Category Archives: Oil & Gas

Oil platform in North Sea

Trap Oil Group PLC slashes costs and bolsters cash

Oil rigs in North SeaThis morning’s RNS from Trap Oil Group PLC (LON:TRAP) sent the firm’s shares flying — and rightly so.

The company announced that former CEO Mark Groves Gidney and COO Paul Collins have now finally stepped down, and updated the market on progress with cost reduction and cash generation.

Costs down 66% on 2014

 

Trapoil was targeting savings of £1m per year, but now says that additional redundancies between now and the end of the year will result in the firm’s SG&A run rate being reduced to £1.5m from January 2015.

Trapoil’s administrative expenses were an outrageous £4.5m in 2013, so this is solid progress — albeit not before time. However, it does beg the question as to what capabilities the company has left, aside from maintaining enough technical and management presence to administer the company’s non-operated stake in Athena.

Goodbye, IGas

Trapoil also announced that it had disposed of its remaining shares in IGas Energy, which I think is good news, in this context.

The remaining shares were sold for £1.86m, or 82p per share, which is 20% less than would have been possible two months ago, but still above today’s share price. However, regardless of the long-term upside or downside potential of IGas, I don’t think it’s Trapoil’s business to be speculating on UK onshore shale, so I welcome the disposal.

47% discount to cash

As a result of these changes and the IGas disposal, Trapoil says that it now has £18.2m of unrestricted cash, up from £16.5m including restricted cash at the end of June.

Although Trapoil shares were up by 50% at one point this morning, they’ve settled back down to 3.95p at the time of writing, representing a 22% gain on the day, and giving the firm a market cap of £9.56m — a 47% discount to the firm’s net cash balance.

There’s still a lot of downside priced into Trapoil stock, and as I have explained before, it could still go that way. However, the rare combination of a cash flow positive,producing asset, no debt, ample cash to meet near-term requirements, and a powerful activist shareholder in the form of Peter Gyllenhammar mean that I continue to rate Trapoil as a hold.

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.

Fifty pound note

Victoria Oil & Gas plc is still burning cash: 3 reasons to sell

Fifty pound noteHaving slated Victoria Oil & Gas plc (LON:VOG) in a recent article following the publication of its final results, I was eagerly awaiting the publication of the company’s annual report, in the hope that it would answer some of the many questions I was left with after reading the final results RNS announcement.

Yesterday was the day, and I can now see why the firm might have chosen to delay the publication of the notes to its accounts for as long as possible: I believe the company’s funding situation is much more precarious than you might expect, from last year’s figures. In my view, Victoria will be lucky to make it through the next year without a funding call of some kind.

It’s worth noting just how badly this firm has underperformed over the years: back in 2011, Victoria was expecting to sell 8 mmscf/d of gas in the first year of operations, rising to 44 mmscf/d by the end of 2014. Production is currently running at a seven-day average of 3.2 mmscf/d…

Anyway, having spent some time poring over the accounts, here are just three of the reasons I believe the firm is a sell.

1. Where did the RSM $20m go?

My first question was about the $20.4m in actual cash Victoria received from its partner RSM during the year. I couldn’t find any reflection of this on the cash flow statement, and the annual report still doesn’t include a detailed reconciliation between the $20.4m lump sum and the cash flow statement.

However, there is an explanation, which makes it clear — if nothing else — that without the RSM payment Victoria would have reported an operating cash outflow of $6.8m last year (my emphasis):

RSM paid the group $20.4 million during the year … Primarily as a result of this payment and the cash inflows from gas and condensate sales during the financial year, net cash generated from operating activities was $13.6 million, compared to a deficit of $13.4 million in the prior year.

I believe this makes it clear that Victoria would have needed another fundraising last year had it not lost the case to RSM, and thus been entitled to a payment.

2. Cash balance down 50% in five months

My feeling from reading the auditor’s notes on Victoria’s accounts were that it was a borderline decision as to whether they could be signed off on a going concern basis. The auditors included an Emphasis of Matter section in their report, drawing attention to notes relating to Victoria’s going concern status, the recoverability of some of its receivables and the valuation of various assets.

Note 3, Going Concern, highlights how fast Victoria continues to consume cash: cash at year end (31 May 2014) was $17.1m, but this had fallen by 50% to $8.5m by 21 October.

The notes make it clear that in order to fund its current exploration and development programme, the group needs rising gas sales and further cash from RSM. If these don’t materialise, the firm believes that only by suspending all exploration and development could “the Group generate enough revenue to fund its base operations for the 12 month period from the date of approval of these financial statements”.

3. Receivables and payables

I freely admit that my original guesstimates of debtor and creditor days was wrong — hardly surprising given the lack of information in the original results RNS. However, I now aim to correct this and explain Victoria’s working capital position in more detail.

Victoria’s receivables are divided into trade receivables, which cover gas and condensate sales, and other receivables, which is everything else. Trade receivables were $3.8m at the end of May, of which 23%, or $873,000, was overdue on the firm’s standard terms of 30 days.

Of this, around $380,000 was overdue by more than 120 days, begging the question as to whether payment is ever really likely. However, Victoria hates to impair debt, and says it prefers to leave the receivables unimpaired as long as the customer’s credit status has not changed. For context, just $11,000 of trade receivables were written off last year.

The situation is no better with other receivables: these include an $8.6m RSM receivable (subject to adjustment before payment is expected, therefore largely a guess) and $988,000 of customer debt. This latter was largely incurred when Victoria footed the bill for setting up some of its customers with the equipment necessary to burn gas, in order to hasten their commissioning process.

This wheeze is known as vendor financing and is something I’ve come across in a former life as an engineer for a large telecoms equipment supplier during the millenium TMT boom. That didn’t turn out well, and I don’t think this will either: 52% of other receivables (excluding RSM) are currently overdue, with 24%, or $237,000, overdue by more than 120 days.

Still, even if its customers never pay, Victoria has a solution to avoid impairments: last year Victoria decided that $866,000 of other receivables were “uncollectable”, but rather than writing them off, these unpaid bills were accounted for as “part of cost of pipeline”. Presumably no action has been taken against the defaulting customers.

Overall, my view is that Victoria is massaging its receivables to present a rosy picture when the reality is, at best, more nuanced than this — and at worst, is a bunch of bad debts waiting to be written off. 

This article is getting long, but I cannot close without a brief look at the group’s unappealing payables and debt situation.

Trade and other payables were $12.4m at the end of May, but of this, $2.4m is overdue to drilling companies and is accruing interest at 5% per annum. The firm says it expects to repay these amounts from cash flow over the next 12 months. You might ask why the firm’s cash balance can’t be used to clear these debts — the answer, I suspect, is that Victoria would then be unable to file accounts on a going concern basis.

The average number of days Victoria took to pay suppliers fell to 116 days last year, down from an even more dire 137 days in 2013. Victoria says that its standard payments terms for suppliers are 30 days from invoice, but clearly has serious trouble meeting these terms. This might, of course, be one reason for the change of drilling contractor last year…

There’s also $10m of debt due within twelve months, although I suspect much of it will be rolled over somehow.

In my view, the quality of some of Victoria’s receivables is questionable, and impairments (and thus reported losses) should probably have been greater than they were last year. This is putting massive pressure on the firm’s cash flow and limiting its ability to pay suppliers on time.

I rate Victoria as a sell, but if you’re not convinced, I will return shortly with part 2 of this article, in which I will take a closer look at some of the enviable ways Victoria’s board has found to extract cash from the company, above and beyond their generous salaries.

Watch this space.

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. Do your own research or seek qualified professional advice before making any trading decisions.

Onshore oil installation

Why has Gulf Keystone Petroleum Limited climbed 35% in two days?

Onshore oil installationEven by the standards of the oil and gas sector, shares in Gulf Keystone Petroleum Limited (LON:GKP) have performed badly this year.

As I write, the stock is down by 60% on the year to date, despite gaining 35% in the last two days.

What’s going on?

The funny thing about the gains of the last two days is that the market doesn’t quite know what’s going on, but Gulf Keystone appears to have convinced most investors that it will be good news.

Gulf released an RNS yesterday postponing its next interim statement (which was originally due today, 30 October) until 13 November. This would usually mean bad news, but the firm said that “constructive discussions” were taking place with the Kurdish Ministry for Natural Resources (MNR), implying that by 13 November, the subject and outcome of these discussions might be available for public consumption.

Investors lapped it up, lifting the stock around 20% yesterday, and this morning, the firm did it again, climbing around 10% after issuing an RNS highlighting that its partner MOL had gained Field Development Plan approval for the Akri-Bijeel block, in which Gulf has a 20% working interest.

The big question is what is the subject of the “constructive discussions” the firm is having with the MNR — and will it solve Gulf Keystone’s potential funding problems?

In two article for the Motley Fool, I’ve taken a closer look at yesterday’s news (click here) and today’s Akri-Bijeel update (click here).

For what it’s worth, I continue to rate Gulf as a hold, as the risk-reward balance now appears quite reasonable.

Disclosure: 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 trading decisions.

Onshore oil installation

Solo Oil PLC, UK Oil & Gas Investments PLC et al Slide On Horse Hill Results

Onshore oil installationEarly feedback from David Lenigas devotees on Twitter suggested that this morning’s RNS announcements from the Horse Hill companies may have been positive.

Comments such as “we have a winner” may have suggested that the well had performed in-line with expectations.

I can only assume that the people concerned hadn’t read the RNS fully, and compared it with the pre-drilling presentation given by UK Oil & Gas Investments PLC (LON:UKOG) in January this year.

Unsurprisingly, Mr Market did the maths, and the shares in all of the Horse Hill companies are down by between 15% and 30% as I write, at lunchtime (although some of these stocks are still up over a 5 day timeframe, they are all down on one month ago too, in some cases quite heavily).

The problem is that although Horse Hill-1 did find oil, there was much less than expected. In a new article for the Motley Fool this morning, I explained the numbers and compared them to pre-drill estimates, which seem to have been conveniently forgotten in all the hype.

I also give my view on whether Solo Oil PLC (LON:SOLO) remains a buy, or not.

Click here to read the full article.

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

Victoria Oil & Gas customer site

Why I’ve sold Victoria Oil & Gas plc

Victoria Oil & Gas customer site

Victoria Oil & Gas is using its producing Cameroon gas field, Logbaba, to create a gas supply network for industry in the Doula region of Cameroon (image copyright Victoria Oil & Gas).

I’ve long been a bull of Victoria Oil & Gas plc (LON:VOG), but after reading the firm’s final results yesterday, I sold my shares. Here’s why.

Missing info: In my view, the worst thing about Victoria’s results was what they didn’t say. For example, the firm did not confirm the average price per unit sold of gas or condensate, although it previously has done.

This seems bizarre; I’ve never seen an energy or resource company publish annual results without specifying the average price per unit sold. Obviously the price of condensate will have fallen with the oil price, but has the price of gas fallen too, perhaps for new customers? We don’t know.

Accounting notes: Victoria’s accounts also raised some questions, due to the firm’s decision to publish them without any supplementary notes. As with gas prices, notes were included (as normal) in the interim results earlier this year, but were missing yesterday. Why?

I expect they will appear in the firm’s annual report, due in the next couple of weeks, but their absence from the final results RNS yesterday makes me uneasy, especially given the glacial pace at which Victoria publishes its accounts, nearly five full months after the firm’s 31 May year end.

In my view, there are only two explanations for this: Victoria is trying to hide some bad news for as long as possible, or its financial controls are so chaotic that its only just managed to scrape together some coherent figures, one month before the next half-year ends. Either way, I’m not impressed.

Accounting questions: I may not be a forensic accountant, but I reckon I ought to be able to spot the $20m cash inflow from RSM on Victoria’s cash flow statement, given that the firm only did $14m of revenue last year.

I can see an arbitration-related adjustment on the income statement, but why isn’t this cash influx clearly represented on the cash flow statement? Again, notes are needed to make sense of what’s happened to the $20m payment.

There are other questions, too: what, for example, was the $3,978,000 ‘other loss’ recognised in the income statement? The lack of financial detail in these results is shocking, in my view.

How long? I accept Chairman Kevin Foo’s comments that ground-breaking engineering projects always take longer than expected — having been an engineer myself, I understand this. However, the firm’s glacial reporting appears to be matched by the speed at which it pays suppliers and receives payment from customers.

Things don’t seem to be improving, either, as debtor days are rising and creditor days are falling. If this trend continues, a cash crunch could follow:

2013 2012
Debtor Days (average time VOG takes to get paid by customers) 348 days 305 days
Creditor Days* (average time VOG takes to pay suppliers) 443 days 606 days

*Estimated using cost of sales

Of course, things may have changed — for better or worse — in the five months since the period these figures refer to. It appears to be a struggle for Victoria to publish its annual results before the end of the first half — and that’s the problem. I no longer feel I have any idea what’s going with this business.

The company’s annual report, which is due to be made available in the next couple of weeks, may answer some of my questions, but then again, perhaps there’s a reason the company is so tardy.

Back in January, Victoria promised that the results of the Deloitte review of the RSM settlement payment would “be completed within 90 days”. Nine months later, and we’re told Victoria and RSM are reviewing the draft — but we’re still in the dark.

Will some of the $20m have to be repaid to RSM? Has Victoria spent any of this money? We just don’t know, and I’m not prepared to risk my own money on that basis anymore.

Valuation doubts: My final concern relates to Victoria’s valuation. This year, revenue doubled to $14.7m, but the company failed to make a profit due to ‘other losses’ as yet to be explained.

If we assume revenue will double again in the current year and that Victoria will deliver an operating margin of around 25%, which is not unusual for this type of business, then we’d be looking at an operating profit of around $7.5m, with post-tax profits of perhaps £3.8m, assuming a 20% tax rate and the current USD/GBP exchange rate.

That means Victoria’s current valuation is around 15 times my purely theoretical guess at next year’s profits — which may be wildly optimistic. That suggests to me that there could be limited near-term upside to VOG’s share price.

Better out than in: Victoria oil & Gas may still deliver a multi-bagging gain from here on in, but it seems very speculative for an investment that is, essentially, a small utility, not an E&P company.

I’ve run out of patience with the company’s slow and opaque reporting, and have put my money elsewhere, in grown-up company, whose reporting doesn’t raise so many questions.

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. Do your own research or seek qualified professional advice before making any trading decisions.

Onshore oil installation

Activist shareholder takes punt at Tethys Petroleum Ltd: should shareholders back changes?

Onshore oil installationUpdate 05/11/2014: I see that Dr David Robson has fallen on his sword and persuaded the other passengers on the NED gravytrain to follow suit.

I remain positive on the Pope changes, as I believe Tethys has considerable potential that is being wasted — at least in terms of shareholder returns — by Dr Robson and his cohort.

See below for an explanation of why I’m backing Pope, plus my latest Motley Fool article on Tethys.

It doesn’t seem long ago that Tethys Petroleum Ltd (LON:TPL) appeared to be on the cusp of transformative successes. Gas and oil production in Kazakhstan looked set to rise and become a cash cow, helping to fund the company’s transformative exploration assets in Tajikistan.

The barnstorming potential of the Tajik assets appeared to be confirmed when Tethys secured a 66%, $63m farm-out deal with no less than Total SA and China National Petroleum Corporation (CNPC).

Not come to pass

As shareholders will be painfully aware, the company has failed to deliver on the promise of 2012 and 2013. Tethys shares have fallen by 61% over the last 12 months, and the company has agreed to sell a majority interest (50% plus one share) of its Kazakh assets for $75m, a deal which I think could cost shareholders dearly in the long term.

As I explained in a new article for the Motley Fool this morning, the risks of further dilution and financial frustration look high, especially as Tethys founder Dr David Robson appears to be more motivated by his seven-figure salary than his minimal shareholding in the firm.

I fear that Tethys could become yet another cash-strapped small cap resources stock that limps along with heavily dilutive funding from China, until shareholders are left owning almost nothing — except an expensive board of directors, who are effectively employed by their Chinese backers to manage local operations and political relationships…

On this basis, if I were a Tethys shareholder, I’d back Pope Asset Management’s call for change: the company and its assets need careful management to maximise cash generation, and give Tethys shareholders a meaningful chance of benefiting from the truly monster potential of the company’s Tajik assets.

Given founder Dr. Robson’s recent form, I’m not sure Tethys can provide this under his leadership.

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

Oil platform in North Sea

Should you sell Trap Oil Group PLC as costs rise?

Oil rigs in North SeaShares in Trap Oil Group PLC (LON:TRAP) fell 40% yesterday, after the firm revealed that decommissioning costs for its share of the Ithaca Energy-operated Athena Field would be 66% higher than expected — £9m, instead of the £5.4m previously accounted for.

This means that more than half of the firm’s £16.5m cash pile is already spoken for — plus there is further expenditure planned for this autumn on workover activities needed to bring the field back into full production.

Based on yesterday’s announcement and the group’s half-yearly figures, I reckon that Trapoil’s net current assets, are approximately £13m, or 5.7p per share.

To reach this, I’ve deducted 25% from the reported value of its IGas Energy shares and subtracted the £9m decommissioning cost from the firm’s cash balance. I’ve also assigned zero value to Trapoil’s licences and not accounted for future cash flow from Athena — I’d expect this revenue to at least offset the workover costs the firm incurs this autumn, so I’ve ignored both factors in this ‘fag packet’ valuation.

In addition to the current asset value of £13m, the firm also has accumulated losses of £35m, which could be of use to another North Sea operator to offset profits.

At around 3p, I reckon Trapoil shares are trading at approximately half the firm’s net current asset value, without considering the potential benefits offered by its historic losses. You’d think that a larger North Sea peer might make an all-share offer to takeover the firm at this level, which could realise some value for shareholders (including 18% activist shareholder Peter Gyllenhammar).

However, nothing is certain, especially while the oil price remains depressed, and there’s no denying that Trapoil shares remain very high risk, at present. If the market continues to ignore the firm, it will now, almost certainly, gradually grind its way into bankruptcy.

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.

Oil platform in North Sea

Is Trap Oil Group PLC being readied for sale?

Oil rigs in North SeaTrap Oil Group PLC (LON:TRAP) published its half-yearly report on Monday, triggering a slide that has left the firm’s share price down by 15% so far this week.

Following the recent, broadly positive, news on cost-cutting and gravytrain disembarkation  by senior executives, the half-year results were disappointing.

However, some aspects of the figures suggest to me that the company’s strategy may now be focused on maximising its attraction to potential buyers within its North Sea peer group. This approach might yet deliver results for long-suffering shareholders.

Production – Athena

The big disappointment was Athena: I think it’s probably fair to say that most shareholders didn’t realise how far production had deteriorated during the first half of the year, a situation made worse by severe weather preventing oil being offloaded from the FPSO and sold for a period early in the year.

Production levels for the first part of the year were not specified (why the hell not?) but the scale of the production decline caused by the failure of the A2 well pumps is clear from the fact that the amount of oil being sold has fallen from ‘multiple [tanker] loads being delivered for sale each month‘ to ‘on average … less than one tanker load per month‘.

As a result of this, Trapoil impaired the value of Athena by £4.7m, pushing the firm into a first-half loss, and taking total historic losses to £35m — something that could be advantageous for tax purposes to a potential acquirer.

However, the short-term effect of Athena’s poor performance on cash flow is obvious, and in addition, Trapoil is now required to fund its share of the costs of the workover being performed by Athena operator Ithaca Energy in October.

To meet these costs and preserve its cash pile, Trapoil raised £2.3m by selling around half of its stake in IGas Energy.

Latest NAV per share?

Cash flow should improve in the final quarter, once the Athena workover has been completed.

Ignoring the value of its non-current assets — data and exploration intangibles, plus property and plant, all of which would be hard to realise any value from — my reckoning of Trap’s net asset value is £16.9m, which I calculated as current assets – total liabilities.

This equates to a NAV per share of 7.4p per share, approximately 13% above the current 6.55p share price.

Exploration upside

There were two potentially positive pieces of news relating to exploration and appraisal drilling.

Trapoil is expecting a decision by the end of September from Valleys farm-out partner Total, regarding that firm’s decision on whether to drill an exploration well in these blocks. If Total decides not to drill, it has agreed to compensate Trapoil for the lost opportunity.

Secondly, Trapoil now says it is planning to drill Kratos (a new location for the prospect previously known as Niobe) in H2 2015.

Outlook

The reality is that Trapoil has a sizeable amount of cash, but is too small to do much with it. Athena production is expected to end by 2017, an unless either of the two exploration options mentioned above deliver the goods, the firm could be left with nothing much except a dwindling cash pile.

However, the outlook isn’t necessarily that grim: at its current distressed price, Trapoil could be a useful acquisition for a slightly larger North Sea firm, which would benefit from its £35m of historic losses and — if the acquisition could be funded by shares — from Trapoil’s £16m cash pile.

In my view that’s the most desirable outcome, and I wouldn’t mind betting that 18.6% activist shareholder Peter Gyllenhammar has something similar in mind.

However, this is only conjecture, and I wouldn’t hold your breath…

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.

Offshore oil or gas platform

Barbier bashes BP plc with gross negligence ruling

Offshore oil or gas platformJudge Carl Barbier didn’t mince his words in his findings into the Deepwater Horizon blowout, citing the “reckless” and “wilful misconduct” of BP plc (LON:BP) in failing to ensure the Macondo well was tested properly.

Naturally BP disagrees, and the whole show is likely to rumble on for years, but what does it mean for BP shareholders?

In a new article for the Motley Fool, I explain the potential $18bn consequences of yesterday’s ruling — plus why BP shareholders who can live with a bit of volatility probably don’t need to worry too much.

You can read the full article here.

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

Onshore oil installation

Delays Disappoint At Gulf Keystone Petroleum Limited, But Value Remains

Onshore oil installationAt this morning’s opening price of 86p per share, Gulf Keystone Petroleum Limited (LON:GKP) was hardly expensive.

Of course, that didn’t stop investors from pushing down the price still further (and most likely losing money in the process) when markets opened this morning, following the publication of the firm’s interim results.

In my view, the results were pretty much what any realistic person would expect — although production and oil sales are being maintained, the conflict in Iraq is disrupting the deployment of international contractors in the region, while disbursement of oil revenues by the Kurdish government is somewhat slow and irregular.

It’s fair to say that cash remains a concern, too, and apparently, bears also defecate in the woods …

Sarcasm aside, I don’t think there was anything in this morning’s news to change the investment case for Gulf Keystone, but there’s little doubt in my mind that the value present in Shaikan is not necessarily going to be realised very quickly.

I took a closer look at the numbers in an article the Motley Fool this morning, which you can read here.

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