Category Archives: Oil & Gas

Offshore oil or gas platform

Lamprell Plc: Solid numbers, but why the review?

Offshore oil or gas platformDisclosure: I own shares in Lamprell.

This week’s 2015 interim results from Lamprell (LON:LAM) contained no nasty surprises.

A net profit of $20m and revenue of $341m is consistent with the firm’s guidance for a result heavily-weighted towards H2, due to the timing of construction cycles.

Cash flow looks strong and net cash was up slightly to $316m, representing 44% of the firm’s market cap.

Although the level of net cash varies with working capital requirements, this balance sheet strength must provide a good chunk of downside protection for investors.

The only problem is that the unexpected retirement of CEO Jim Moffatt has coincided with the firm deciding that it needs a strategy review. Should shareholders be concerned?

Just a precaution?

Thus far, Mr Moffatt appears to have done a good job of turning around Lamprell and sorting out the firm’s finances. As far as I can tell, the firm is on a sound footing both financially and operationally.

This is what Lamprell had to say in this week’s interims about its decision to launch a strategy review:

In the context of the prolonged market weakness, the Board is undertaking an in-depth review of the earlier announced strategy to ensure that it is sufficiently robust to withstand the current industry challenges. The Board remains confident the Group is well positioned to leverage growth opportunities in the medium to long term, whilst maintaining a competitive position in the short term.

The message seems to be that the firm has revised its view of market conditions and now expects them to remain softer, for longer, than expected.

There doesn’t seem to be an obvious problem. The firm’s order backlog was unchanged from the year end at $1.2bn at the end of June, while revenue coverage was 90% for 2015 and 60% for 2016, slightly higher than comparative figures from 2014.

Margins appear to remain reasonable. Lamprell reported a gross margin of 11.6% for the first half of the year, down from 13.6% last year. That translates into an operating margin of 7.6%, down from 8.4% for the same period of last year.

Unless pricing on newer work is collapsing, these margins don’t seem to be a cause for concern either.

For the time being, I don’t see any reason to change my view on Lamprell and continue to hold.

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 trading decisions.

Offshore oil or gas platform

Will Shell’s offer for BG Group trigger a wave of dealmaking?

Offshore oil or gas platformToday’s offer by Royal Dutch Shell for BG Group has compelling logic, in my view, and should be a sound move for both firms, albeit one which will take a few years to prove itself.

Shell’s expertise and focus on LNG and deepwater drilling is well-mirrored in BG, and Shell CEO Ben van Beurden’s record of cost-cutting and asset sales to date suggests to me that he will live up to his promise of $30bn of disposals and $2.5bn per year of sustainable cost savings.

Shell’s move to buy BG indicates two things: firstly, Shell’s management believes that the oil price will recover in the next eighteen months, and secondly, the firm is increasing its bet on a gasified future.

However, the more interesting question, of course, is what Shell’s bold move means for the wider industry. In my view, this deal could well mark the low point in valuations for independent producers with solid assets: inevitably some of those firms who are financially distressed may still fall by the wayside, but solid firms with good prospects may now see a floor placed under their valuations.

That’s not to say that the oil price has necessarily bottomed out: it may have, but there could still be a few violent moves lower to come, along with a further period of low prices before the global oversupply problem is addressed.

Staying within the universe of the London Stock Exchange, there are a number of other obvious bid targets: Tullow OilGenel EnergyOphir Energy and perhaps Premier Oil and Gulf Keystone Petroleum — plus of course BP, which could yet become part of the ExxonMobil empire, in my opinion.

In two new article for the Motley Fool today, I took a closer look at some of these possibilities and speculated on what may happen next:

Whatever happens, I’m pretty sure there will be further consolidation in the oil sector while mid-cap valuations remain so low. What do you think might happen next? Let me know your thoughts in the comments below or @rolandhead on Twitter.

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

Victoria Oil & Gas customer site

Victoria Oil & Gas 2015 interim results: any improvement?

Victoria Oil & Gas customer site

Victoria Oil & Gas is supplying gas for heat and power to industrial customers in Douala, Cameroon (image copyright Victoria Oil & Gas)

Having slated Victoria Oil & Gas plc (LON:VOG) after the publication of its 2014 results, I decided to take a look at the firm’s interim results, which were published at the end of February, to see if anything had improved.

The main areas that concerned me in the 2014 results were:

  • High levels of cash consumption
  • Stressed working capital situation with high levels of bad debt and likely bad debt
  • Excessive remuneration for staff and related parties — I’ve previously highlighted how Chairman Kevin Foo’s interests didn’t appear very well aligned with those of shareholders. Put differently, this company appears to be skilled at enriching its management but not its shareholders.

Have things improved?

Cash

Victoria’s cash balance fell from $17m to $5.8m during the period, while total borrowings rose from  $10.7m to $12.4m, an increase of $1.7m. In total, the firm appears to have consumed almost $13m of cash between June and November 2014.

However, in Victoria’s defence, some of this expenditure should have been funded by the firm’s 40% partner, RSM, which has subsequently paid up most of what it owed.

Victoria didn’t provide a pro rata breakdown of RSM’s payments across its accounting periods, but did say that it had received $6.9m from RSM to cover its share of expenses from February 2014 onwards, while a further $1.2m was still outstanding at the time of publication.

I’ve guesstimated the amount of this expenditure incurred during Victoria’s H1 (June- Nov) as $6m, meaning that Victoria’s net cash consumption during H1 appears to have been around $7m.

Working capital

Perhaps my biggest concern in 2014 was the apparent poor quality of Victoria’s receivables, and its fairly grim payables situation.

During H1, Victoria’s payables actually fell, from $12.5m to $10.5m, so I’ll focus on receivables here.

There was a slight improvement in receivables, too. Trade and other receivables (excluding monies owed by RSM) rose by 23% from $4.8m to $5.9m during the first half, as you’d expect given higher gas sales.

However, debtor days (the average time taken for customers to pay their bills) was 106 days, a modest reduction on the 120 days reported last year.

We won’t learn how this translates into good and bad debts, plus subsidised (never to be repaid?) customer installation costs, until this year’s annual report is published, but limited progress does appear to have been made.

Excessive related party remuneration

I’ve written about the gravytrain being enjoyed by top management at Victoria before. The firm’s interims suggest that the influx of cash from RSM, coupled with rising revenues, have given renewed momentum to the firm’s remuneration habits.

Total related party transactions — described as “payments to directors and other key management personnel” rose from $1.6m during the first half of last year to a nice round $2.0m during the first half of the current year.

One area of particular growth was “Directors’ remuneration – cash payments”, which rose from $716,000 during the first half of last year to $1,183,000 in the current year. That’s 10% of revenue!

Still a sell?

My conclusion after reviewing Victoria’s 2014 results was that the firm was putting a too much of a favourable spin on its receivables, and continuing to burn cash.

Although the subsequent growth in gas sales and the new supply agreements with the local power company are a big bonus, in my view, the firm’s interim results suggest my conclusions from last year are still broadly valid.

The increase in debt is worrying, and even if this is brought under control with more regular payments from RSM, I believe Victoria’s $100m valuation is ample, if not excessive.

Upside to valuation?

Victoria says annual production for 2015 is expected to average 10.4 mmscf/d, around 2.5 times the current average of 3.9 – 4.4 mmscf/d.

To keep things simple, let’s assume that means H2 revenues will be 2.5 times H1 revenues. Therefore, using the last 18 months’ figures as a guide, this is how Victoria’s 2015 income statement might look:

  • FY2015 revenue of c.$40m;
  • Gross profits c.$11.2m
  • Administrative expenses: $10m
  • Sales and market expenses: $0.8m
  • Operating profit: <$0.5m
  • Post-tax profit: c.$0.00

This is –obviously — a simplification, but as I’ve said before, it’s hard to see how Victoria will make a meaningful profit in the foreseeable future, unless perhaps gas sales rise much higher and actually manage to grow faster than the firm’s considerable overheads… (Remember, the firm’s forecast in 2011 was for sales of 44mscf/d in 2014. Actual sales were less than 4mscf/d).

There are of course, a few people who benefiting directly from Victoria’s rising revenues: the beneficiaries of the 4.5% royalty payment that comes directly off the top of the firm’s revenues. This would have been more than $500,000 during H1 alone…

Victoria Oil & Gas remains a sell, for me — especially as the firm could, in the next few years, face competition from BowLeven, whose Etinde gas field lies just offshore from Douala. BowLeven already has an outline agreement to supply a nearby fertiliser plant with gas, starting at the end of 2015…

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

Onshore oil installation

Gulf Keystone Petroleum Limited bid hopes: what are the shares really worth?

Onshore oil installationGulf Keystone Petroleum Limited (LON:GKP) got private investors all hot and flustered yesterday, after announcing that the firm was reviewing the options for a possible sale or asset sale.

I don’t know what the buyers who bid the shares up to 55% were expecting, but yesterday’s RNS made it clear that despite incoming cash (of which more in a moment) of $20.8m, Gulf is still on the rocks, financially speaking:

Concurrently, and in view of strategic discussions and its current liquidity position, and with the intention of meeting its existing debt payment obligations, the Company is undertaking a review of its financing options and in that context will engage in discussions with its key stakeholders.

In other words, any sale at the moment would effectively be a distressed sale to a buyer in a very strong negotiating position.

What about the $20.8m?

Here’s another mystery: this morning (Thursday) Gulf confirmed that the US$26 million gross payment (US$20.8 million net to Gulf Keystone) for Shaikan crude oil sales referred to in Wednesday statement had arrived successfully in the firm’s bank account. Good stuff.

Except that the the firm has now revealed that the payment is a pre-payment for oil sales from a third-party buyer. Not — as I’m sure most investors assumed — part of the backlog of payments that’s due to the firm from the Kurdistan Regional Government.

What have we learned?

Firstly, given Gulf’s current situation, a pre-payment deal of this kind is material. Investors might expect the RNS to have revealed a little more about what’s been agreed — is it for export or domestic sales, who is the buyer, and how much oil has been sold forward?

To me, this lack of information suggests that the terms of the deal are not especially favourable to Gulf.

Secondly, it’s a timely reminder that the Kurdish authorities have no reason to clear the backlog that’s owed to Gulf — which I estimate at around $150m — anytime soon. Here’s why.

Gulf has stopped exporting oil, so is no longer generating income for the Kurds, whose finances have presumably been battered by the impact of the fall in oil prices and the cost of doing battle with ISIS.

The arrears owed to Gulf were accumulated when oil prices were much higher, so clearing these arrears would cost more than the income that would be generated if Gulf did start exporting oil again. Thus there is no logical reason for the Kurds to pay Gulf in the near future — I’d suggest a year or twos’ delay is likely.

The debt issue + a realistic valuation

The pressing question of Gulf’s $520m net debt is the other big reason that any hopes for a premium takeover bid are naive and futile.

I’ve also completed a ballpark valuation of Gulf’s shares which suggest that the 55p peak reached yesterday may be as good as it gets — and substantial downside is possible.

I haven’t touched on these issues in this article, as I have covered both topics in some detail in a new article for the Motley Fool, which you can read here.

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

Oil platform in North Sea

As Trap Oil Group PLC collapses, is loss-making production threatening North Sea operators?

Oil platform in North SeaIn any market crash, the first companies to suffer are the smallest, and those with unmanageable debt loads.

We’ve already seen the effects of ill-judged debt loads:

After watching oil rise by nearly 20% since the end of January, oil bulls might believe this is as bad as it’s going to get.

However, today’s news from AIM tiddler Trap Oil Group PLC (LON:TRAP) — and by proxy its much larger partner, Ithaca Energy Inc. (LON:IAE)  has convinced me there is almost certainly much worse to come.

Pumping cash down the drain

In case you missed it this morning, Trapoil admitted that although its sole producing asset, Athena, is now pumping oil again, it isn’t economic at $58 per barrel. Here’s what Trapoil had to say:

“… at the currently depressed oil price of approximately US$58/barrel the field is significantly loss making and the Company is currently incurring a cash outflow of approximately £380,000 per month after absorption of its share of the field’s operating costs.”

In other  words, the operating costs of this well are considerably higher than $58 per barrel. Trapoil had net cash of £7m at the end of 2014, but clearly this is fast disappearing down the drain — one year’s losses at $58 per barrel would be £4.6m.

In fact, based on Trapoil’s working interest production of 720bopd, my calculation suggest that the break-even price for this well could be as high as $85 per barrel.

Ouch. I had wondered whether Athena was profitable sub-$60, but I didn’t expect things to be this bad.

In my view, Trapoil is clearly toast: back in early December, I warned that the risks were high and suggested that I should already have sold. Subsequently, I did sell, and at the end of January, I replied to another investor on Twitter highlighting why:

Who’s next?

Athena is operated by Ithaca, which is presumably losing money at the same rate as Trapoil. However, Ithaca also benefits from having around half of its production hedged at $102/bbl until the end of June 2016, which should help to offset these losses, assuming that all of Ithaca’s production isn’t losing money at a similar rate.

Ithaca is a much larger business, and Athena isn’t one of its biggest assets, but today’s news has sent Ithaca shares down by around 6%, and begs the question: how much more North Sea production is currently losing money?

In an interesting piece of timing, OPEC’s monthly oil market report for February, which was published yesterday, claimed that 15% of current UK North Sea production was uneconomic at current oil prices.

Today’s news has given that claim rather more credibility, in my view — there’s nothing like cold, hard figures to make reality hit home.

Alongside Ithaca, other mid-cap LSE-listed North Sea operators whose shares have slid by around 5% today include:

  • Enquest
  • Premier Oil
  • The Parkmead Group
  • Xcite Energy
  • Cairn Energy

Interestingly, Faroe Petroleum — which is noted for its quality assets and mostly operates in the Norwegian North Sea, where the tax regime is more generous — did not lose ground today, closing broadly flat despite the 2% decline in Brent crude, which is now back down to $55/bbl for March delivery.

Are the firms above losing money on their North Sea production (or likely to when it starts up)? Are other operators, who I missed from the list, losing money?

Time permitting, I hope to take a more detailed look at London-listed North Sea operators later this week, to try and determine what their North Sea breakeven price might be, and who might be hemorrhaging cash at today’s prices.

Update 18/02/2015: I’ve not had a chance to take this further yet, but this article by experienced oil man Steve Brown on Share Prophets provides a detailed insight into the rough breakeven costs for a number of key North Sea fields, including Catcher (Premier Oil), Kraken (Enquest), and Clair Ridge (BP). Well worth a read (you can also see an updated version of the main chart on Steve’s website, here).

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