Trap Oil Group PLC Could Be 73% Covered By Cash

Oil rigs in North Sea[Update 03/01/2014: Following a reader comment, I have updated this article which has reduced my estimate of cash growth a little.]

[Update 22/01/2014: Trapoil reported net cash of £16m at end December ’13.]

In this post, I’ve taken a look at a new farm-out deal announced by Trap Oil Group PLC (LON:TRAP)  and run my eye over the company’s valuation, which suggests that its current share price could be a serious bargain that’s 93% covered by cash and other liquid assets.

Into the Valleys…

Trapoil announced a farm-out deal for its Valley Licence P.2032 last week.

I have to admit that I hadn’t heard of this licence before, and as far as I can tell, the firm has only mentioned it twice in an RNS announcement before, once when it announced provisional awards in the 27th licensing round, and once in its final results in March, when the firm said that it was one of several new blocks that needed seismic before any drilling decisions could be made.

Given this, it’s encouraging that Total has chosen to farm into the licence, which includes five blocks for which Trapoil has access to CGGVeritas’ 3D long offset data. Presumably the data provided enough promise to encourage Total to offer up some cash to fund new 3D seismic, and an exploration well.

Overall, the deal seems a good one to me. Trapoil has swapped some of its equity and data access for carried seismic and and an exploration well, while retaining enough interest to provide significant upside if things go well.

Interestingly, Trapoil also has an option to swap some of its interest in the Valleys licence for an interest of between 10% and 30% in Licence P.1816 (Block 29/15a)(“Scaranish”) operated by Total. The significance of this is that Total is about to drill an exploration well on Scaranish, which is close to Trap’s Romeo licence, and should provide extra information that could help Trap attract a partner to drill another Romeo well.

What are Trapoil shares worth?

While many shareholders have found Trapoil’s approach to E&P to be frustratingly slow, it’s hard to criticise the firm for the way in which it has built up its financial resources, and avoided the kind of ‘all-in’ wildcat gambles that ruin so many small cap resources companies.

A substantial part of the Trapoil’s market cap is now covered by its cash reserves and investments. As things have changed a little since the firm’s interim results were published in September, I’ve produced a rough estimate below of how I think things might stand at the end of 2013, ahead of the firm’s final results, which will probably be published in March.

Cash at 30 June 2013: £13.1m

In its interim results, Trapoil reported net positive cashflow of £3.8m over the preceding six months. Virtually all of this comes from Athena production, but the picture it provides is obscured slightly by a £2.7m purchase of intangible assets and a £4.2m bonus payment from Dyas relating to Trapoil’s Athena purchase price.

If these two exceptional items are stripped out, net positive cash flow during the first half was £2.3m, which equates to around £0.4m/month.

Trap’s last update on Athena indicated that production was down by around 15%, so that equates to net positive cashflow of around £2m during the second half.

Estimated cash at 31 December 2013: £15.1m

Of course, this doesn’t take into account any new investments the firm may have made during the second half, but is intended to show that Trap is still generating cash.

Other investments:

Trapoil caught some flak from some private investors for selling its former Reach Oil & Gas assets substantially below book value, but in reality, I don’t think it was a bad deal.

Trap’s $7.5m payment came in the form of just over 4m IGas shares, which it received recently. At the time of writing (updated 3/1/14), these have a market value of around £4.2m.

Therefore by my reckoning, Trapoil has £19.3m in cash and reasonably liquid assets, once its three-month lock-in period on the IGas shares is over (March 2014).

Given that Trapoil’s current market cap is just £20.7m, this valuation means that around 8.4p of its current 9.0p share price is covered by cash (6.6p) or IGas shares (1.8p).

All of the firm’s exploration assets and proven discoveries are discounted to zero, even though the firm’s current committed capital expenditure is just £2m, following the Valleys farm-out.

In my view, Trapoil remains a strong buy that is far less risky than most £21m natural resources stocks, thanks to the way the firm manages its risk and financial exposure.

Note: What are IGas shares really worth?

You could argue that IGas’s share price has been inflated by the hype around UK shale gas, and that it could just as easily collapse again, and I’d agree.

On the other hand, Lybster production was very low, and the field cost more than it earned last year. Knockinnon, while it is a proven discovery, needed investment for any further appraisal, so Trap’s paper loss on the sale doesn’t equate to any real cash loss.

What’s more, any future cash flow or upside from these assets should feed through to IGas’s share price anyway, so Trapoil still has some indirect exposure to both assets, as well as a 2% stake in a company whose licences cover a big chunk of the most prospective UK shale gas acreage.

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.

7 thoughts on “Trap Oil Group PLC Could Be 73% Covered By Cash

  1. W Tomkins

    “Cash at June 2013: £13.1m
    Trapoil reported net positive cashflow of £3.8m over the preceding six months. Virtually all of this comes from Athena production and production is down 15%, so that equates to net positive cashflow of £3.2m.
    Estimated cash at Dec 2013: £16.3m”

    The £3.8m was after including a one-off +£4.2m bonus payment from Dyas. Cash outflow was therefore -£0.4 million and with production down on H1 that outflow will have increased in H2.
    Try £13.1m at June less £1.6m outflow = £11.5m at Dec 2013

    Reply
    1. Roland Head Post author

      Hi Wes,

      Thanks for your comment. I see your point about the Dyas bonus payment, but I think that the reason cash outflow was negative was the firm’s other spending — Trap’s H1 cash flow statement shows a £2.7m ‘purchase of intangible assets’, presumably licences or data, without which cash flow would have been positive, regardless of the Dyas bonus payment.

      If you remove both the intangible assets and Dyas bonus from the cash flow statement, you’re left with +£2.3m, or +£0.4m/mo. Although this is a bit lower than my estimate of £3.2m (£0.5m/mo), it’s still very positive.

      It’s also worth noting that Trap reported unsold oil inventories of £2.1m and net trade and other receivables of around £2m at the end of H1. Summing these and subtracting your £0.4m cash outflow gives +£3.7m of cash payments owed to Trapoil.

      Although it’s not possible to be completely certain, I believe that Trapoil does remain cash generative. Unfortunately, as with most AIM oilers, the firm seems to take longer than global mega caps to produce its annual results, so we’ll probably have to wait until the end of March to find out if I’m right.

      Cheers,

      Roland

      Reply
  2. Tim BROADHURST

    Igas shares +35% on total’s move into uk shale. Valuation gap now closed further albeit can’t sell the shares yet. But still interesting comparisons you make.

    They will have Athena cap expenditure later this year now iae have confirmed work over. That cost is the big unknown in all this but to date trap have played it safe – been a little unlucky with Athena but their caution has meant they are well set to afford everything in the near term and still have potential for the future IMO.

    Thanks for your work!

    Reply
    1. Roland Head Post author

      Thanks Tim,

      It will be interesting to see whether Trap keeps the IGas shares long term to complement its plans for pursuing an unconventional oil play in the North Sea with Extract Petroleum. However, the cash may be more useful, as the two projects are unlikely to be correlated and I still see UK onshore shale as high risk.

      Either way, with signs that the O&G market may be picking up, I think it’s time for Trap to announce some concrete plans for the year; in my view they need a mixture of appraisal drilling on existing discoveries and one or two carefully chosen exploration wells. They aren’t a savings and investment firm after all — some of that money does need to be spent.

      Cheers, Roland

      Reply
  3. vincent mulleman

    I have taken a look at Trap oil purely from a financing/ accounting perspective , they have around 20 million US$ in cash, an unused debt facilty of 17 million US$ and I Gas shares worth around 8 million US$ , market cap at 35 million US$,

    they will have a terrible 2013 annual accounts, due to the high impairment taken in the second half of 2013 of 15 million US$ ( although this is non cash event, Trap oil will report a loss around 3p per share )

    2014 cash burn is 13 million UDS$ ( operator status, G&A, Noble drill ) you need to add expected work over at Athena ( another 2 to 3 million US$ ) , max out at 15 million US$, operational free cash flow will support 5 million US$ of that expense, they will have a cash burn around 10 million US$, they will not be able to post positive accounting figures for 2014 either

    I am not an expert on their exploration/ appraisal program but I think it will be rather flat due to credit crunch and lower Brent prices.

    Trap oil is trapped, I am sure you will have a drop in April after releasing the 2013 numbers, I expect a rise from now till April, a drop after April and a recovery play again around the Oct – Dec period linked with the drill fever at Noble

    regards Vincent

    Reply
    1. Roland Head Post author

      Hi Vincent,

      I think you’ve described a worse-case scenario for Trap — although I agree with the risks you’ve identified, I don’t think they are inevitable.

      However, as I commented the other day, the firm badly needs a successful drilling programme, and funding this could be challenging unless further farm-out deals are agreed.

      Regards, Roland

      Reply
  4. Pingback: Activist Gyllenhammar Takes 12% Stake In Trap Oil Group PLC: Time For Action? | theFiringRoom.com

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