planning supervised in part by independent experts.
Trinity’s confidence in Jacobin clearly remains. There’s little caution in describing the discovery as “very significant and material”. Furthermore, it’s notable that the purpose of the heavy-duty workover rig, that will soon replace the drilling rig, is “to run the completion, perforate and tie the well into production facilities.” Why would they want to tie the well into production facilities other than because they intend to produce from it?
Obviously we’ll have to wait for the production figures, but part of the excitement of Jacobin’s primary targets is the high “virgin pressures” as no production has previously been taken from these pools.
Of course, the bigger prize remains that Jacobin unlocks the other eight deep prospects and Buenos Ayers. More details will follow in September, but after a very slow start to drilling (not much has happened over the past three years whilst the careful analysis has been taking place) these are now exciting times.
…The well has been cased to 10,021 feet and is being prepared for a series of production tests that is likely to commence with the deepest oil-bearing reservoir, and first production is expected during September. This timeline is driven by the demobilisation of the drilling rig from the site and installation of a heavy-duty workover rig to run the completion, perforate and tie the well into production facilities. A further update on production rates, fluid properties, as well as future plans will be provided at that time.
The Jacobin results validate both the structural and stratigraphic model demonstrating the existence of a deeper turbidite play across Trinity's entire Palo Seco area, and the recently awarded Buenos Ayres block. The integration of the onshore 3D seismic over the Lease Operatorship blocks purchased in 2021 has been key to the understanding of the sub-surface. Data from the well will now be used to de-risk and re-rank the remaining "Hummingbird" prospects across the Palo Seco blocks and those recently mapped within the Buenos Ayres block.
Jeremy Bridglalsingh, Chief Executive Officer of Trinity, said, "This is a very significant and material achievement by the Team. To find virgin oil in our mature acreage points to a step-change in our understanding of the hydrocarbon system, the remaining resource potential and how we can approach the exploitation of these resources.
"I would like to congratulate the Trinity Team on this success. We have demonstrated a true competitive advantage by the hard work in, building our geological understanding, working through the many aspects of planning and delivering a complex well and critically, safe execution of drilling operations.
"I would also like to thank our partner Heritage, for their valued help and assistance in facilitating the drilling of this well. The next step is to undertake a full production testing programme, that is expected to commence during September. We look forward to updating shareholders on our progress."
Here’s Trinidad and Tobago’s Energy Chamber (see https://energynow.tt/blog/trinity-jacobin-1-oil-discovery-confirmed ) write up on Jacobin:
Trinity Exploration has confirmed the Jacobin-1 oil discovery in the Palo Seco area. The company has stated that over 290 feet of net oil pay was encountered in the Jacobin well, including 63 feet of net oil pay in the deeper exploration targets.
While production volumes are still to be determined, the news of the exploration success will be welcomed in Trinidad & Tobago, where oil production has been declining for many years. In an attempt to attract new investment in Trinidad’s mature oil sector the Government responded to industry advocacy in 2022 and made some changes to the tax regime to improve project economics and attract investment in oil production. These changes included making permanent the previously temporary measure to raise the threshold price at which windfall Supplemental Petroleum Tax (SPT) comes into effect for small onshore producers (defined as companies producing less than 4,000 barrels per day). Other changes introduced last year also included a new lower sliding scale SPT for production from new offshore wells. While these changes were welcome by the industry and helped attract investment from companies like Trinity, there has been a continued call for further reforms to encourage new investment in mature fields and the infrastructure needed to safely increase production.
The Jacobin-1 well was spudded on 15 May 2023 with an objective to appraise and explore the potential of Lower Cruse sandstones within the Palo Seco area of the prolific Southern Basin.
According to Trinity, drilling samples, wireline logs and pressure testing indicate that the well encountered significant reservoir and hydrocarbon accumulations in the Lower Forest, Upper Cruse and Lower Cruse. The exploration section of the well encountered net reservoir thicknesses varying between 45 to 190 feet. An aggregate of 63 feet of net hydrocarbon pay was identified in the deeper exploration section of the well. Reservoir pressures appear to be high (up to 7,500psi) and indicate virgin pressures.
In addition, and as previously announced, 228 feet of net pay was found in the secondary target section, adding to the commercial attractiveness of the well.
Data acquired from the well are being analysed further by Trinity's reservoir and petroleum engineering teams through dynamic modelling to design an optimal completions strategy for the stacked pay encountered within the exploration section…
And here’s Malcy’s comment:
“This is undoubtedly a great find by Trinity, over 290′ of net pay in the well and deeper targets is not to be sneezed at. They say that there is a ‘significant reservoir and hydrocarbon accumulation in the Lower Forrest and the upper and lower Cruse’ which sounds good.
“However at present there are no flow rates, the drilling rig is being replaced with a heavy duty workover rig in order to not only test but also run the completion, perforate and tie the well into production facilities. This means I guess that the company are certain of the well flowing but I would just prefer to see the flow rates before giving it a definitive value.”
https://www.malcysblog.com/2023/08/oil-price-beacon-trinity-egdon-reabold-prospex-and-finally/
Touchstone appears to have risen today, at least in part, in sympathy with Trinity. Although they’re different, success with Royston’s testing (which is due soon) may repay the favour whilst we wait for September’s results.
Here’s the link: https://www.investorschronicle.co.uk/ideas/2023/08/07/an-oil-stock-that-could-double-in-value/
Only boost to production and reserves from Jacobin will be welcome (especially as Trinity have forecast that a successful well will pay for itself, $4.5 million, in less than a year), but the real prize is what success means across Trinity’s licences.
Success at Jacobin proves the seismic analysis showing another eight deep wells in the Palo Seco area and many more in the newly acquired, previously un-drilled, Buenos Ayers licence. The presence of deep oil in BA alone may enable Trinity, in the words of James Menzies at the last presentation, to double, triple, quadruple reserves. Doubling, tripling, quadrupling reserves should increase the share prices by at least a similar magnitude. And that’s before taking into account that Trinity’s share price is considerably undervalued at present (on Friday it was trading on about four times 2023 earnings) and the boost that will come from successfully developing Galeota (which has proven reserves, but which isn’t yet in production as it’s offshore - update due next month, with potential drilling next year).