President Energy - Renaissance

[Equitinimus]

 

Timing Is Everything

Whoever suggested that timing is key when investing in resource stocks may have had President Energy in mind. From dusters in Australia and Paraguay to problems in the US, it's a company that has gone the long way round to reach its current position. And, in my view, that position is very strong.

Focus On Argentina

Broadly speaking, President is a company with oil producing and exploration assets in the US, Argentina and Paraguay. However, its main production focus is on Argentina. It produces around 325 BOEPD in the US in an operation that basically ticks over – it recently completed a deal that should add to this production but it's relatively small-scale. Having lost some US$100 million in Paraguay in 2014, this is now on the back burner. However, the company has substantial acreage in the country and has expressed its intent to return to drilling, albeit at a far lower cost in terms of capital expenditure. Should it be able to open up Paraguay to oil production, the upside will probably be enormous. That takes us to its bread and butter: Argentina.

The Turning Point

President's acquisition of the Puesto Flores and Estancia Vieja concessions from Chevron in September 2017, in my opinion, radically transformed the company. Although it was already established in Argentina through its ownership of the Puesto Guardian concession, it was not going anywhere in terms of production. The workovers were proving problematic and it had serious issues with Chinese manufactured pumps that impeded its growth. However, the company seems to have grasped with both hands the opportunities presented by Puesto Flores and Estancia Vieja and has moved at a breakneck speed. In little over a year, it has doubled oil output from its Puesto Flores acreage. As I write, it's midway into a three well drilling programme that was targeting an extra 600 BOPD from Puesto Flores. This morning it announced that it had achieved that target from its first well and that has now gone into production. It aimed at exiting 2018 with total production in excess of 3,000 BOEPD but appears to have already breached that figure.

The company has three gas wells on long-term testing at its Estancia Vieja assets. But the problem was getting the gas to market. Building a pipeline would have been prohibitively expensive. However, the company appears to have found a solution through the acquisition of the Las Bases and Puesto Prado concessions. Not only will they provide extra production as well as exploration potential but they come with pipelines that can be used to get the gas out of Estancia Vieja. From early 2019, it's planning on using at least some of the gas to become energy self-sufficient in Puesto Flores and Estancia Vieja – this is projected to save it some US$130,000 per month. Incidentally, it has the added benefit of being royalty-free due to it not being sold on the open market. It might also be worth bearing in mind that Argentina wants to develop its own gas industry for strategic reasons – some 23% of the gas it consumes is imported.

Significant Management And Institutional Shareholdings

Unlike many listed companies, the CEO, Peter Levine, has substantial skin in the game. He owns just under 30% of the equity. When shareholders bleed so does he. It may be worth remembering that he built and sold a Russian focused oil company, Imperial Energy, for US$2.6 billion in 2008. He has done it before. The company also has significant institutional support, including the IFC, an arm of the World Bank.

So What Do We Get From The Numbers?

Firstly, I think that we need to accept that President after its 2017 acquisition from Chevron is a new beast. What has gone before will have little bearing going forward. That said, it currently has 1P reserves of about 15 MMBOE and 2P of 27 MMBOE. However, this does not include the results of its current drilling campaign and neither does it take into consideration its Estancia Vieja gas assets. Its netbacks for Puesto Flores now run at some US$40 per barrel (Before General and Administrative costs). It should be remembered that the company receives a local Argentine price for oil – currently, this is around US$66 per barrel for its Puesto Flores output: This accounts for around 2,700 BOPD out of a total output of what is now around 3,400 BOEPD.

In terms of cash generation, for Q3 2018 it produced some US$6.8 million in free cash flow, before General and Administrative expenses. Representing a 59% increase on the previous quarter.

The litmus test will be the next set of results. But, from early 2018 the company seems to be generating significant amounts of cash and that does not appear to be disappearing into overheads. At the same time, it's investing to develop its assets.

And What's The Downside?

The most obvious issue is the price of oil and I will not bother guessing where it will go. The company has received a local Argentine price that was set by the Government and gave a degree of stability for several months at a time. That said, the authorities seem to be heading towards a market-based model. However, with increasing production the company appears to be gaining economies of scale - its well operating costs per barrel were down 20% in Q3 compared to Q2. It does have a buffer against falling prices.

It needs to develop its Puesto Guardian assets. Why? Because that's where most of its reserves, some 18.6 MMBO of 2P, are located. To that end, the company has announced a drilling programme of three wells to commence in 2019. With production of around 450 BOPD, it's profitable but there is potential for a great deal more – both its costs are higher and the price it obtains for its oil is lower than its Puesto Flores assets. Incidentally, it should be borne in mind that the company has a licence running to 2050 for Puesto Guardian and it has already carried out all the necessary mandatory work.

Although it has tried and failed to discover commercial quantities of oil in Paraguay, it appears determined to try again. However, this time its approach will be different and so will the cost – it's looking at spending some US$12/13 million on a well. 

Economically, Argentina is in the doldrums. However, this appears to be having little or no negative impact on the company. With a cost base largely in Argentine Pesos but an output priced in US Dollars, I would suggest the Peso's decline has probably been a benefit.

Finally, the market reforms of the Argentine President, Mauricio Macri, are being delayed due to the economic crisis. But President Energy does not seem fazed. There is no sign, as yet, of a left-wing demon waiting in the wings.

 

As with any resource stock, there is an inherent risk. And, as always, do your own research and take professional advice. By the way, I am a President Energy shareholder.

[Caseynotes]

Thanks for this @Equitinimus, great piece well researched, I'm sure many in the forum will find this very interesting.

[Equitinimus]

Speed is certainly of the essence with President. It has just formally closed the deal to buy the Puesto Prado and Las Bases assets. However, it's already preparing to test the pipeline linking its Estancia Vieja gas resources with Puesto Prado and making the latter energy self-sufficient by the year-end. Moreover, it's looking at getting its gas to the local market by H1 2019.

 

Whether it delivers or not, the company is definitely short-cycle. It does have a tendency towards action. Unlike many resource stocks, it's not, in my view, a lifestyle company.

[Equitinimus]

However one views it, President appears to be delivering on its side of the bargain. It exited 2018 with production at around 3,300 BOPD, its original goal was 3,000 BOPD. Its year-end three well drilling programme in Puesto Flores came in ahead of expectations and went straight into production. Interestingly, the drilling located valuable secondary deposits that can be accessed at a later date.

Its acquisition of Puesto Prado and Las Bases gave it 60 km of gas pipelines. This is key for it to open up its Estancia Vieja gas fields. The company is powering its Puesto Prado field using generators on its Estancia Vieja acreage. However, it's now constructing a 16km overhead cable that will link Estancia Vieja with its Puesto Flores field. If it goes according to plan, that will make Puesto Flores energy self-sufficient and give it the opportunity to sell its surplus electricity (2/3 MW) to the Grid within six months.

But the key move seems to be its pivot towards gas. It has already gone to work on reactivating a shut-in well at Las Bases. This should bear fruit in the next 1-2 months. Incidentally, this is a field that, in the past, has produced some 4,000 BOEPD. The company appears confident that it can monetise these assets and even proposes using Las Bases as a hub for third-party gas. And, of course, it has its shut-in gas wells at Estancia Vieja that are due to be re-commissioned.

Considering the success that it has had with its Puesto Flores assets, it's of no surprise that this seems to be where the company has focused its energies. However, it will still be drilling three wells on its Puesto Guardian assets in the North of Argentina during 2019. But this is not a priority – As I mentioned before, the concession runs until 2050 and it has already carried out the required mandated work.

It has further developed its assets in the US with a small acquisition that will involve drilling in April 2019. The impression that I get is that the company is looking at bulking up its US operations and then possibly selling them. In the meantime, it benefits from accrued tax losses.

The one question mark that I have over the business is Paraguay. It appears intent on drilling this year. Should it work, the upside will probably be huge. If it fails, then some US$12 million will go out the window. The company has already tried and failed in Paraguay. This time, the costs will be a lot lower and the company insists that it has done a great deal of homework in preparation for the drilling.

The upside appears to be a company with a portfolio of relatively small-scale and short cycle projects that collectively add up to something substantial. For starters, it could by the year-end not only be producing a good deal more. But it will probably be a more balanced company with a mix of oil, gas and a modest but reliable income from the sale of electricity to the Grid. There is also considerable scope for remapping its reserves – the company takes a conservative approach to its assets. Should Paraguay not work out, it won't break the bank. If it does work out then the company will open up a new frontier for energy. Frankly, I don't think Paraguay will work out but the potential upside far outweighs the downside and so I think it's worth the bet.

As for Argentina's economic crisis, this does not appear to have had any negative impact on the company's operations – maybe unsurprisingly bearing in mind that most of its costs are in Argentine Pesos but its income is largely in US Dollars. Basically, the company appears to have traction and with it, economies of scale as its unit costs fall with rising production.

[Equitinimus]

As I pointed out at the outset, when it comes to resource stocks timing appears to be of the essence. On Sunday 28^th April, President Energy received a very positive review in the Mail On Sunday. Predictably, the shares rose strongly on Monday and on high volume. Where the share price is heading now is anyone's guess.

Giving clarity to its intentions, the company issued an RNS on 25^th March 2019, in which it set out its plans for 2019/2020. It presented investors with a clear set of objectives. These were specific, measurable, timed and, in my opinion, very achievable. But the point is this. The company has laid out its plans and so offers investors something by which it can be judged. The link is attached below.

https://polaris.brighterir.com/public/president_energy/news/rns_widget_homepage/story/x2qkqlx

Broadly speaking, the company is developing its gas assets and moving away from a dependence on oil. Key to this transition was its recent acquisition of the Las Bases and Puesto Prado concessions. With these came the pipelines that will allow it to get the gas out of its Estancia Vieja fields and to market. In addition, the company plans to reinstate the gas plant at Las Bases by the end of October 2019.

As with all resource stocks, there is an element of risk. Not only is the company dependent on reasonable commodity prices but it's also operating in Argentina. Presidential elections are due to be held in October 2019. However, the final list of candidates will not be announced until June 24^th 2019. And so there may be an element of political risk. That said, the recent economic turmoil in the country appears to have had no negative impact on its operations.