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Interesting dynamic as share price has stayed now within specific tight range, since the dividend announcement. There are various theories over share price valuations, those who are fundamentalists and believe that the share price always reflects the intrinsic value of the net future cashflows from the businesses continuing operations, essentially the existing production, saleable value of asset base and or potential from further upside, based on publicly available information in the marketplace. This has rarely been the case for Caspian as the share price has generally traded at a discount to the company's net worth.
Then there is the chartist perspective, that the share price generally exists between a given range until such time when it breaks out of that range and trading takes place by players in the market, catching the highs and lows, making a margin wherever possible, generally within this range but also when it breaks out. This has not been possible for the past 2 months, since the dividend announcement, as the share price has not moved and the range is not there to trade successfully.
So if we look at the current valuation, it is assumed that the market determines the price, of which one of the factors is the market perception of risk as well as the known income stream, that the Company offers. In the past this income stream was only potential based on actual and projected production levels. However, now the market has a definitive income stream in the form of the dividend, supposedly guaranteed at a minimum of £1m per month. This equates to an approximate 12% return on investment. If we believe in a perfect market, then this is the valuation that the market attributes to the company. The risk free rate currently offered by gilts in the UK is approximately 3.3%, therefore the market attributes a 9% premium on the Caspian business, for all of the obvious reasons and history that we all know.
The interesting question therefore, is if production increases or we get a large cash increase due to improved oil prices or the sale of the boat, and that this results in either the dividend increasing from the minimum of £1m to 35%+ of free cashflow at that time, then presumably the return on investment will still remain at 12%, because of the perceived market risk of Caspian, which should then result in the share price increasing proportionately to the increase in dividend payment/rate.
This is a simplistic view and many other factors will impact the share price as the dividend yield increases. The fundamentalists will argue that the share price increases as more oil is being produced or discovered or sold on the international markets. neither are wrong, however, given the current stability in the the share price and its link to the current dividend rate, I will be interested to see what happens when we get a change in the dividend rate due to improved cashflows in the business. Will the share price maintain the same market risk rate
Have to read a lot between the lines from the Interim Accounts to try to understand what has been happening since they last reported anything back at the AGM. Production seems to be still be coming from 4 wells from the MJF structure based on previously announced production levels for those wells:
Well 154 - 600 bopd
Well 153 - 1000 bopd
Well 150 - 500 bopd
Well 144 - 184 bopd
Total 2,284 bopd
So we can summize from this that South Yelemes has no further production during the six months from existing wells that were shut in pending getting approval for their production license and their commitment to work over these wells using the horizontal drilling approach. Appears to be no work at all at SY. There was a report in March 2022 that a further well was to be drilled on South Yelemes using the horizontal drilling approach, but no news on the status of this plan either.
Going back to MJF, apart from the above wells which are producing, the following other wells are now temporarily suspended pending reparation work to restore production:
Wells 141/142 - previously producing over 1400 bopd, now awaiting bits to be extracted from the well
Well 151 - this was planned to be horizontal drilled in 2H 2022, but no further update on this as at Sept 2022 ?
Well 146 - reported in Oct 2021 that this was to be re-drilled using horizontal drilling approach - but no news on status on this 1 year later by Sept 2022
Well 145 - had some issues with water cut, but no further update - has it been abandoned ?
So am not sure whether the absence of news represents absence of work undertaken or just these planned works just have not yet happened or going to happen?
Nothing much reported or happening on the Airshagyl Structure, namely A5 as this evidently has been pushed back and probably waiting for well 802 to be completed and tested. All other deep wells there are on hold or in A8 case abandoned.
Yelemes deeps obviously we are below the salt layer with Well 802, with the "significant" oil shows and high pressure, so all depends on the testing of these horizons in 4Q 2022. This well has been drilled in the vicinity of the old soviet well that experienced a blow out many years ago and so is the most likely to result in finding oil and the experience they now have on trying to control the pressure from these depths may come through for Caspian and result in something significant. Only time will tell with this one.
So we are looking at approximately $85000 per day from selling existing MJF production to the mini refineries or $2.6 million per month. This is less than we the circa 4,000 bopd through a mixture of export and domestic at an average mix of $61 per barrel from 1H22. Less transportation costs though.
So many turns and changes to plans previously announced. Can only make guesses of what is happening to all that has not been commented on through sparse operational updates.
Interesting to look back to 2019 when 3A Best was originally acquired under a similar arrangement, a large acreage of 1347km2 with limited 3D and 2D seismic work undertaken when at the time of acquisition their was a work commitment obligation of one well at an estimated cost of $3m to be drilled. This asset acquisition also being a related party transaction. The carrying value of this asset and all costs associated with 3AB were written off in 2021, amounting to $12m, as the license had expired and is now subject to managements best efforts to get it renewed. I am not sure if they ever drilled that well for $3m and suspect not and so lost their license ? But correct me if I a wrong as I am not aware of what work has been carried out on 3AB since they acquired it for an exchange of shares worth $13.5m at the time. We now have a similar transaction with Block 8, except this time two wells have been drilled, and modest production similar to South Yelemes structure of c100 bopd are being produced. A minnow in the context of strategic focus for Caspian, given expected production horizons of c 4-5k bopd fromMJF, once they decide to get all their apples flowing at the same time. This latter acquisition comes at no cost, just a drain on cashflows and resources to complete supposedly a work obligation approximating $5m. The consideration payable this time reported as a maximum amount of $60m, approximately 4 times the value of 3AB, that had no wells drilled and no production. The royalty arrangement will be there to pay off this debt out of any production from Block 8 for the foreseeable future, no real consequence to Caspian. However, it is difficult to envisage this as a strategic acquisition rather than an easy way to package common assets together perhaps to be sold on when that moment arises and in the meantime providing cashflows to complete the license obligations to avoid a similar situation to 3AB. This must have been a difficult one for the Board to stomach, as given the potential we have from MJF alone, why waste additional resources going back and starting over with an undeveloped asset. Isn't this just a distraction of management time and the Company's valuable resources. Can anyone recall the circumstances on why the 3AB license was not renewed/expired ?
This appears to be history repeating itself, another asset being taken over, be it all from the family, on similar terms that have been negotiated in the past on other deals. This represents a royalty deal for acquiring the interest in Block 8. Block 8 is being sold to Caspian in return for them financing further work commitments under the block 8 license, as long as Caspian pay a 5% royalty out of all future production from block 8. Yes no consideration paid for the acquisition cost, but we will need to understand what the work commitments and obligations are under the Block 8 license. This will be the new work obligation for Caspian to pay for. Apart from this, many positives from the update. Delays and issues with the wells, I agree could well be to do with the taxes and discount on exports, so they are looking to delay further production until sanctions and restrictions on exports are lifted. Certainly lots to look forward to as all of this unfolds and this period is our new starting point, profitable and a cash generating company, which is very different to the past 15 years. But also much more that we need to understand and yet to be disclosed about newly acquired ongoing license obligations ?
Investors are holding their positions. The Company has achieved its new status as a producing profitable company, based on existing production levels with the prospect of providing its investors with an immediate return on investment via dividends, whenever that maybe in 2022 or 2023. We need greater clarification of what the short and medium terms strategy going forward is now they have reached this new level of profitability, whether it be selling the asset, getting one of the deeps flowing, diversifying into wind power or buying other producing assets. Not sure they plan imminently on drilling further shallow wells, nor am I sure how many further horizontal drills they will undertake on existing shallow wells going forward ? Until we know the answers to these questions, investors are probably just going to sit tight and hold leading to further gradual slippage in the share price.
Tic tock .... 9 days before the ultimate deadline, 30 Sept, before the interim financials have to be released. Unprecedented lull in news releases, something must be brewing behind the scenes.
Sometimes we need to sit back and look at the big picture and accomplishments to date. Since listing the company in 2007, the company started the process of exploring the huge acreage of over its 1500 square kilometres license area. Initial listing proceeds were spent on undertaking 1376 square Km of seismic coverage and subsequently drilling some initial exploratory wells in potential structures identified from the 3D seismic work. The company raised additional funds from a couple of farm-outs selling down interests in the license area, which although found oil from some of the wells drilled resulted in the % interests sold being returned to Caspian, so that ultimately they still retain 99% interest in the license area. After further drilling into the MJF structure and South Yelemes structure, both deep wells and shallow wells, the company has most success from the MJF shallow structure, which since adopting some horizontal drilling techniques has resulted in current day production levels approaching 4,000 bopd. The company still has some historical work commitment obligations associated with the license, but are essentially a company free of any third party debt, which is in the extraordinary position of still owning 99% of the principal license having discovered oil and now producing circa 4,000 bopd. This is by far the biggest achievement, as exploration companies often have to farm out their interest in their license to raise sufficient funds to explore and develop the asset, resulting in a diluted interest in a producing company rather than 100% interest prior to exploration and development. Caspian are now potentially generating significant profits, which will be revealed/confirmed this week when the half year 2022 results will be published, with a commitment to pay dividends going forward. All of this without carrying any debt on its balance sheet and still owning 99% of its license area. Production licenses are in place on two of its structures, allowing it to export its oil and achieve greater prices than can be achieved domestically. Not great at communicating their success stories and it has been a bumpy ride over the 15 years since the IPO, so the market is still hesitant and waiting to see the final outcome of the story to date. However, the story is good and the company has never been in better shape. Undervalued yet turning a corner into a bright future. Lets see what this next week brings in terms of an update when the half year financials are published.
Work commenced in June 2022 on MJF wells 141 and 151 using the new drilling horizontal approach. This approach has already successfully resulted on increasing production from wells 154, 153 and 142 to initial flow rates of approx 600 bopd, 1000 bopd and 1400 bopd, respectively. Wells 141 & 151 had been previously drilled in 2019 and 2020, resulting in very small levels of production so the expectation is that this current work, will further boost production levels for Caspian. The Company also planned to use this approach on some of the South Yelemes existing wells, quite apart from what they are doing on drilling 802, their next deep well. We will receive an update in the next 2-3 weeks on all work carried out on these wells, since our last update in June 2022. Ongoing work on some of these shallow wells should therefore be nearing completion. A lot to report on after such a long period of silence, should be an interesting few weeks ahead.
JD, valuations have been done by WH Ireland in the past, however, these have to be updated as does the last CPR reserves report done by Gaffney Cline over 10 years ago. This was done before the much of the MJF drilling has been completed and does not take account of the success from the horizontal drilling technique. Your estimate may well be right, however, I don't think a new CPR is very high on the agenda as management know how much oil is down there and probably see no point in getting someone else to tell them what they already know. Would imagine an external buyer would be interested in some independent assessment of reserves, so if they were to get it updated they would have to first to update the market before they could release it to a third party buyer. Anyone wanting to do a discounted NPV calculation based on current production levels and some modest drilling activity plan over the next 10-15 years, I am sure it will come up with a big number, even when applying modest/prudent assumptions.
The company has already taken the decision to re-shift its focus to developing the shallow structures with the BNG license area. In the past the deeps were the big prize and drilling to 4-5 kilometers, below the salt layer, was the potential jewel in the crown, but difficulties with heat and pressure at those depths and the difficulties trying to contain the flow rates have proved to be a step too far to date and so a shift in strategy to relatively easy 2-3 kilometer drills, above the salt layer, where oil saturated structures exist and flow without these complications seems to be the logical and sensible way to commercialise the license area. At the time A5 was being drilled the discussion on here was that A5 could flow at 2-3 thousand bopd and this was incentive enough for the share price to bump along at 10-15p. We now have 4000 bopd from MJF and SY, with still more easily accessible oil just by re-investing own funds into horizontal drilling existing wells and drilling further development wells into the same shallow structures. It is a no brainer that this is the way to go. Within a 3-5 year timeframe with a concerted effort on the drilling front and an appetite to develop the infrastructure, the company has the ability to transform itself. Yes they have to complete the work program obligation of 2 more deeps, but seriously, after all that has passed do you really think they have the expertise to get the oil out even if they find further down there after so many attempts with the other deeps. May as well develop the shallow structures at this stage and take production number upto 10-15k bopd and look for other opportunities through acquisitions and develop the business this way. Investor perspectives are still very short term when in fact we are just at the start of a company that has the potential for exponential growth, if management choose to continue to develop the asset this way. They of course may decide to sell it before reaching these levels, however, with existing production at circa 4,000 bopd and now profitable, valuations and ultimately the potential sale price should mean that the share price will have to also increase to more realistic valuation levels. After all, the business owners are not going to sell the company off cheaply, after creating a cash cow and profitable organisation from 15 years of effort.
Think it is more to do with the logistical difficulties in finalising the financial statement close and the auditors having to fulfil their responsibilities within a 3 month timeline. I imagine the financial records are kept in Kazakhstan, whereas the auditors are based in the UK. Logistically challenging.
KK, yes good point, the results won't show the benefit of the 4000 bopd throughout the whole 6 month period, however, this is a timing issue at the end of June 2022. There was also an equivalent timing issue with Well 153 at the end of December 2021, which will result in the 1H 2022 results and overall production being higher than the 2H 2021 results. The 2021 annual results showed average annual production of 2,130 bopd with little impact from the success of well 153, so although we only will see one months benefit of the 1400 bopd from 141 in !H 2022, we will see the full benefit of well 153 coming through for the 6 month period. So profitability should be significantly (a multiple factor) improved from past periods profits (before impairment), assuming the auditors don't find any further reasons to impair asset values in 2022 ?. What that new level of profitability will be I am not sure, as there are too may unknown variables, but it will show a favourable increase period on period, even without the impact of KEGCO/Urals discount. I am obviously focusing on what "it is" and not what it "could have been", as these factors only distract from what will be a positive reported result for the period.
Will be out of the blue. Last year interim results announced on 21 Sept, so we have approximately 3 weeks to wait for a full update on 2022 1st half year results. The important thing with these results will be the first time in 15 years of reporting that the company will show significant profits, as the 4,000 bopd production and high oil prices throughout the reporting period will be the big news. Normally we are hanging on to hear news of a new well being drilled, this time the news will be an indication of what sort of profit levels will be generated in the future and how this impacts on the valuation of the business. So 2-3 weeks and we will know......
Finally heading into the 1st week of September, so can look forward to full disclosure of new level of profits being generated from production at historic highs of approx 4,000 bopd and higher oil prices since the start of the year. Been a long wait since the AGM and investor presentation, but will be the first time we see the impact of the current market conditions on the Caspian performance in "black and white", via the half year financial statements, which have to be published. All other majors have been disclosing record profitability for the 1st and 2nd quarters for 2022. The same will be the case for Caspian, just on a smaller scale, but the dynamics will be the same given the favourable circumstances that Caspian Sunrise finds itself in, this year. Fundamentals justify higher prices for this investment and as a chartist, you will see the return of investor interest as we lead up to the release of the financials in either 3 or 4 weeks time. As to what further information will be released as part of the required financial disclosure, who knows, however, at least we know we will finally understand how much profitability has been achieved during this period.
Director
Number of Ordinary Shares
As at 31 December 2021
As at 31 December 2020
Clive Carver
2,245,000
2,245,000
Kuat Oraziman*
nil
41,485,330
Edmund Limerick
7,911,583
7,911,583
Aibek Oraziman**
592,857,583
528,476,278
Seokwoo Shin
nil
nil
They both have had this capacity within their term, but Carver became Executive Chairman recently, leaving Limerick as the only independent director. Tim Field also used to be an independent director until he changed his role to that of a consultant. All of them are involved to assist the Management and more specifically the Executive Directors with the AIM reporting responsibilities and give strategic advice.
Aug 23 (Reuters) - Russian and Kazakh oil exports via CPC Black Sea terminal facing at least one months disruption each once repairs begin on two of its three single mooring points, CPC confirmed on Tuesday. Damaged by bad weather. Expected to be able to achieve 60% capacity via its third terminal.
KK, yes they probably have historical links with some of the local oil traders from the past, when cashflows were short and they needed to sell domestcally their early production from S Yelemes and MJF preliminary wells to finance the drilling of the deeps in the past and additional shallow wells. Probably not easy to move away from these contractual relationships, but now the finance constraints have been eliminated, finding more economically favourable trading options must be a priority going forward, as advance selling oil is not ideal and must be on generally unfavourable terms.