Malcy’s Bucket list 2018 and 2017 review, with apologies for the delay…
The 2017 bucket list was an entirely different game to that of 2016, last year the oil price was at its high on bucket list day, $57 for Brent and fell through the spring reaching its low of $44.82 in June before rallying to reach $70.53 at the peak. The previous year had seen the low of $27 in February and things only went up from there taking all things oily with it.
So the 2017 list performance is a disappointment, yes there were special reasons here and there but if you had said to me that oil would be well above $60 (my year end forecast incidentally) around now I would have expected oil shares to be much higher than they are at the moment. Which is why the list is a bit bigger than last year, we have lost two in Ithaca and Bowleven who were both subject to corporate raids but gained a net four as six new companies join the list. I can only reflect the views of many of the blog readers who feel that the oil sector has, in the main, not performed as well as it should, with an oil price of over $60 and costs having been slashed, oil shares should be much higher. As a result there are stocks that remain in the list which have the potential to do much better.The upcoming results season should show that 2H 2017 was a highly profitable time for E&P companies as the upstream parts of the majors have already exhibited.
For those who don’t know the bucket list, it was the brainchild of a certain Adrian Collins back in 2016, Adrian, who is a self confessed non expert in oil and gas but knew a commodity collapse when he saw one, wanted to try and invest in the sector at its nadir. He wanted a list of stocks that would provide some comfort and some risk, buying the whole portfolio shouldn’t put you in penury but might have some decent upside. Last year’s performance was very mixed, of the 12 survivors 5 were up, one was unchanged and 6 fell, I’m afraid if you bought the lot you would have been down somewhat.
This year’s list is also late for which I apologise, I will try to get back on the straight and narrow for the interim report in which I envisage more changes than before. That is because I am giving one or two stocks a further run but cannot be patient forever, also the subs bench is loaded with exciting shares I expect to really kick on in the second half.
Best performers since last February have done very well however but the winner was Jersey Oil & Gas + 34%,who had a roller coaster ride during the summer in which time they had a dry hole swiftly followed by a successful sidetrack at its Verbier prospect in the North Sea. JOG retains its spot as it is rolling the dice again this year as Statoil plan to drill an appraisal well which should take reserves expectations to the top end of the current range. Should that happen I would expect a step change in its valuation which is not storing much value at the moment.
At Christmas SDX Energy +27%, were in top position as they completed a year of unparalleled success with the drill bit in Egypt and Morocco. For these shares to be only up 27% is one of the mysteries of modern man but following a highly successful visit to Morocco recently I’m sure things will go better. The Circle deal is proving to be a great success with a policy of high margin growth which can only go from strength to strength whilst in Egypt an exciting drilling programme is already under way.
Ironically, the company that few people know but those who do, see huge upside, is Far ltd +11%, who are partners in Senegal with Cairn and possibly Woodside…Far is in my view full of value which may have been crystallised had Cairn gone ahead with its sale but for whatever reason didn’t, I know that a deal was inches away from the Ministers desk… Far isn’t just a one trick pony though, apart from Senegal which is valued way above its share price it has acreage down the coast in The Gambia which I think might be very exciting indeed.
As I write there is breaking news regarding Far as it has just announced a farm-out of its acreage in The Gambia to Petronas which looks like a truly awesome deal for Far. I will write in more detail later in the week but Petronas are paying 80% of the well costs to a cap of $45m plus $8.6m of cash and they pay $665/- per % point of equity for 40% of the block. Far remains operator through the exploration period which includes drilling of Samo-1 exploration well scheduled for Q3/Q4 of this year. Negotiations for a rig are ongoing but the Stena Drillmax is warm stacked nearby and that would be a bonus as Far have also agreed to sublease the shore facilities in Dakar thus possibly giving them the same rig, facilities and people as in the Senegal campaign. More to come in detail but this looks like a cracking deal with an NOC with one of the best track records of success and will make good partners for Far. The deal is also significant as there have been no 2 for 1 deals for a while and this one is better than that which speaks volumes about the major oil companies desire to get into this play, which is what I have been banging on about for ages!
Next up is Aminex, +10% which was well up on the year but at one stage more than double what it is today. For what it’s worth I think that Ntorya is worth significantly more than the market is valuing it at as per recent resource upgrade where the numbers speak for themselves. If I were Jay or his major backers I would buy the asset back in and make the fortune they deserve, if not somebody else might well…It stays in the bucket list on value and takeover prospects.
Also up on the year, just, are the pin up boys and girls of the oil sector over at Faroe Petroleum who have snuck in at +3%. FPM has the best record over the long term in exploration which consistently beats its peers and delivers returns for shareholders. At $65 Brent even Jon Cooper will be smiling but so to should Graham Stewart who pulls it all together very well, FPM is without doubt one for the long haul.
The only unchanged stock after a year of ups then downs is Victoria Oil & Gas which might surprise some readers. Difficult operating conditions eventually gave way to success as the wells at Logbaba eventually came in and the power generation and tariff market in Douala were to be profitably served by the patient building of the pipeline and distribution system. Unfortunately a dispute between the Government and power generator ENEO has led to this power generation client to be suspended which as 53% of their business means a significant cut to revenues for VOG. If I thought that this situation would not be sorted out for the better I would take the company out of the bucket list but call me old fashioned I think that, especially in an election year the population will not take kindly to 10-15 blackouts a day as is happening at the moment. In the meantime they are continuing to build their, more profitable, corporate business who now with so many blackouts will need more on site power generation which VOG can supply.
Now we start on the under performers who have usually got a reason for remaining in the list. Rockhopper -12% has been in the list since the start as I have always thought that, given the ultimate value of Sea Lion, it would someday actually happen. With all the costing done at a time when oil industry efficiency has become as good as ever, and an oil price of north of $60 if it doesn’t get the go ahead this year then there is something wrong in the State of Denmark. RKH have announced today that their investment in the Greater Med area is progressing nicely with improved production from Abu Sennan giving them a net 880 b/d. There is strong pricing here with only a small discount to Brent and an exciting four well drilling programme this year. Receivables in Egypt are being ‘significantly reduced’ and historic liabilities to Beach are now satisfied.
Premier -13% has had a spectacularly good time operationally, most recently with the success of Catcher which has just sold its second cargo of oil at a premium to Brent. Assuming Sea Lion gets the OK and with no operational problems PMO is set as well as any company in the sector to take advantage of current conditions. This is another stock that should be significantly higher given current economics, I know that they have to service the debt but that should be happening as PMO is firing on all cylinders.
Hurricane Energy -29% was runner up last year and 2017 was always going to be a year of consolidation as designing and paying for the Lancaster EPS took centre stage. Markets are perennially short sighted and despite first oil being forecast for 1H 2019, earlier than most developments, the shares have underperformed. To some extent that was exaggerated by how shall we say ‘complications in the capital markets’ before the real raise but when push came to shove the company raised well over $500m for the project. I have recently travelled to the Dubai Dry Dockyard and the FPSO appears to be very much on, if not ahead of schedule. Assuming no other complications, before long the shares should be looking a lot better as the Lancaster EPS not only becomes visible but may even tempt one of the waiting majors to take the plunge and beat the rush. My target price for Hurricane is still over 100p which could be conservative if Lancaster delivers the goods.
Amerisur -36% has had a torrid year despite making the 7,000 b/d it promised and with better news from the OBA coming up should increase production and revenues substantially. Doing the sums means that with a dozen wells still to drill in the programme and ONGC getting increasingly excited about CPO-5 what is there not to like? Indeed recently mentioned the D word and thoughts of a dividend are definitely not off limits especially if the board sees the cash coming in and can reward patient shareholders in this way. There has been, an albeit modest, move towards companies with reasonable production making returns to shareholders which can kill two birds with one stone if the market is being overly harsh on the company.
Sound Energy -37% has, by its own standards had a quiet year, after the disappointment in Milan it has decided to put its Italian portfolio in with Saffron and PO Valley to make Coro which will become a European and South East Asia play well worth watching. As a result of this Sound has become a serious Morocco play and with the potentially vast Tendrara discovery, and in due course development of the recently announced new Petroleum Agreement at Sidi Moktar, the much awaited LE may not be far away.
And finally, Pantheon Resources -39% where not a dry hole has been drilled and only operational difficulties have plagued them this year. I have thought long and hard about its place in the list but although my timing has been lousy and my patience should have deserted me about five warnings ago I can’t bring myself to quit now, Jay and his team do have a valuable asset on their hands so I am sticking with it.
New for 2018
There are six new stocks coming in now and as mentioned a very strong subs bench of shares I think will do better later in the year.
Two stocks effectively came in half way through last year, or in the case of Savannah Petroleum would have done but for suspension. I announced its inclusion the night before its suspension and waited six months for its return. I believe that Andrew Knott has made a significant acquisition in his long and determined pursuance of the Seven interests and I think it is already paying off with early numbers being positive upstream and huge opportunities midstream. With the shares suffering from the post placing blues I believe that this is a good opportunity to tuck these shares away, before long it will become obvious just how much value the Seven deal is going to produce and in the meantime the Niger exploration programme will add spice to proceeds.
The other inclusion was President Energy where I advised investors to buy into the raise but having gone well above that price have now come back to it, if it was good then it is better now. The acquisition of assets from Chevron has been a master stroke as workover success has already been announced from Puesto Flores and the new intervals tested have been every bit as good as suggested. PPC is seeing a significant increase in cash flow and margins and is well set for a very good year, indeed only last week I reported in the blog that their January numbers were a record.
Also intimated some time ago was the inclusion of Trinity Exploration & Production who has come back from almost the brink to become probably the most profitable company in the sector. Its mixture of recompletions, workovers and reactivations has come into its own as production last quarter increased by another 11% which is very impressive and shows a clear upward trajectory. Its EBITDA margins are very high and I think yet to be appreciated by the market, this year should see a notable improvement as drilling may mark a material step change in its fortunes. I expect consistently good progress from Trinity this year as management deliver on the promises they have made but not bragged about, a rock solid pick for the list.
The final three companies to go into the list at this stage are all relative newcomers and certainly add to the spice in the bucket list pot.
ECO Atlantic Oil & Gas has a model that has gifted them significant stakes in Guyana and Namibia which have both become amongst the most interesting postcodes for this year. With Total highly likely to exercise its option to buy into the Orinduik licence in Guyana, ECO will add $12.5m to their coffers already boosted by the strategic partnership with Africa Oil which brought in C$14m at a premium to the then share price. That licence is adjacent to the Exxon ‘super discovery’ at Stabroek which may have 3bn barrels in it after six successful wells. In Namibia Tullow will drill nearby to ECO’s Osprey block giving them a ‘free look’ and potential de-risking of the acreage. The size of the prize is genuinely extremely high and is probably one of the stocks most likely to be taken over should things go well. Either of their two assets might suddenly become attractive to others and so the shares have to be bought, not watched.
I am including Echo Energy in the list although with a lot of hard prep work to be done it may be a slow burner until the second half of the year and beyond. That I am not going to take that risk speaks very highly of the Argentine assets that the company has bought and is now working so hard to deliver. With workovers and exploration wells at the Fraccións and Laguna De Los Capones, not to mention a whole heap of seismic to deliver there should be plenty of excitement and that is before Tapi Aike which looks like the jewel in the crown.
The last new stock into the list, until the June review when I anticipate adding a couple of stocks that should have second half operational activity is Reabold Resources. I have written about this stock a few times recently after I met its joint founders, former fund managers Stephen Williams and Sachin Oza and liked the model that they are creating at RBD. Investments in Corallian Energy, giving exposure to the Colter prospect in Dorset and Wick in the North Sea as well as Danube Petroleum in Romania are only the beginning of their plans I suspect. Having said that, the recent rights issue from Corallian has meant that they have had to put more money in to that and with imminent potential investments it looks like that they will have to raise money again themselves. I mentioned last week that they had solid support from investors, who share their view that money should not be raised at a deep discount and with rumours of a raise of something between £12-15m and around the current share price the stage is set for further progress. There are risks here of course, a second raise in less than a year and of significantly larger size will provide some indigestion and should there be any slippage in the Colter or Wick wells investor patience might waver but I am prepared to see through that to the very likely substantial upside.
So that concludes the update to the bucket list, albeit a bit late, again my apologies. There is as I have said a very substantial reserves bench and I do review the list all the time. If you have a favourite stock which is not on the list or I dont cover I very much appreciate your input even if my replies can be sporadic at best.