Small cap oil E&P company Antrim Energy (LON:AEY) has already disappointed investors once this year, when it abandoned its Fyne development in the North Sea at the very last minute.
Today’s interim results mark the second big disappointment. Despite booking oil revenues of $12m and cash flow from operations of $6.6m in the first quarter of this year, Antrim may soon run out of money.
Unsurprisingly, Antrim’s share price collapsed following the news, and is down 31% at 7.5p as I write — a massive 78% lower than it was at the start of the year.
Last year, Antrim arranged a $30m payment swap transaction that should have enabled it to provide its share of the capital expenditure for the development of the Causeway field, in which it has a 35.5% interest.
The problem is that the firm is now in danger of losing access to that money, as Causeway production has been below expectations and Antrim’s lenders have tightened up their restrictions on how the money can be used.
In today’s report, Antrim explains that it may soon be unable to pay its bills:
The Company is working with the lender to reduce the impact of these additional
restrictions, however, there is no certainty that the funds will be made available which may cast further doubt on the Company’s ability to continue as a going concern. The restrictions may impact the Company’s ability to fund capital expenditure and operations.
Reading on, Antrim reveals that at 31 March 2013, it had accounts payable and accrued liabilities of $19.7m, and was committed to a further $2.4m of capital expenditure for Causeway this year.
To add some extra spice to the situation, it is currently disputing a $5m drilling invoice dating back to 2011, and is in dispute with the operator of the Fionn field (Valiant Petroleum, now part of Ithaca Energy) over potential well decommissioning costs. In both cases, Antrim has made no provision for any possible payout.
To meet all of these obligations, Antrim Energy currently has just over $1m in unrestricted cash, plus whatever cash flow is coming in on a month-to-month basis — this averaged $2.2m per month in Q1.
It’s not looking good. If Antrim doesn’t manage to renegotiate its debt terms,then it will have to try to raise funds through new debt or an equity raise — neither of which seem very attractive, from an investment point of view.
If this fails, then the only option left might be a fire sale of its producing assets, which would probably meet its obligations, but would be unlikely to leave any value for shareholders.
What went wrong?
With hindsight, anyone (me included) who believed that Antrim Energy could raise the funding and deliver the operational capability needed to develop Fyne single-handed was optimistic, to say the least.
Having abandoned Fyne, I thought that Antrim might salvage something from the situation by farming out its exploration prospects (as it has done) and generating some cash from Causeway and Cormorant East, in order to clear its debts and stabilise its finances.
It turns out that these production revenues will be too little, too late, given the scale of Antrim’s previous exploration losses, Causeway capex commitments and debt repayments: this too was probably foreseeable.
I’ve already sold my Antrim shares and avoided today’s slump, but what I should have done was to sell them the instant the firm abandoned Fyne — after all, that was the main reason I bought them. It’s a timely reminder that when investing in resource stocks, you have to have a clear idea of your investment thesis and be willing to take a loss as soon as it is invalidated.
Disclosure: Roland does not own shares in Antrim Energy.
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.