FAROE v ITHACA – How they stack up

These two healthy E&P companies have  released H1 results within the last few weeks with FAROE posting news this morning which makes for good reading.

The two companies are well run, have great assets (majority in North Sea) and share a great deal of similarities including share prices. At a glance they look very evenly matched. But lets take a closer look and match blow for blow, top trump style:

Here we go…

FAROE MKT CAP: £240m                 ITHACA MKT CAP: £280m
Shares in issue: 367m                         Shares in issue: 412m
Current Production: 9kboped         Current Production: 9.4kboped
Post acquisition production            Post Stella start up production
y/e 2016: 16k-18kboped                     annualised y/e 2016: 16kboped

Net Cash in bank: £61m                     Net Cash £0m
No Debt                                                    Net Debt of £463m

Reserves 2p: 80mmboe                     Reserves 2p: 55mmboe
Sizable 2c/ 120mmboe+                    Limited 2c
Huge 3c / 1bln boe+                            Limited 3c
Finance Costs: £1.5m                         Finance Costs: £20m
Tax Credits: £100m                              Tax Credits: £1.6bln
Exploration cost rebate 78%           No Exploration cost rebate
(Norwegian)

GAS hedging in place til 2016          GAS hedging in place till mid 2017
No oil hedge in place til 2016          Oil Hedging in place till mid 2017

1 Year SP Range 82p to 42p              1 Year SP Range 76p to 16p

Current Share price 66.25p          Current Share price 64.25p

Production 2017 est: 16kboped     Production 2017 est: 20k to 25kboped
OPEX $25pb                                            OPEX $23pb to $25pb
CAPEX Unclear circa £20m ’17        CAPEX Unclear circa £25m ’17

Both companies are free from heavy development projects although Ithaca still has some way to go before they bring Stella fully online. Also new $20m pipeline expenditure requires noting.

Blow for blow each one is closely matched on production. But the huge difference between the two is the DEBT piles. FAROE have $23m debt which reduces to ZERO when taking NET cash position of £60m. Ithaca has a hefty debt pile of over £460m.

If you strip out FAROE’s cash balance from market cap, you are left with £180m. This compares to Ithaca’s market cap of £280m.

In 2017, Ithaca are likely to average production between 20k and 25k. Faroe look likely to average between 16k and 18k. Ithaca’s hedge through to mid 2017 at $60pb is worthy of note although any correction to PoO between now and mid 2017 could bring FAROE inline pretty quickly in terms of PoO exposure/risk. More importantly, ITHACA’s flagship Stella development is not hedged and thus any increase in PoO could see IAE lock in hedges at anything near $55pb. FAROE is virtually fully hedged on Gas prices for 2016.

On a reserve basis FAROE are more advanced. On a 2c basis FAROE are considerably more advanced. On a 3c basis, FAROE are a country mile ahead of Ithaca. This is largely due to FAROE’s business model which has for the last few years been exploration focused. The advantage is that any sizable exploration in Norway returns almost 75% of all exploration costs back to FAROE on a cash basis. It’s an incentive that is hard to refuse hence why FAROE have such a large pool of development opportunities which Ithaca cannot compete with and will likely have to pay full 100% (less farm outs) on any future exploration projects. Ithaca do have a series of GSA assets which they can bring into play and benefit from the FPF-1 hub facility. The latter is also an owned asset and will provide Ithaca with cost savings in the future.

However, in summary FAROE looks hugely undervalued. The recent DONG asset acquisition has transformed their asset / production base. Whilst the equity placing at 70p was clearly dilutive to some shareholders, the shares in issue compared to Ithaca is still greatly lower.

FAROE are targeting around 40k to 50kboepd within 5 years. They have the resources to develop, whereas, ITHACA’s asset base beyond Stella looks limited. The £100m difference in MKT CAP (less FAROE net cash) is unusual considering Ithaca’s debt of £460m vs FAROE’s debt of zero. Yes, Ithaca could produce 8kboepd more than FAROE but this plateau’s and drops soon after. Their ability to pay down the £460m debt is highly dependent on future PoO going into H2 2017. Hence some risk should be attributed to these unknowns.

On a blow for blow basis, FAROE looks the top trump card. To compare with ITHACA’s sp, FAROE should be closer to 85p a share compared to IAE’s sp of 65p.

Both have near term catalysts to watch out for. ITHACA’s long awaited and delayed Stella project is cited to produce first oil in November 2016. FAROE have a small interest in an exploration well already underway and a slightly more material interest in the Barents sea prospect called Dazzler which is expected to spud in late 2016 or early 2017. Any success with the latter and that could be very meaningful for FAROE. That said, after the PIL and Brasse discoveries, the company doesn’t really need more success… it already has ample 2c prospects to develop.

The above exercise is for illustrative purposes only and investors should research each individual company in detail. RISK remains across both companies as does the uncertainty over PoO.

Both companies are part of thesharehub top ten picks for 2016.

Hurricane Energy – notches up 3 bagger for ShareHUB Hotlist

Hurricane Energy has proven to be a top pick for the sharehub hotlist. Added to the list in January at 10.25p, the stock has now 3 bagged at 41.5p Terrific performance and a prime example of how a strong management team can deliver growth in a pretty ugly market.

At close to £420mil market cap, the company is one of the highest valued stocks on AIM. Zero debt and a monster size discovery under their belts has clearly put the company back on the map. The journey ahead is by no means simple and the company will soon be heading into the ever important phase of commercialisation. It’s that stage that really matters. Hurricane are likely to seek a farm in partner and the terms of any deal should be considerably higher than previous discussions due to recent success with the drill bit and testing gear.

With a market cap near £500mil (which is possible with further success) the company may even consider going it alone. The first phase of Lancaster could cost near £200m dependent on flow rates/production targets. That phase could in turn generate funds to self fund phase 2 and so on.

Should Hurricane go down the partner route, they need to choose wisely. Rockhopper unfortunately partnered up with a mid tier size company in Premier Oil. It might have made sense at the time but now with Premier Oil very much in the doldrums and struggling with debt, rockhoppers assets look like they are going no where fast. That said, should Premier Oil sell their interests in the FI assets to a bigger player, then clearly RKH will benefit greatly. But in summary, if you are going to partner on a field development project – pick wisely and go for deep pocketed players. Or… go for innovative type rev sharing deals like that seen between Ithaca Energy and Petrofac. Hurricane Energy could do well by doing a similar deal with Schlumberger or Halliburton. Each could deliver cost efficient services/ development in return for a slice of mmboe / production rev.

Hurricane are due to wrap up drilling in October and testing should be complete by early Nov. That said, there maybe scope for a potential window on the rig that could see an additional well drilled through to March of next year. Should they do this…. it would greatly enhance the time frames involved in getting to phase 1 production. 2 wells may well be sufficient but 3 x producing wells is something else and could change the commercial story considerably.

So plenty to follow on Hurricane as the company seeks to gain maximum value from Lancaster assets for all shareholders.

Hurricane Energy is part of the sharehub top ten picks for 2016.

Amerisur Resources ready for lift off

It’s been a year of break ups and historic unions. The latter is quite remarkable. After 52 years of fierce fighting, Colombian rebel group FARC have agreed to lay down arms and unite with Colombians. A formal referendum will be held on Oct 2nd where all Colombians will be allowed to vote for or against the peace deal. Unlike the Brexit vote, this should be a shoe in as no one in the right mind would vote for a continuation of war. The last 52 years have been ugly. While the world progresses forwards (well not all parts of the world) Colombia has been left behind. International companies have long given up on the country due to safety reasons. And who could blame them. But one or two companies decided to take on the risk and build a business in the volatile and dangerous region. Amerisur Resources is one. Unfortunately, being the first or part of a few companies means one thing… lack of investment and lack of infrastructure. Colombia has a number of pipelines but the distance between them and many of AMER’s licences means AMER have to truck their oil through dangerous and poorly managed roads. But that’s about to change big time!

On Oct 2nd, Colombia will be a united country. Open for business and keen to get on with it. In the comings days, AMER are set to flow barrels of oil through Colombia to Ecuador. It’s a game changer export route. One that has taken years to complete. Not because of the distance, but because of the politics and rebels involved. Now the export pipeline route is complete, it’s time AMER began exploiting it. To begin with, test volumes of 1.5kbopd will be processed. This will then rise to 5kbopd. Big deal I hear you say! Well, there is room for more. 50kbopd capacity in fact. AMER do not currently have that volume of production. They are working on increasing production 2 fold to 7kbopd and then 10kbopd into 2017. But that still leaves around 40kbopd capacity. This is where AMER can make some fruitful deals. The pipeline currently offers around $11pb discount to trucking ($26pb). In this market, that’s probably twice as much as many companies are making with oil at $45pb.

AMER could lease the pipeline or they could potentially buy in production from surrounding licences. Of course, you can’t just open the valves and let 50kbopd flow. First you need to ensure that the resources and infrastructure is in place on the otherside. Ecuador are in big trouble financially due to lower PoO. They don’t have much money. They may struggle to get their end of the storage/hub pipeline up to a level that can cope with that high volume. But you can bet your bottom dollar they will make it work. It’s potentially worth a lot of revenue to them.

Long term investors will recall managements vision for the OBA pipeline. It started over 5 years ago. Just under two years ago management were excited by the prospect of it being operational in early 2015. But lower PoO and more politics kicked in and brought progress to a sudden halt. Early in 2016, management again got a little over excited and suggested the OBA would be flowing in early May. 4 months later and they are now days away from first oil, well …apparently.

Markets are tough and particularly ugly on commodities at present. Times are looking better after 2 years of burning gluts. But the truth is… you can’t cry wolf more than once in this market before the doubters come creeping in. So it is not unexpected that AMER’s announcement yesterday that the Oil would flow in ‘days’ was met with a bit of a whimper albeit a 5%+ sp whimper. Of course the ‘news’ really deserved more but management have set a precedent of missing deadlines. So until AMER start issuing real news rather than ‘promises’ the sp is going no where fast.

The next few days and coming weeks should allow management to begin to rebuild some trust and belief in the business. And with that, the share price to increase considerably. AMER are one of a few companies out there that have zero debt and a healthy cash balance. Not to mention a very valuable and strategic pipeline route under the belts which is also 100% owned.

Where next for AMER? Well, the company has an active drill plan which is focused on adding production and some exploration/reserve building drills in there too. But all eyes will be on the OBA and the companies ability to commercialise it. If they can gain royalties or make close to $6 or $7pb on spare capacity, then the company could be looking at sizable profits on 40kbopd. Not bad at all.

The region is set to be open for business come OCT 2nd peace deal. It would not surprise me to see a few super majors eyeing up some opportunities and some mergers/consolidation in the area as it is the big boys that Colombia need now… not the minnows.

AMER is part of thesharehub top ten picks for 2016.

Current share price 24p. Target sp 46p.

Colombia peace deal: Farc to announce ceasefire on Sunday – BBC News

farc

 

While the majority of the Globe seems to be falling part or at war, there are a few pockets of hope left out there. And Colombia is certainly one of them. Sure, their issues are far from over but come Sunday… they will have taken the biggest leap toward ‘peace’ that the region has seen for over 50 years. There is still an official ratification vote to be held by Colombians on Oct 2nd, but for most, the deal is already done and as of 12am tomorrow, guns will be laid down and a new and prosperous era beckons.

One stock from the sharehub hotlist looks set to prosper… AMER (Amerisur Resources) has assets in Colombia and more importantly is just weeks away from completing a strategically placed oil pipeline linking Colombia to Ecuador and vital export routes. Currently trucking oil through Colombia has been hazardous and expensive due to poor road infrastructure and of course… Rebels. The latter appears sorted now, but the infrastructure is going to take a long time to sort out. AMER’s pipeline provides an immediate discount to trucking costs of around $12pb to $15pb. In a low PoO environment that is priceless. AMER currently have production of around 4.5kbopd moving to 7300bopd later in 2016. The pipeline capacity is nearer 50kbopd. The company clearly has the potential to lease the pipeline or buy in oil from other companies and scale up, delivering greater profits.

The sp at 25.75p has not moved a great deal thus far and the company has been slow in getting the pipeline up and running. But the ground breaking peace deal is clearly the start of better things for the region and I would not be surprised one bit to see some large oil majors begin moving into the region now ‘peace’ is officially in place.

AMER may want to think about bolstering their production base themselves before someone else thinks about bolstering their own asset with AMER. M&A has been lacking but history shows that once the ball gets rolling between buyer and sellers, the market and deals move fast. An article by Bloomberg recently showed that buyers and sellers are getting closer to being on the same page in terms of price expectations.

AMER is certainly sitting pretty and their faith in Colombia and peace has finally paid off. It should not be too long before the sp finally catches up.

Of late, one large holder called Seager Rex Harbour Holdings has been top slicing a large 9% holding which has weighed on the share price. When the seller finally dries up, then the stock should move north fast assuming all the good news promised … flows as management hope.

Hurricane Energy also had a large seller in early spring which caused their sp to plummet below 10p a share. A subsequent placing at 15p and drilling campaign was launched helping the sp rise higher but the seller still persisted to sell down their holding moving the HUR share back from 16p down to 11p again. When the seller finally finished… well.. the rest is history. HUR closed at 29.25p on Friday.

It’s amazing how share prices can perform when large sellers are cleared and decent news flows are around the corner.

BBC article on Colombia peace deal below:

The main leftist rebel group in Colombia, the Farc, is set to announce a ceasefire at midnight on Sunday after a peace deal with the government.

Source: Colombia peace deal: Farc to announce ceasefire on Sunday – BBC News

Oil heading for $65pb in September – second time lucky?

Back in 2015, the market predicted the oil glut would end sooner rather than later.

Just take a look at the below 2 year 2 year chartchart…

 

Note the move from Feb 2015 to May/June 2015. A $48pb to $66pb move based purely on the ‘recovery’ or ‘rebalancing’ being underway. Of course, this proved incorrect. The subsequent fall was brutal and during the period saw Saudi’s, Iraq and Russia all producing at top target levels. Flooding the market was an understatement.

But here we are again at $48pb range and some 18 months more advanced. If the market wanted to get excited in Feb 2015, then surely it will want to get excited heading into OPEC’s informal meet due for Sept 26th?

There are many reasons why OIL has struggled over the last 18months, but the main pointer is simply too much oil vs demand vs the pre-existing stored glut.

Should Iran, Iraq, Saudi’s and Russian’s agree a CAP or Freeze in late September, then finally the market has a marker from which to benchmark any ‘rebalancing’. At present it is impossible to determine when a rebalance will occur if the likes of Saudia Arabia and Russia keep adding an extra 1 or 2 million barrels per day. US shale hasn’t gone away and will come back but not like how it was before.

If the big countries agree a Freeze, then there’s more reasons to get excited again than in 2015 – that’s for sure.

Talk is talk, but my guess would be that an informal agreement will be pencilled in Sept with a formal agreement pen’d in the biannual meet in Dec. This would set up a bullish period for PoO heading into 2017.

One last pointer… traditionally the US market/PoO dips into Autumn as the summer gasoline burn dwindles and refineries get back to normal. The very fact that OPEC are getting verbal again perhaps suggests that they too know ‘action’ is needed (in some form) to avoid another casino style attack on PoO by speculators kicks in again. Of course, that may still happen but if the verbal banter carries through Sept, Oct and some of Nov, then by the time the December OPEC meeting arrives, most shorters will have been left shirtless… well, that’s my guess.

The market may have got ahead of itself 18 months ago when it zipped PoO back to $65pb, but second time around it may just get it about right.

As an example to contemplate… Premier Oil (PMO.L) tested 180p per share in the 2015 recovery rally. Today, just $16pb shy of the $66pb reached in May 2015, Premier Oil is priced at 71p a share.

There are quite a few stocks out there like Premier Oil that have disconnected further and harder during the last 18 months. Not all will return to 2015 levels, but the ones in better shape certainly should. Faroe, Ithaca, and Amerisur to name a few should all do very well ‘when’ PoO recovers.

Iran ready to talk freezes?

Iran signals more willingness for OPEC action to boost oil price

By Rania El Gamal and Alex Lawler | DUBAI/LONDON

Iran is sending positive signals that it may support joint action to prop up the oil market, sources in OPEC and the oil industry said, potentially aiding efforts to revive a global deal on freezing production levels at talks next month.

OPEC’s third-largest producer has been boosting output after the lifting of Western sanctions in January. Tehran refused to join a previous attempt this year by OPEC plus non-members such as Russia to stabilise production, and talks collapsed in April.

Though Iran has not yet decided whether to join a new effort, Tehran appears to be more willing to reach an understanding with other oil producers, the sources said.

Venezuelan Oil Minister Eulogio Del Pino last week toured oil-producing countries including Saudi Arabia and Iran to rally support for a deal. Despite rising this year, oil at around $49 a barrel is less than half its level of mid-2014.

“Iran is reaching its pre-sanctions production level soon and after that it can cooperate with the others,” said a source familiar with Iranian thinking after del Pino’s visit to Tehran.

“In general, Iran prefers more actions from the OPEC side rather than just freezing at the maximum production level of all members. If this freezing issue helps prices to improve, Iran by positive words of support, will help.”

Members of the Organization of the Petroleum Exporting Countries are due to meet informally in Algeria next month on the sidelines of the International Energy Forum. Russia is also expected to attend the IEF.

Venezuela, whose economy has been hit hard by the oil price collapse, has for months sought to rally producers towards an agreement to limit production. Del Pino was in Tehran on Aug. 15 before flying to Jeddah in Saudi Arabia.

Iran confirmed its participation in the OPEC meeting in Algeria, an OPEC source said on Tuesday.

‘POSITIVE SIGNS’

Russia, which in April was ready to freeze production, now wants to see an internal agreement among OPEC before it commits to rejoining an initiative.

“Negotiations are ongoing. I see positive signs coming from OPEC ‘majors’,” said a senior industry source familiar with the discussions, referring to Riyadh and Tehran.

“Russia wants to see an OPEC agreement before committing anything. So (OPEC members) are busy among themselves formulating an agreement.”

OPEC sources say Iran’s participation in a production pact has been the main stumbling block in reaching a deal.

The previous attempt to freeze output at January levels collapsed in April after Saudi Arabia said it wanted all producers, including Iran, to join the initiative.

Tehran insists it will be ready for joint action only once it regains pre-sanctions output of 4 million barrels per day (bpd). It pumped 3.6 million bpd in July, OPEC figures show.

But since the appointment of Khalid al-Falih as Saudi energy minister in April, Riyadh has taken a softer tone towards Iran at OPEC. The group is likely to revive freeze talks in September as Saudi Arabia appears to want higher prices.

Besides Iran, output levels in Nigeria and Libya could also complicate reaching a deal. While Saudi Arabia, Iran and Russia have reached record production since April, Nigeria’s hit its lowest in more than two decades due to attacks on oil sites. Libya is pumping a fraction of its pre-conflict rate.

“The difficult question for all will be defining the freeze – at what level of production. Agreeing a number may be a challenge – unless they all agree to allow some form of flexibility?” the senior industry source said.

An OPEC source from a main Middle East oil producer agreed.

“Freezing output now is difficult, everyone is raising production. And even if, and I am saying ‘if’ … we agreed to a freeze, no one will commit to stick to it,” the source said.

(Editing by Dale Hudson)