Petro Matad funded for its drilling programme which should see production start next year. Watch the full video here.
"CERP assets were bought as a lifeboat if no Bahamas success, Potter et al would have looked it over from all angles to ensure it was seaworthy before buying it - after all it was in their vested personal interests to do so, no better incentive."
It shouldn't necessarily give you confidence though. Arguably buying CERP could have been for other reasons: looking back could BPC have got the funding it did without buying CERP?
If they didn't have CERP, the company would now be bust with $10m of P1 cost overruns and no real assets. Shareholders would be wiped out any so would the CCNs: their £3m advance would have no useful security. LO would also be wiped out: if the post-P1 share price was 0.1p instead of 0.5p they'd be owed >$5m instead of $4m by a bust company. Stena too would be owed $10m by a bust company, so if they had any foresight they ought to have been thinking about whether their customer could endure a cost overrun.
So arguably what BPC needed to buy something (anything!) with shares that would have some perceived market value if P1 failed. CERP fitted the bill whether they really liked Saffron or not. And it worked, whether Saffron works or not: they got their funding from Bizzell and LO, and after P1 raised the OO money to repay LO.
Yes the CERP acquisition diluted the upside for management's own shares, but their priority was getting P1 drilled. After all, if they couldn't give Bizzell and LO enough security to unlock their funding, P1 wouldn't have got drilled and the licences would have expired worthless: game over. So no need for CERP to actually be assets they liked.
Is this really an attempt to work out what CEG is worth? Where’s the answer - it’s more like a list of supposed positives followed by but not quantifying to the conclusion CEG ex-Saffron is worth more than £14m.
1. Stena don’t want shares. I’m sure they are capable of making investment decisions if they want oil company exposure. They’ll have all the cash there is left, so they’ll be no leftover cash. In fact CEG are $7m short on their bills as best we know.
2. CEG is not making a meaningful profit. $8m less $4m, if that is what is being inferred, completely misses at least another $4m in royalties and extraction costs. There isn’t a multiple of (zero) earnings that would put CEG over £14m.
5. You’ve already valued the tax losses. They are only available to offset the profits from CEGs own fields, so If you considered already ongoing profits with zero tax, you already included their valuation gain.
6. Likewise you already valued the 2P. The earnings (or non-losses) come from extracting the 2P. 425bopd is 150k per year - i.e. all the 2P barrels during the 10 year licenses.
So what’s it worth. Well TRIN recently bought 85bopd for $3.5m so you could multiply that by 5. Or TRIN itself has 3000bopd, seven times CEG’s production (and 20mbbl of 2P) so you could divide TRIN’s $75m EV by 7. And then adjust for CEG’s net debt position...
Yes I’m sure those tanks have a lot of water to separate. CEG can indeed sell the oil to Heritage but they won’t be doing the transport and marketing for free.
Ah yes the Middle Cruse. CERP thought 60 wells producing 48,000 barrels each. http://docs.publicnow.com/viewDoc?filename=70768%5CEXT%5C3628E505B2E1344FB5FC733C3D17D45D2070C357_C4EF11042A2526718DA8312001E1C53BE1E66F68.PDF
Unfortunately you can see the combined CEBL Bonasse and Saffron production rates here month by month which means S1 started out at less than 30b/d and is probably now no more than 10b/d, so it’s fading away with less than 5,000 barrels produced in total. https://www.energy.gov.tt/publications/
Gross revenue, yes. I am talking about cash returns after costs. Saffron is much better than the old fields for a few reasons:
i) They are not obliged to sell the oil to Heritage: they COULD get fuller oil price, especially for lighter oil
ii) They pay a crown royalty of 12.5% (on any field) but not (until a pretty high threshold) a second overriding royalty to Heritage or a landowner
iii) 200b/d wells are clearly more efficient that older 10b/d wells: extraction costs are maybe $20 per barrel instead of high 20s.
So in time, at $60, a Saffron barrel might be sold directly to an oil trader for $57; that's $50 as CERP claimed after 12.5% royalty (and would be $37 after opex). Compare that to a legacy barrel sold with a larger discount to Heritage for $50; $35 after royalty; $7 after opex.
But initially CEG doesn't have the facilities in place to store and export their oil themselves: tanks and pipes would cost a couple of $m. So initially they would have to go through Heritage. I was working at a $70 oil price; sell the oil to H for $60; $52 after royalty; $32 after opex.
I'm not especially negative about the chances of Saffron becoming a nice development if S2 delivers. My concern is whether the risk of getting the LC to work has been underplayed: I think they might have bought CERP for convenience even if they though S1 was less promising than claimed, and of course LK has since run for the hills.
I agree a Saffron barrel is worth about $30, much more than a barrel from the old fields. However the 278b/d rate is backward-engineered to give a 1 year capex payback so it can't be called analysis or research. Nor is a well going to produce at a flat rate for a year or two: if you want to say a well is going to pay for a future well and then continue to throw off barrels and cash, that is what you are assuming.
Given the decline rates of typical wells, for an sort of immediate confidence of 278b for 2 years you'd probably need an IP nearer 1000. More likely, a lower IP but sustained production of 350 after 3 months might give you that confidence. Personally I don't believe Arena will be advancing any money until 2-3 months of production history has been established.
If they fund 3 wells, with a further 2 self funded within 12 months, I might make an upside case for 1000b/d from Saffron: $11m free cash per year (1000x365x$30) with the old fields covering the G&A. More potential wells beyond that, but don't expect the market to look further any time soon. What's $11m/yr worth if/when S2 has worked? The current market cap plus the Arena debt would make an EV of $30m.
And then there's the current balance sheet. The company is $3m short on their 2021 budget as $3m from Bizzell (at 8p, lol) is missing; and that budget assumed $4m savings on the P1 bills but nearly 6 months on we have no update on that. Arena are funding growth not past failings: to me the company needs a fundraise first to close these off. And I reckon the Arena conversion price will be set from that fundraise. Currently 4.2p = the old 3.5p raise + 20% and I don't believe that will work for them - expect it to be rebased to the post-S2 price, whatever that is, +20%.
I'm puzzled by the testing programme. They've perforated all of the Lower Cruse potential pay: the 70ft assess as oil bearing and the 60ft that was unclear. Why wouldn't you first (or only) test just the best parts. If there's a risk some it is water bearing, why risk giving the water a route to dominate the oil flow.
And if the LC worked, my expectation was that the MC and UC would never get tested in this well. Why perforate those zones and mix the heavy oil with the LC light oil? I was in fact thinking that to test those zones would mean plugging off the LC after its test so really this can be completed as a LC producer or a MC producer but not both. Perhaps someone technical has some thoughts on that.
Of course I take the negative slant, but it seems to me they are getting the obligatory LC test out of the way as quick as possible - not a sign of confidence.
Always seems odd when I’m arguing upward for CEG but I’m afraid you are confusing terms here. The 2P is the central case estimate you should use for a valuation as the amount of oil CEG will produce, rather than you having to multiply it by some recovery factor.
You are confusing it with oil-in-place, where a reservoir engineer report will estimate the total oil in the reservoir. Then reserves are a portion of this: an estimate of the percentage recoverable of that gross amount. For mature fields it’s a bit different: the oil-in-place reservoir capacity will be well understood by now and maybe 20% of that oil has been recovered. The difference between 1P, 2P and 3P is now simply whether another 2%, 4% or 6% can be extracted.
I didn’t misquote you - I asked what you meant by “worth”. So can I take it you mean your $77m is a 10 year (life of licences) revenue total? And that you accept it says nothing about whether CEG will ever make a cent of profit from these fields?
Yes I am still short, largely because I don’t believe they’ll ever be profitable if S2 is less than a clear success (200b/d sustained for 3 months).
“worth $60 x 1.29m = $77.4m gross.”
What do you mean by worth? What relevance does the $77m have for a shareholder?
No barrel of 2P is worth anything like $60 to CEG. So far in 2021 it looks like they’ve received pricing from Heritage at about -15%, consistent with what the other operators are saying. Then they pay royalties on that revenue, 28% as last reported. And then they have the opex, $4m in 2019. Based on 424/day production for 2021, that would make a gross profit to CEG of $11.3 per barrel. 155k is about 12% of the 1.29mbb, netting $11.3.
But 2P reserves are assessed until the end of the economic life of the production. This therefore includes the last barrels from each well before their production declines to the point where they are loss making. The last barrels are therefore the marginally economic ones, less that a dollar a barrel.
So overall each barrel is worth between $11 and zero. $8 would seem a generous average, even before you discount it for an NPV. About $10m for the 2P number (before we think about >$2m decom provisions).
And then what is a 2021 barrels worth to a shareholder? Of course like every other barrel in the last 5+ years the $11 of gross profit will be eaten up by G&A. Nothing left for shareholders, not even a cent to fund capex.
So the bonuses start at 4p. A massive 15% return on the open offer price, and apparently the company was already worth more than 3.5p. So a premium performance would be 15% value creation in 4 years.
And more options if they get to 1,000 barrels a day. Saffron is meant deliver 1,000-1,500 by year end, so a management’s target is way below the low end of the story they pitched.
And the other 100m options are priced, targeted and ready to dilute. 1.5m coming your way Mr Bizzell - thanks for braking your commitments again (though if you’ve grifted 59m shares what’s another 1.5m).
The nine days will be more about moving the drilling rig off the site and moving-in their own workover rig.
We also don't know the extent to which they to have their testing plan approval by the T&T gov.
For what it's worth, the allotment of shares for the "reset" has been filed. I'm a bit reluctant to say where because it contains a whole load of personal information. If you put some thought and effort into it you can figure out where to find it.
The bit I was most interested in was who took the placing. In fact the "big boys" part of the placing of 1.216m shares is not reported together with (not separately listed from) the 937m shares issued for the £2.5m share conversion. Together those shares were taken by:
Bizzell Capital: 877m
Pershing Securities (who are the nominees for RAB and possibly others): 608m
Gneiss Energy: 427m
Eva Pacific Pty (Oz): 78m
Rain Tree 2020 (BVI): 77m
Greevest Investments Pty (Oz): 64m
A private name in Glasgow: 14m
A private co in Dundee: 9m
Not a long list. No conventional institutions. I don't get how Bizzell don't now have a disclosable position in the company as they got 11% of the company, unless they were previously short the stock.
Friday is when the production testing starts. Possibly when the guns go off but possibly only the date the workover rig is ready to start its work. I wouldn't expect an update with any results before the middle of next week, or it may be 2-3 weeks to test all the zones (but if they don't release them individually I think that's a bad sign).
Monecor is not a "professional II" - it is a private client broker and spread betting company under the ETX Capital brand. It's reduced position is a client selling their position or closing their spread bet or, given the scale of the sudden change, more likely a client moving their business to another broker in which case the holding doesn't really change but the new broker becomes the holder.
Monecor would have to disclose in that TR-1 if they also had a short derivative. They would also have to publicly disclose a short >0.5% of the company to the FCA, published on the spreadsheet here. https://www.fca.org.uk/markets/short-selling/notification-and-disclosure-net-short-positions . Of course they could renege on that obligation, but risk their FCA authorisation and LSE membership - their whole business - to make a few hundred £k shorting CEG: don't think so.
There are no disclosed CEG shorts at all. There is no conspiracy, sorry. The share price is probably lower because those that took the placing, hoping for a quick turn, never wanted to take the risk on S2 and are eating their losses.
As to the fundamental value, the Trinidad business in all its guises has never made a profit. With sharp cost cutting and a strong oil price it may just about be able to make one, but hardly enough to be able to reinvest in the legacy fields and keep production on a flat line. Such a business is not cheap at £16m; it is arguably worth zero. The whole value of CEG lies in S2 and the Bahamas (which may soon evaporate).
Sorting out the historic debts is not an issue of due diligence. CEG wee banking on reducing the $14m of outstanding bills, as last reported, by 20-30%. If they don't the funding shortfall is more than the $3m left by Bizzell's failure. If they've got a material reduction or a meaningful agreement on deferring payment they would have to have disclosed it. No amount of due diligence is going to convince Arena that a reduction is coming. Stena, etc are not going to give them any comfort until any agreement is executed. So either Arena are happy to risk a chunk of their money going to Stena rather than into generating income from S3/4/5 or they are not. The former is unlikely as it would massively increase their repayment risks. CEG need to complete the P1 resolution, not just let Arena DD it.
Meanwhile, no licence execution in Uruguay either. From the OO notice: "the signing of the licence for the OFF-1 offshore block presently awaits presidential approval, which has been delayed due to the Covid-19 pandemic situation. The Company expects the formal licence execution within Q2 2021".
Investments are meant to offer a return. If it’s about what you can afford to loose, you’re gambling not investing.
You can’t grumble if a high risk investment like P1 doesn’t work out, but you can grumble if you’ve been misled about the well being fully-funded.
The T&T investment case was sold as something very different. Reset the company at 3.5p then Bizzell would fund the development at 8p effectively, and 5-9 further wells would be drilled in 2021. Those two parts of the story have fallen apart. Frankly they were never going to happen. That’s not an investment risk, I’ll let you figure out what it is.