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Trap Oil Climbs After Announcing Surprise Acquisition and New Partners

Trap Oil Group (LON:TRAP) delivered a triple-whammy of good news yesterday, with three RNS annoucements on the day of its AGM.

The share price has since risen by around 10%, suggesting that the last remaining sellers may have cleared the stock after the Scotney disappointment, making way for buyers who are still keen on the company’s longer-term prospects.

90% of a Surprise!

First up was news that the firm had acquired an additional 85% interest in the Surprise and Nutmeg oil discoveries in the North Sea from Dana Petroleum, taking its total interest to 90%.

Surprise and Nutmeg are located in the Moray Firth Basin in the Central North Sea and contain proven oil. Trap’s estimate is that gross recoverable resources total 12 million, but as we saw with Antrim Energy recently, the key to success will be finding a larger partner who agrees that the barrels are commercial and will farm-in to the deal.

Trap intends to become operator, as with Trent East Terrace and Orchid, and the firm is currently waiting for approval from the DECC to become an approved operator.

New Partners

Next up came the announcement that the firm has two new exploration partners, TAQA Bratani (a subsidiary of the Abu Dhabi national oil company) and CIECO (a UK oil subsidiary of a large Japanese trading corporation called ITOCHU Corp.).

Asian and Middle Eastern firms are becoming increasingly interested in the North Sea, and TAQA already has a big operational presence in the region. Broadly speaking, the deal is that both companies will pay Trap a retainer and carry some its exploration costs, in return for Trap using its technical knowledge and access to CGGVeritas seismic data to identify promising new prospects.

It looks great on paper and is certainly an advantage in the current environment, where financing is difficult for small firms, but it is worth remembering that Trap’s previous partners — Noreco and Suncor — didn’t experience much exploration success with Trap and have chosen not to continue their previous partnership arrangements with the firm.

An extra £4m cash…

The final bit of news came in the AGM statement. Trap said that it had received an extra £4.2m cash payment following a post-completion adjustment to its acquisition of a 15% stake in Athena, which completed last year. The adjustment mainly relates to oil that had been produced but not sold at the time of the deal.

Overall, Trap’s finances are looking surprisingly healthy. Athena production is delivering net cash flow of £2m per month, and the company currently has a net cash balance of around £13m, which should rise gradually through the year as long as Athena production does not start to decline.

What’s next?

Trap is very keen to attract a partner in order to drill another well at Romeo, which it believes may offer up to 25m barrels of gross recoverable resources. Trap’s original drilling partners on Romeo didn’t agree and wouldn’t fund another appraisal well.

Trap is also keen to starting operating the fields in which it has substantial interests (Trent East, Surprise, Knockinnon and Orchid) and is hoping to be able to arrange a four-well appraisal programme with its new partners next year.

I’d really like to see some of these drilled — going for new discoveries is all very well, but it doesn’t always pay the bills or reward shareholders. If Trap could prove commerciality on one or two more existing discoveries before Athena starts to wind down, it should be in a much stronger position to attract investment going forwards.

There’s also the promise of a proof-of-concept unconventional well, as a result of Trap’s farm-in to Extract Petroleum’s unconventional play acreage. Trap is funding £1m of research to attempt to persuade a group of larger operators to fund a test well — as a reward for success, Trap would be likely to get a carried percentage in the acreage. The firm is hoping that a proof-of-concept well might be drilled in 2014, but nothing is certain.

All in all, Wednesday was a positive day for Trap, and while there is still a lot of luck required, it does seem to be adjusting its strategy to align itself better with its larger partners, which should help prevent a repeat of last year’s disappointments.

Disclosure: Roland hold shares in Trap Oil Group.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any purchase decisions.