Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Flogging a dead cow: a profile of Andes Energia Many eyes are on Argentina this year. In October, the country will put an end to 12 years of one-family rule, latterly overseen by the increasingly unpopular and health-troubled Cristina Fernández de Kirchner, who took over from her husband and presidential predecessor Néstor in 2007. Election polls are currently tilting towards Daniel Scioli, president of the Justicialist Party and the current governor of Buenos Aires. Sergio Massa and Mauricio Macri, of the Renewal Front and the Republican Proposal parties respectively, are also in contention. But whoever wins, many expect the next candidate to be less populist and reflexive, more business-friendly and eager to repair the country's image as a litigation-embroiled pariah of capital markets, unsafe for foreign investment. Such a change would further explain why Argentina has attracted so much attention from natural resources companies and their investors. Long home to a developed oil industry, the majors have been closely watching developments in the Neuquén Basin, where some - including Chevron - have claimed that the region's enormous Vaca Muerta shale formation could gift Argentina energy independence. The Vaca Muerta (literally, 'dead cow') is the only oil-producing shale outside the US, and - depending on who you ask - the second or third largest shale resource anywhere. The US Department of Energy estimates that the shale contains as much as 27bn barrels of oil and 800 trillion cubic feet of gas, and a recent Goldman Sachs report compared the resource potential with the Bakken formation either side of the US-Canada border. Past oil production has left a solid infrastructure legacy, and land currently fetches up to $10,000 an acre. As you might expect, this has led to a gold rush in the past two years, and explains the presence of Shell (RSDA), Total (Fr: FP), Petrobras (Bra: PETR4), ExxonMobil (US: XOM) and Chevron (US: CVX) in the region. Last month, Russian behemoth Gazprom (Ru: GAZP) signed a deal to develop shale and oil and gas assets in the region with state-owned YPF (US: YPF), which by default has the largest acreage of any major. One of the lesser-known names in Vaca Muerta is Andes Energia (AEN), a company jointly listed on Aim and the Buenos Aires stock exchange and headed by Repsol's former business development director, Alejandro Jotayan. It is touted as London's only 'pure-play' on the shale, and although it has a market capitalisation of £172m, it boasts more than 500m barrels of certified resources, and 6.2m net acres in Argentina - including 250,000 in the Vaca Muerta, over 90 per cent of which is in the proven oil window. This, management says, gives Andes the largest acreage position in the shale of any independent company, although four of its six licences are still shared with YPF. That sounds impressive.
see Macquarie sales team comment: ANDES ENERGIA - Small cap pick of the year I am more convinced that this is a stock that could generate some very large returns this year given their position in the World Class Vaca Muerta Shale in Argentina. The first thing to point out is that THIS IS NOT ANOTHER POLAND. The Vaca Muerta is the world's third largest shale oil resource and the only producing shale oil outside of the USA - it is primed for development: flat, accessible plentiful water, no animals, vegetation, cities or community issues to meander, intrastructure in place, excellent geology (of course) and it has already been proved up and is producing - and Andes has +6million acres of the stuff which is enormous. Why invest now? Activity is gearing up - 400 wells were drilled between 2011 and 2014 and yet 500 wells are being drilled this year alone. Large Industry players continue to make their move - many were caught sleeping in the US and ended up buying their way into the shale and they don't want to miss out this time. Recent investors include Shell, Petrobras, Total, Exxon, Chevron, Wintershall with more wanting access - however nearly all the land has already been licensed... Political situation is improving - with the 'pro business' government being the front runner to win the elections in Aug this year, arguably never has there been a better time to invest in the country. ASSETS - Andes have 6 licences, 4 discoveries, 2 producing wells in the shale. IMPORTANTLY they have optionality as they hold 2 blocks 100%, 1 block with 40% WI and the other three remaining blocks 20%-27% WI with YPF their partner. Their blocks are surrounded by existing infrastructure, services companies and pipelines and geologically it looks excellent. ECONOMICS - ROI are around 15% today but this is expected to rapidly increase as costs continue to drop hard. The shale is naturally over pressured so opex is only ~$10/bbl. The shale is still in its relative infancy wrt Horizontal drilling, but that is the opportunity that Andes has - economics are good now, so with Horizontal drilling, it is expected to be significantly improved. CAN COSTS FALL? - absolutely. The country has been producing oil for over 100 years so technical knowledge is high. Competition is increasing as more and more Services companies expand their operations, unused equipment and rigs are coming down from the US, timing per well is reducing rapidly and the number of fracs per well is also increasing. NEXT STEPS - Andes has a stable production base of around 2,500 bbl/d (from Conventional production in Colombia and Argentina) to pay for G&A, business development and to provide the company a base with which to grow their operations. Given the scale of the resource that they have, the company plans to enter a series of farm-outs to accelerate the work program. Sure it is small cap but the company will have a valuation materially larger than it is today.
It is not correct to compare Petroamerica value ratios with Andes ratios. Most of the Andes value comes from its position in the Vaca Muerta unconventional shale acreage, not from current production or ebitda. To do that properly, you need to adjust Andes value, deducting the value of Vaca Muerta acreage first, and then do the ratios with the EV residual conventional value and compare them with other pure conventional E&P companies.
right moment to buy back. Nice price now