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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….

Correction: I meant a special dividend of 2p (which will still cost about $1 million).

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.

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

…companies you don’t believe in. If you don’t think a company is any good, what basis do you have to believe that others will invest and raise the share price.

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).

I don’t think the closed period rules apply to executive purchase schemes. They wouldn’t be able to buy every month, as they have done (including shortly before results were announced), were it otherwise.

SPT applies to oil, not gas.