The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
I agree, good interview. Much better than the webinar. I thought the webinar was poor because it didn't explain the financial strategy well at all. The technical charts were needless as they were not even explained properly. If they had better set out the strategy on the webinar, the sp would not have dropped so sharply.
Clearly, the board have made big mistakes to let the sp drop this far. If it takes 2 years to get a Taps tie in, why have they not started the regulatory process already? Their old prove and sell strategy would still require that, so they have massively missed a trick there. My concern with the TAPS tie in is whether they have the skillset internally to get the tie in signed off or they will require expensive external consultants.
They are paying SLB and NSaI a lot of money for their models. Is that the best use of their limited resources, not sure. If it will allow them to book reserves then yes. If not, then no. Why do we need a fancy dynamic model from SLB - what is wrong with a standard CPR that allows them to book reserves. If they cannot book any, then that has to be the first priority for the rest of this year and the next drilling season. Concentrate on getting some reserves booked at the same time as the TAPS process continues. They can also work on the FEED and drill the next lateral. They shouldn't need to raise much to do this.
There was also no mention of what they are now going to do with the money from the recent raise. Are they sill going to test the old SMD to try and get an initial flow rate? If so, why are they not more forthright about that? What next after that?
I am a very angry shareholder. I believe in the assets but not the naievety of the board. I hope David takes the bull by the horns and makes changes. Somebody needs to carry the can for the mess they are in. Jay should step down in my view.
Vent over.
JL
Yes, very pleasing indeed! They did talk about 2 potential services contracts in FY results so presumably this is one of them. Interesting to see if they get the second in due course too. I agree that they still look really, really cheap. I wonder why the market is not valuing them. Tier 1 customers, significant fast growing labs business, good rig utilisation, but still a cheap valuation. I can only assume that the market is cautious in what is a very cyclical market. But CAPD are in a very strong position for when the tide turns.
These remain my largest holding and a very happy holder.
JL
Hi Andii
Thanks for those figures. I just did my own calcs on a more conservative basis and still get £12m GP this FY. This is based on slower ramp up to 7500 per quarter by Q4. I am probably being a little too cautious but some of the earlier interview (I think) guided us to them spending at least a couple of quarters with teething issues and ramping up.
With a further increase from 30k run rate to 84k by end next year, we are then talking £50m p.a. in GP. Pretty good for a company with an EV of under £40m.
JL
Finally, got round to watching this too. I agree, I came away impressed. Their forecast sounds perfectly reasonable but excludes two large mining contracts that they have been shortlisted for. Each of these is perhaps the half the size of Sukari so maybe $125m over 4 years i.e. $30m per year. If one of them land they will fund it out of existing resources. In the pleasant situation where they win both then they will need to raise a little. If they miss these two, that would be a disappointment but there will be others.
I liked the idea they will be a £0.5bn revenue company in the next three years. So roughly 20% CAGR plus a dividend of 3%. All with a ROCE of 25%! What is not to like? I cannot see this staying under 100 for much longer so bought some more.
JL
Hi Scot
thanks for coming back to me. Is the opex actually that far away? Blended figure of $32 that has risen since is not that far away. But I was deliberately erring on the side of caution to get an idea of payback time from each well. I was actually encouraged by the payback time as presumably each well will flow for several years albeit declining.
These estimates presumably exclude Capex for all the top side facilities too. Any estimates for that? That would presumably include a tie back at some point.
How many wells were envisaged for the first phase, was it 8? Or did I make that up? Just trying to get a handle on the total Capex for phase 1 of Alkaid alone. As a standalone field, what could the IRR be?
@PeakyBrum, I was just doubling their $40k income from the current well to an 8k lateral. That is based on 'current pricing' so actually there is room for this to decline too.
JL
I have been playing about with some of the figures from the latest RNS to assess profitability. The IRR of 11% at $60 oil is not exactly impressive - they won't raise funds on the back of that.
Cost per well $19.5m
Gross Income from current well is $40k p.d.
So a full 8k lateral should double the flow and hence the income so $80k p.d.
Opex: I have assumed $40 per boepd
Net income per well (pre tax) is therefore $36k p.d.
Payback on the well cost would take about 1.5 years assuming steady flow.
Of course this ignores a host of other variables, depletion being the main one, but it was a useful exercise for me as a comparison to other capital investments.
JL
I agree. Good results. Revenue marginally ahead of expectations is a positive surprise. Nothing on margins though so we don't get a handle on profit or EPS until March. Which is of course fair enough.
I would have liked to see some more detail on MSALABS. Hopefully they will break down revenue by the three pillars in the final results.
JL
PS thanks for all the mine updates Rivaldo. Much appreciated and please do keep them coming.
Interesting to see that the Canadian side of the fund raise was not fully taken up. The first RNS details $7.5m minimum, but only $5.6m raised. Thankfully UK was oversubscribed to more than make up the difference. So far from a ringing endorsement of the strategy from Canada, or if I was being kinder, a sign of how little money is now available for E&P.
JL
As this testing continues and continues and we have to wait, I have one concern that is nagging at my mind. I am no oil expert at all but have picked up a bit of knowledge from investing in the sector for many years. As this self-confessed layman understands it, the longer drilling mud stays in the hole, the more chance of formation damage. Is that correct? If so, should we not be concerned that we have only got 10% of it out now? And that it has been in there for a long time now? Could this not be gumming up the well and providing a real challenge to getting a decent flow rate?
If so, how could that play out. Presumably they will continue with cleaning out the sand and getting the well to start flowing naturally to remove the remaining fluid. Then oil cut should start increasing. But if the fluid does start gumming things up, would the flow just not start as hoped, or would it quickly decline? And if so, what further remedial action could be taken, if any? Would they need to reperforate, or even re-drill the horizontal as a worst case?
Thoughts gratefully received. Hopefully my concerns will soon be put aside one way or another anyway.
JL
@9billion
Great spot! Thank you. It could just be internal reorganising then - combining the two nominee accounts together for example. But surely they would need to announce that anyway.
Looking at that list, I was struck by how many of the top 20 holders are actually nominee accounts. Which implies that most of the holdings are actually retail rather than institutional funds or industry. Which possibly explains the lack of valuation. Until institutions wake up to the value here, it is hard to see where large gains could come from. The positive view of that is that when they do wake up and see the value, they are going to struggle to build large positions quickly. Which should drive the price up quickly if they want a decent slice of the action.
JL
Yes, looking forward to that with interest. Mostly interested to see that MSALabs is on track with their aggressive roll out. Hopefully a few more small contracts have been signed this quarter. If they can get their 10 new rigs utilised quickly then there should be some fairly reasonable increase in drilling revenue too.
JL
Considering investing here so just been through the interims in a bit of detail. Firstly, there is not a lot in them, which is an immediate worry.
A few other bits I spotted:
Can anyone enlighten me on their two investments in Vortex and Manganese Namibian? What are these and how did they come about? Seems odd to keep these when they raised funds for Zulu.
Loans, why are we loaning our cash to Outback? Why is this farm needed? and the loan to Otjozondu? Who are they and why are they borrowing our cash?
Any help much appreciated.
JL
HI Duntmatter
Yes, I saw that. They clearly don't have $30m kicking around to fund their share so their reference to cash or equity is intriguing. Cash presumably means offtake agreements or other such. Equity of course would mean dilution. Surely though that should be only a last resort. I agree with other posters that debt should be the way forward for such a small amount. With payback in a few months, maybe allow a year from first drawdown to paying it off, which bank would turn that down. In order of likeihood that gives us:
1. offtake or other agreement to pre-fund the outstanding amount.
2. reserve based lending.
3. equity.
But I doubt they will sit still next year. Raising $50m to fund both another large exploration drilling campaign in 2023 and early 2024 plus their share of the mine Capex may actually work out better in the longer term. If they can prove up more reserves to double the resource, the DFS will quickly be out of date!
Hopefully we will find out more in their results next week. Has anyone seen confirmation of the date for these yet?
JL
Thanks Pastyhead. Good point, I think you are right. So only $30m to find if we allow a little for cost overruns or contingency.
Plans for next year will be interesting, will they announce further exploration drilling? If so, how will they fund it? The more I look at it, the more I think a small raise will be on the cards next year.
JL
Having reviewed this PFS in as much detail as I can, the main change from the scoping study is of course the increase in Capex:
"CAPEX has increased from US$70 million to US$125 million in the PFS"
So ALL will need to find $55m by late 2024, the rest paid for by Piedmont. I don't see that as a massive issue at all given the payback of 5 months! I hope they will use reserve based financing for this or of course pre-paid offtake agreements. On this basis, I think there should be very little, if any, dilution.
I wonder how much cash they have left. They had $22m in the interims. The PFS and a lot of the drilling should have been paid by Piedmont if I read their contract correctly. So only really the overheads to cover. So they should still have plenty left for the next year or so. The annual results should presumably be out next week when we should learn more. And there will no doubt be interviews in the coming days to present the PFS.
Even if we assume they burn through most of their cash next year on more exploration drilling and supporting the DFS, they should only need one small fund raise before the wall of cash comes in from late 2024. If that was 10% dilution then the project finances look amazing!
Newsflow to look forward to...
Financial results next week
Drilling results - maybe one next month (or with the results) and then a final summary before year end.
H1 2023 probably quieter as they concentrate on the DFS. Although I would not rule out more exploration drilling, with an associated fund raise to pay for it, with the aim of expanding the resource - I actually hope they don't. With patience, they will have plenty of money from 2025 onwards for expanding the resource. So the upside of further drilling in 2023 will need to be clear.
Q2/Q3 confirmation of permitting.
Q3 DFS. One year from PFS sounds about right to me so hope it doesn't slip.
Offtake announcements.
Q3 2024 production!
Happy to hold through this as the upside is huge from the current price.
JL