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.

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