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They will ultimately build a pipeline to connect to the existing mainline pipeline structures used in the locality to transport oil from other neighbouring oil fields that have been producing significant volumes for many years. Each producer pays its share of the volume transported after taking account of the quality of crude it produces. The higher the quality the lower the transportation cost, depending on the destination and which pipelines it connects to. It may well be connecting to pipelines used by KMG Exploration & Production Plc, from the Uzenmunaigas field and other neighbouring producers which ultimately is blended into the URALS oil along with other crude coming from TCO via the Caspian Pipeline Consortium and others. The length of pipeline that Caspian will need to lay from their BNG fields will therefore most probably extend to the edge of the BNG licence area, where they will connect to other existing pipeline routes.
We know we are about to get news along with the release of the interim financials before 30 September, however, this will be an update, so we should not expect any significant news as this would have had to be released independently from the required submission of the accounts. So most probably at this stage we will get an explanation as to status of work to date and probably reasons for delays in news on the various wells that are in progress.
The 2017 financials clearly show there is no external debt in the company. Not that difficult to read. This is very unusual for an exploration company that still holds 99% of its primary asset, BNG and which has production already in place from some of its shallower wells. Should additional financing arrangements be needed the Company has all options available to them, so not much to be sceptical here. Interims will be out before end of Sept so in the next 2-3 weeks so will be forced to give an update to the market as part of their reporting responsibilities.
Normal risks associated with a small exploration company like this would be things like:
(i) absence of adequate financing to continue exploration, however, with Caspian, they already have production from their shallow MJF wells, that already finances their plans for development of further MJF wells and when they start to export their MJF production under their new production license, once approval is applied for and provided, then cashflows will improve still further sufficient to finance continued exploration costs associated with their deeper wells. Fixed costs are already covered by existing production;
(ii) normally companies of this size and stage of development have already divested a large part of their interest in the license area, however Caspian have not only financed the drilling of all of their existing wells through various past financing arrangements, yet they still hold 99% of the BNG license and more importantly have no external debt. This leaves them with all possible ways to raise additional finance if they ever need it, through reserves, farm outs, advance sales of crude and even private placements, none of which they are planning to do as they have sufficient cash from production.
(iii) There is always technical risk associated with execution of operations, this is where they have struggled the most, however, they have learned from past mistakes and so ongoing operations are likely to be better than we have seen so far. This is probably their biggest risk though as they need to be able to demonstrate that they can test the oil from the deep wells with such high pressure and continued operational challenges.
(iv) political risk is another factor, however, the Kazakh Government continues to look for further foreign investment and has/is developing its laws and investment climate so with the fact that Caspian has already received approval to move to a production license then much of the political risks are less for Caspian than other companies investing in the region and of course we have strong Kazakh management running the Company, which also protects it from political risks;
(v) Risk of climate and location is always there and impacts the timing of operations with the severe winters and proximity to the flood zone being near to the Caspian Sea, however, this mainly impacts in the form of delays to operations;
So there are not really and tangible risks that are associated with companies such as this, as always, it comes down to timing of their success rather than will they become a successful oil producer.
Ask the question now that they have approved the ability to move certain fields to production and therefore start to export their production at international prices, are there any further approvals needed to physically move oil to the international market and if so how long will these take to obtain and additionally do they already have access to pipelines or export routes that will enable them to physically move oil to the international markets or is there a mechanism where they simply sell to oil export consortiums that move oil and sell internationally. If so have these agreements been made for the MJF production already ?
Roxi/Caspian have only had a couple of reserve evaluations done during their exploration activities and their current proved reserves from their latest was done when they just had a limited production from their Yelemes field and that from MJF structure. It is the latter that has been developed further since that evaluation with more producing wells now than when the last reserves evaluation was done. The company however, if waiting for one of the deep wells to be successfully tested before it undertakes the next reserves evaluation as this will significantly enhance their reserves and upgrade the valuation significantly, if the well is successfully tested. So a reasonable estimate would be in the second half of 2018, if their current testing plans pan out for the deep wells.
FK, I will be in Andulucia as well over the next couple of weeks and have been invested in Roxi/Caspian for many years now and would be good to catch up for a coffee/beer/golf and talk about our mutual investment. Am a member of a local golf club here so would be happy to invite you along if you have time or I could drive across to you