Trap Oil Group PLC shareholders need to ask themselves serious questions

Trap Oil Group PLC (LON:TRAP) has been an unmitigated disaster as an investment, despite the firm’s promising start, cash-generating asset and today’s £18m cash balance.

Just how bad the market’s view of the firm is is illustrated by the fact it currently trades at a 50% discount to net cash.

I’ve remained cautiously optimistic on this stock for a long time (too long…), but I’ve started to think I need to be a little more rigorous with my analysis and consider taking a loss to get out — after all, the only certainty here is that the shares could still fall by another 3.5p…

Why the discount to cash?

There are several potential reasons why Trapoil’s shares are trading at a 50% discount to cash. Here are a few suggestions:

• The market is discounting the gradual erosion of the firm’s £18m cash pile, as Trapoil meets its contractual obligations on Athena, spends money on G&A, pays £3.6m (based on 2014 AGM presentation) figures for the firm’s share of the Niobe well in 2015, and stumps up a potential £9m for the decommissioning of Athena in 2016/17.
• Small cap AIM resource stocks can’t be trusted not to fritter away cash until there’s none left, rather than returning cash to shareholders if it can’t be profitably deployed.

Indeed, despite the cash balance, the only concrete hope for the firm seems to be the involvement of Peter Gyllenhammar, who owns 18% of the stock, and appears to have become very influential over the last year — witness the boardroom cull and other cost saving measures.

Shedding assets

Sadly, Trapoil isn’t selling its assets; it’s simply relinquishing them because it lacks the funds or partners necessary to try and develop or explore them, and because the high costs involved in North Sea drilling and production are starting to look seriously problematic against the backdrop of sub-$70 oil.

For example, according to Trapoil’s AGM presentation this year, the firm’s Surprise asset, which is a proven discovery with development potential, has 13.85mmbbl of reserves and a 10-year field life. The only problem is that this was calculated based on oil at $95/bbl. This looks less than appealing in today’s market, and although Trapoil owns 100% of Surprise, it will be forced to relinquish this asset at the end of 2014, unless it finds a development partner before then, which is pretty unlikely.

Similarly, Trapoil allowed its option on Total’s Alfa prospect to expire, due to uncertainty over drilling costs, which makes it much less likely that the firm will be able to monetise its adjacent Romeo discovery.

Trapoil does have a 10% carried interest in Homer, on which operator Noreco is meant to be acquiring some new seismic data in the second half of this year to fulfil a licence obligation, but there hasn’t been any update on this yet, and it’s unlikely to add much value to the firm in the current climate.

What about Athena?

Athena was meant to be the cash generator that funded Trapoil’s other exploration and development activities. Sadly, it hasn’t worked out that way. Cash has piled up (modestly) in the bank, while Athena production has fallen this year, due to various technical problems.

Operator Ithaca Energy recently said in its Q3 results that it was nearing the end of the Athena workover, so there will hopefully be an update on Athena production before the end of 2014.

Isn’t there any good news?

Trapoil is sitting on £35m of historic losses, which could be of some use to another, mid-sized North Sea operator — The Parkmead Group, for example — which might be able to do a share-based acquisition in order to get the benefit of Trapoil’s cash and historic losses, without spending much itself.

In my view, this seems the only likely exit route for Trapoil shareholders which might generate decent uplift on the current share price: I don’t think there’s much likelihood of any exploration-related upside, no of any capital return.

Should I sell?

Trapoil shares no longer pass my acid test: would I buy the same shares at today’s price?

By rights, I should sell. Indeed, I should have sold a long time ago. I will, however, probably wait until we hear that the Athena workover has been completed, in case this generates any positive newsflow on cash or production — but time is definitely running out for this stock’s position in my portfolio, as it’s by far my worst performer this year.

Update Feb 2015: As per my original disclosure below, I was long Trap Oil Group at the time this article was published. However, I subsequently took my own advice and closed my long position gradually through December, ending the year with no financial interest in the firm.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has a long position in Trap Oil Group PLC. Do your own research or seek qualified professional advice before making any trading decisions.