North Sea Small Cap Buys: Antrim Energy & Trap Oil Group
The North Sea’s heyday may be behind it, but there are still plenty of opportunities for determined operators, whatever their size.
At the top end of the scale are BP (LON:BP) and other well-established majors — and at the other end of the scale are the two companies I want to talk about today, AIM small-cap E&P companies, Antrim Energy (LON:AEY) and Trap Oil Group (LON:TRAP).
Trap Oil Group
I’ve been following Trap since March last year, when I highlighted its expenses-paid drilling program in an article for the Motley Fool.
With hindsight, I was a bit premature, and thanks to a combination of bad luck and the kind of inevitable delays that arise with offshore drilling, progress in 2012 wasn’t as swift as I had hoped for.
Market sentiment towards small cap resource shares didn’t help either, and Trap ended 2012 down by 27%, at 15.75p. Worse followed at the start of this year, as an ambiguous drilling result from the company’s Romeo well disappointed investors once more. Finally, investors pushed Trap’s share price down to around 13.5p at the end of January, when the company unveiled a $20m borrowing facility with an unspecified interest rate.
Production Plans: Athena and TET
However, I think that the sell-off has been overdone. Trap is on course to receive approximately £2m per month from its share of the oil production from the Athena field, which started at the end of last year.
This should fund most of its ongoing operations, with the $20m borrowing facility providing headroom and reducing the likelihood of dilutive share issues.
What’s more, Trap’s latest licence acquisition, the Trent East Terrace Area (TET), where it has a 33.3% working interest and intends to become operator, is estimated by Trap’s management to contain between 35 and 60 billion cubic feet (bcf) of gas and could be tied back to the existing Trent platform for production quite easily, suggesting that if appraisal drilling is successful, TET could be brought into production quite quickly.
Trap announced today that drilling has begun on the Scotney prospect, a pure exploration play in which Trap has a 12.5% carried interest.
Bad weather has delayed the start of this well, but that’s normal in the North Sea. Scotney contains best estimate gross prospective resources of 57 million barrels of oil equivalent (mmboe), of which 7.1 mmboe would be due to Trap.
Drilling Scotney to its target depth of 10,690 feet is expected to take 36 days, and in the meantime, Trap’s next well, on the Magnolia prospect, is also due to start drilling shortly.
Better value now than ever?
For my money, Trap looks better value now than it ever has done. Cash flow is improving, it has solid production assets against which to secure a debt facility and its drilling programme is moving ahead under full steam once more.
If you’re interested, then I would suggest a look at the company’s February 2013 presentation, which includes a good overview of planned drilling activity for this year – click here.
Disclosure: I hold shares in Trap Oil Group.
Antrim Energy: Fyne Awaits
Antrim Energy is another small cap North Sea exploration and production company with healthy cash flow from non-operated production assets and a bigger asset it is trying to take to production.
In Antrim’s case, it’s further ahead than Trap. Its current production of 1,800 barrels of oil per day (bopd) is expected to rise sharply this year now that production from the Causeway field is rising and production from Coromorant East has been restarted.
Antrim is hoping to use the cash flow and credibility this gives the company to raise additional funds to develop its Fyne Field, which has 2P reserves of 11.7 million barrels, in which Antrim has a 100% working interest.
Antrim believes that first-year average production from Fyne could hit 9,000 bopd, which would be very significant for a company this size.
Going it alone
Antrim’s publicly-stated plan is to retain 100% ownership of Fyne and raise funds to develop it alone. This begs the question of where the money will come from — and whether it will dilute existing shareholders.
In a recent video interview (below, worth a watch), Antrim’s CEO Stephen Greer says that the company will need $170m to get Fyne through the first stage of development, after which it might look for partners. For a company whose market cap is around $100m, that’s a significant chunk of money and, in my opinion, is the big risk in this stock.
Greer says that “we expect to have it fully financed in the next quarter”, which if on favourable terms could ingnite the share price, which has dropped 50% from a peak of 70p to its current level of 35p over the last year.
A solid risk?
I’ve bought into Antrim at less than 35p, in the belief that the company’s current discount to its asset value, its credit-worthy assets (2P reserves of 28m barrels), and its $54m net cash are collectively sufficient to offset the potential downside of any near-term fund raising.
If you’re interested, then I would strongly suggest a look at the company’s latest corporate presentation, for more details and an overall picture of the company’s strategy (click here).
Disclosure: Roland hold shares in Antrim Energy and Trap Oil Group.