Category Archives: Oil & Gas

Offshore oil or gas platform

Which oil producer will follow Afren Plc down the pan next?

Offshore oil or gas platformThe near-demise of Afren Plc (LON:AFR) caught many investors by surprise, and I have to admit that while I did flag up the risk of a collapse following the firm’s admission that it was seeking to delay a $50m bond interest payment, I underestimated the true scale of the problem.

What’s more, it should have been obvious — hell, it was obvious, and I missed it.

Even without knowing that the yield on Afren bonds had risen from 6% last July to 35%, the signs were there in Afren’s Q3 cash flow statement. Operating cash flow was being wholly absorbed by capex — without any spare capacity to repay or service debt. This was okay while oil prices remained high, but as oil prices started to fall, it should have been obvious to me back in December that Afren’s largely unhedged oil sales would cause cash flow to be crushed, triggering a liquidity crunch for the firm. (In my defence, it was the start of December, when oil was still $70 per barrel — I underestimated that decline, too…)

In the light of this realisation, I decided that I should take a more critical look at the finances of four other popular UK-listed small/mid-cap oil producers, to see if any of them were at risk of an Afren-style collapse.

I broke down the resulting analysis into two articles, which were published on the Motley Fool UK website.

The first, featuring Gulf Keystone Petroleum Limited (LON:GKP) and Genel Energy PLC (LON:GENL), can be read here.

The second article, which looked at Premier Oil PLC (LON:PMO) and Enquest Plc (LON:ENQ) can be found here.

These four companies may not be the next to fall — there’s even talk now that Tullow Oil may breach its convenants.– and in my view, at least one, possibly two of the companies listed above will survive intact

However, I am pretty certain that Afren won’t be the last casualty, so it’s now more important then ever to scrutinise energy firms’ cash flow, capex and debt — how much cash is coming in, are prices hedged, when are repayments due, and will debt convenants be breached in the meantime?

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no interest in any company mentioned. Do your own research or seek qualified professional advice before making any investment decisions.

A falling knife.

Fenner plc, Lamprell Plc and The Weir Group PLC: falling knives or bargain buys?

Should you catch a falling knife?The falling price of oil is starting to throw up potential bargains in the engineering and oil services industries. Three examples from the engineering sector are Fenner plc (LON:FENR)Lamprell Plc (LON:LAM) and The Weir Group PLC (LON:WEIR).

However, there’s a clear risk that all three of these could prove to be falling knives.

Of the three, I suspect that Fenner is closest to bottoming out: as I explain in a new Motley Fool article this morning, it doesn’t seem likely to me that Weir and Lamprell’s current valuations reflect the full consequences of oil’s recent collapse.

In contrast, Fenner’s business is more diverse and benefits from the fact that many of its products are consumables, that need to be replaced regardless of market conditions in order to keep essential plant in working order.

I’m believe that all three of these companies will become attractive recovery plays when the time is right, and I will be watching them closely over the coming months to learn more and see what happens.

You can read the full article here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no position in any company mentioned. Do your own research or seek qualified professional advice before making any investment decisions.

Onshore oil installation

Gulf Keystone Petroleum delivers something more valuable than oil

Onshore oil installationI’ve written before about the need for Gulf Keystone Petroleum Limited (LON:GKP) to deliver on its promises if it is to retain any credibility as an investment, and I was pleased to see this morning that the company has done exactly that.

Oil production from Shaikan should hit 40,000 bopd later this month, as promised, leaving the path open for a third production facility and a rise in production to 66,000 bopd, if the payments from the KRG become more regular and the current price of oil doesn’t make funding the project too difficult.

At the very least, Gulf should now be able to stand on its own two feet as things now stand, even if it is only treading water: it’s not a zombie company with dwindling cash and no meaningful cash flow.

Although it’s been a grim year, and the firm’s shares are still down by 67% since January, this morning’s RNS was very encouraging, in my view.

I took a closer look in a new article for the Motley Fool earlier today, which you can read here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author owns shares in Gulf Keystone Petroleum. Do your own research or seek qualified professional advice before making any investment decisions.

Offshore oil or gas platform

BG Group plc update sends mixed message — what should investors think?

Offshore oil or gas platformToday’s update from BG Group plc (LON:BG) was very much a case of taking the rough with the smooth.

On the one hand, the firm announced an impressive $5bn asset sale, but on the other hand it announced another big impairment and indicated that assumptions about future earnings and valuations may need to be revisited in the light of weaker commodity prices.

For investors, it’s a mixed — and confusing — picture. In a new article for the Motley Fool today, I took a closer look at today’s news and the outlook for BG, and considered whether current assumptions about the firm’s return to positive cash flow and earnings growth are likely to remain valid next year.

You can read the full article here.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no financial interest in BG Group. Do your own research or seek qualified professional advice before making any investment decisions.

Oil platform in North Sea

Trap Oil Group PLC shareholders need to ask themselves serious questions

Oil rigs in North SeaTrap 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.

Offshore oil or gas platform

Valuation gap between BP plc and BG Group plc raises interesting questions

Offshore oil or gas platformDespite the calamitous decline in the BG Group plc (LON:BG) share price fall over the last year, the LNG-focused E&P company retains a sizeable valuation premium over integrated oilers BP (LON:BP) and Royal Dutch Shell.

A look at each company’s underlying reserves and own discounted cash flow valuations only serves to reinforce the difference and make BP look cheaper still.

The question is why is BG Group more expensive? The firm expects to start generating free cash flow in 2015/16, but that’s hardly something to write home about, and consensus earnings forecasts don’t seem to suggest that the market sees dramatic earnings growth.

In terms of yield, there’s no contest, either: BP’s proven ability to generate cash and its determination to return as much divestment money to shareholders as possible makes the major a strong income contender, even allowing for the 40% fall in the price of oil since June.

The only advantage that BG might have over BP or Shell is that it could be sold whole — or it could flog some of its prize, virgin assets, rather than non-core or mature assets as in BP and Shells’ cases.

If you’d like to learn more about the valuation of BP and BG and the assets and modeled cash flow that lie behind them, then take a look at an article I wrote for the Motley Fool yesterday, which you can find here.

Disclosure: This article is provided for information only and is not intended as investment advice. The author owns shares in Royal Dutch Shell. Do your own research or seek qualified professional advice before making any trading decisions.

Offshore oil or gas platform

Has the Afren Plc sell-off been overdone?

Offshore oil or gas platformShares in Afren Plc (LON:AFR) have fallen by 71% this year. I’m sure that all shareholders are familiar with the reasons why — management fired for taking backhanders and a falling oil price — but it’s starting to look to me as though this sell-off may have been overdone.

It’s worth remembering that unlike some of its peers, Afren has a highly cash-generative business with some solid producing assets.

In a new article for the Motley Fool this morning, I took a closer look at Afren’s valuation, the costs and profitability of its production assets, and the factors that could trigger a sharp re-rating of the firm’s share price over the next couple of quarters, including the potential for a takeover bid.

Although risks remain, I concluded that there is good reason for optimism, and I would urge shareholders or potential investors to take a closer look. You can read the full article here.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no interest in any company mentioned. Do your own research or seek qualified professional advice before making any trading decisions.

Fifty pound note

IGas Energy PLC keeps digging as CEO Austin defends Equity First deal

Fifty pound noteToday’s underwhelming interim results from IGas Energy PLC (LON:IGAS) were followed a few hours later by a second RNS, defending the IGas chief executive Andrew Austin’s share sale and repurchase deal with Equity First Holdings, of Quindell fame.

My jaw dropped as I read the RNS — IGas must really think its investors are mugs (a bit like Quindell, come to that). Here are a few highlights:

Under the terms of the ‎facility with EFH announced on 16 January 2014, Mr Austin transferred  a total of 7.5 million shares to EFH and received the net sum of £7,009,533, equivalent to 93.46p per share transferred under the agreement. Mr Austin both fully intends and is required to repurchase all of these shares at the end of the three year term, by repaying the facility at a cost of £7,899,870 equivalent to 105.33p per share.

He intends to repurchase the shares, but since the shares themselves were Mr Austin’s only security for the deal (see here), what recourse does EFH have if Mr Austin decides not to repurchase them? Probably none, I’d suggest, making the obligation to repurchase somewhat flimsy…

Furthermore, why would anyone in their right mind repurchase the shares at 105p when they can be bought in the market (as I write) for 58p?

Whilst Mr Austin has transferred title to the shares and waives his voting rights in these shares, he has the right with five business days’ notice in the event of certain corporate actions, to terminate the arrangement and on repaying the facility to take back and vote the shares

This is rather like me saying that I’ve waived the right to use the car I sold last week. Honestly — you can’t waive the voting rights to shares you don’t own: you don’t have any voting rights.

As regards buying back the shares in the event of a corporate action, I’d suggest he wouldn’t have entered into this agreement if he thought a takeover bid was even remotely likely. Furthermore, in today’s market he could lock in a big capital gain and regain his voting rights by buying the shares back in the market. It would be crazy, as I mentioned above, to buy back the shares from EFH.

It gets better:

Whilst the facility is contracted by way of a sale and repurchase agreement, the arrangements are treated as a loan from an accounting and taxation perspective.

I know that accountants are paid to cut your tax bill, but surely having your cake and eating it in this way just isn’t possible?

Anyway, I’ve saved the best for last (my emphasis):

As a result of this and subsequently disclosed further acquisitions, Mr Austin has an interest for disclosure purposes in the voting rights attaching to 10,967,075 Ordinary Shares representing 3.7 per cent of the issued ordinary share capital of the Company, which includes the shares transferred to EFH under the sale and repurchase agreement (as a result of the buy-back obligation).

Assuming Mr Austin’s contract with EFH is similar to those of Messrs Terry and Moorse at Quindell, we got a taste of how effective the EFH buy-back obligation is this morning, when Quindell issued the following statement on behalf of Mr Moorse:

Laurence Moorse has informed the Company that he received a notice of margin call under the agreement with Equities First Holdings LLC (“EFH”) … Mr Moorse did not meet this margin call which, consequently, has led to the termination of the Agreement.  As a result, his right to repurchase 200,000 ordinary shares of 15 pence each (“Ordinary Shares”) transferred by him to EFH under the Agreement will be terminated with effect as of today.

According to Quindell’s earlier RNS, Mr Moorse was “required to redeem the transferred shares”, Yet all of a sudden, the “loan” agreement has been terminated, and Mr Moorse is free to keep the proceeds, without further recourse. Quindell also issued a near identical statement on behalf of Rob Terry this afternoon. He too has teminated his agreement with EFH following a margin call.

If this is the kind of “buy-back obligation” that Mr Austin is subject too, then his claim to have an interest in the shares he has sold to EFH is questionable, in my opinion.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no interest in IGas Energy and a short position in Quindell. Do your own research or seek qualified professional advice before making any trading decisions.

 

Offshore oil or gas platform

Third time’s a charm: do 3 profit warnings make Petrofac Limited a buy?

Offshore oil or gas platformInvestors who ignored the old stock market adage that profit warnings come in threes will have had their fingers burned when Petrofac Limited (LON:PFC) fell by more than 25% yesterday. I know — I was one of them.

However, I’m not disheartened, and am even contemplating a top-up position to average down on my original purchase price (a little over 1,000p, since you ask).

In a new article for the Motley Fool today, I explain three reasons why I believe Petrofac is now priced to buy, and could offer as much as 50% upside — plus dividends — over the next two or three years.

To read the full article, just click here.

Disclosure: This article is provided for information only and is not intended as investment advice. The author owns shares in Petrofac. Do your own research or seek qualified professional advice before making any trading decisions.

Fifty pound note

Who is getting 4.5% of Victoria Oil & Gas plc revenues, straight off the top?

Fifty pound noteIt’s a sad fact that directors of AIM resources companies often get rich far more quickly — and reliably — than their shareholders. Victoria Oil & Gas plc (LON:VOG) is far from the worst offender in this regard, but I do think that shareholders might want to ask the firm’s board how executive chairman Kevin Foo’s 85% pay rise in 2014 was calculated.

Last year — despite Victoria continuing to eat up cash and failing to turn a profit — Mr Foo pocketed a salary of $573,000, an 85% increase on the $310,00 he was paid in 2013.

There’s more, too: Mr Foo appears to have provided himself and his family with an amazing lifetime income stream from Logbaba gas production, as I’ll explain below.

Foresight pays off

The main related party listed in Victoria’s annual report is a company called Cameroon Holdings Limited (CHL). Back in 2009, CHL signed a deal with Logbaba to provide discounted drilling services and a $4m cash advance in exchange for a sliding scale production royalty from Gaz du Cameroun (GDC), Victoria’s Cameroon operating company, which would average 4.5% of GDC revenue over the life of the Logbaba project.

Whoever was behind CHL clearly had foresight. One shareholder was PR Marriott Drilling Limited, which owned one third of CHL. In 2011, Marriott sold its 35% share to Victoria for $6.6m, effectively allowing the company to buyback a share of its future revenue. Arguably, a good deal.

However, who owns the remaining 65% of CHL? Well, we don’t know for sure, but what we are told is that HJ Resources, “a company owned by a discretionary trust of which Kevin Foo and certain members of his family are potential beneficiaries”, is “indirectly a significant shareholder in CHL”.

We are also told that “CHL is controlled by another shareholder [note the singular] which owns 65% of CHL”. To me, this suggests that HJ Resources could be the beneficial (albeit indirect) owner of 65% of CHL — although I can’t be certain of this. This structure, however, would enable Victoria to maintain its position that CHL is not an associate, and thus its earnings do not need to form part of Victoria’s accounts.

In other words, while Victoria’s shareholders have been diluted repeatedly, and may never receive a dividend, the beneficial owners of CHL are enjoying a non-diluted income from Logbaba gas production that will last for the lifetime of the gas field.

If Mr Foo and his family are among the beneficiaries of this royalty stream, then this is effectively a mechanism to siphon a percentage of Victoria’s revenue directly into the pockets of the Foo family, bypassing Victoria’s shareholders altogether.

As a result, shareholders in Victoria Oil & Gas might want to question how closely Mr Foo’s interests are aligned with their own. Naturally, all of this is above board and has been signed off by the firm’s auditors, Deloitte — I am not suggesting that any wrongdoing or deception has taken place.

There’s more

In the scheme of things, this is small beer, but I couldn’t help noticing that deputy chairman Grant Manheim received a $13,000 cash advance for reimbursable expenses last year.

I can just about accept that Mr Manheim might need to spend $13,000 in places where company credit cards aren’t accepted, but it’s harder to understand why $12,000 of this advance was still outstanding at the end of the year. This suggests to me that whoever decided on the amount of the advance massively overestimated Mr Manheim’s requirements, and has effectively gifted him an interest free, indefinite loan.

Elsewhere, Victoria paid professional fees of $400,000 last year (2013: $800,000, 2012: $1.1m) to Blackwatch Petroleum Services Limited, a firm of upstream oil and gas consultants of which Victoria’s chief operating officer, Radwan Hadi, is a director.

They get rich, shareholders don’t

As I’ve said already, I am not suggesting that any wrongdoing or deception has taken place.

I’m simply trying to explain to shareholders, of whom I was one, until recently, that it is much easier to get rich as the director of an AIM company, than as a shareholder.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in Victoria Oil & Gas plc. Do your own research or seek qualified professional advice before making any trading decisions.