Screening Oil Companies Resources vs. their Enterprise Value

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


The average private investor can find it most confusing trying to assess a company’s share price when looking at its resource base. This isn’t helped by wild claims by some junior resource stocks (which I won’t name) on billion barrel discoveries. So I’ll briefly explain each of the internationally approved reserve classifications to assist understanding.

We can also look at some of the more popular oil company’s enterprise values versus their resource base to illustrate how you can start playing with figures and building this into your appraisal of stocks.

The below summarises the Petroleum Resources Management System, and the different classifications of reserves:

reserve classes

Reserves

Hydrocarbons that are either already on production, approved for development or justified for development, i.e. commercial reserves. The most common way of assessing a company’s resources is using 2P reserves, i.e. reserves that are already on production and those reserves where a board FID case has been passed. As the reserves should be commercial in order to be recognised then this gives the investor some confidence of a viable production business. Note – commercial is a broad term though, Afren went into administration with 200mm Boe of 2P reserves!

Contingent Resources

These are resources that are discoveries, but development potential is on hold. This could because of sub commerciality or it could be the project is viable but further work is needed to get this to a FID. i.e. there are contingencies which need to be solved before they can be booked as reserves.

Prospective Resources

Exploration Plays, Prospects or Leads. Typically undrilled or not sufficiently appraised to move to contingent resources.

How are companies able to book reserves?

To stop companies quoting utter codswallop in their reserves, a Competent Person Report is required (CPR) before a company can recognise these reserves in its financial reports.

So let’s take a look at the bulletin boards favourite companies…

I’ve looked at Gulf Keystone, Genel Energy, UK Oil and Gas, 88 Energy and Sound Energy. I’m not going to analyse these companies in detail but just make brief comments about what the results show us.

2p reserve vs ev

Genel
Very low value assigned to each barrel. The overall OPEX Boe is low, however all contracts relate to Production Share Agreements which are less lucrative. That said this is potentially an attractive valuation and could be a buy signal.

Gulf Keystone
Very low value assigned to each barrel. The overall OPEX Boe is higher than Genel as its transport is through trucking rather than pipeline. Significant CAPEX also likely required to maintain production and access these reserves.

BP
Included as Benchmark, it is hard to value BP on this basis as it only publishes a 1P figure, it also as downstream and trading operations so the figure is likely lower than illustrated above when these factors are adjusted for.

UKOG
The favourite stock of the Bulletin Board. Based on its 2P reserves UK Oil and Gas appears hugely overvalued, with its 2P reserves valued at $60 a barrel this is well in excess of current oil price and thus the current valuation must be expecting material upgrades to reserves from its exploration plays. Let’s look at that next…

resources vs ev

The above chart combines reserves, contingent resources and prospective resources so low valuations here could indicate a buy signal and represent significant growth upside.

Genel and GKP
Both have lots of potential resource which could make them good longer term growth plays. Both operate in low CAPEX/OPEX environments, any oil price rise and the KRG payment situation sorted could help significantly. However, high risk too given where they operate. However, here is where you need to be cautious, I would though not buy GKP due to the distressed financial situation it finds itself in (I wrote about this here), this highlights the importance of using analysis like this as part of your research, not basing investment decisions solely on this analysis.

88E
A one trick pony company but with some promise. A recent CPR estimates 768m barrels net. It is also looking at conventional prospects expecting results of seismic soon, this could upgrade its resource bookings further. Again a good speculative play, close to infrastructure and planning permission unlikely to be an issue unlike UK Oil and Gas.

UKOG
Despite lots of media attention with its ‘Gatwick Gusher’ UKOG is unattractive to me. The Gatwick Gusher aka Horse Hill lead is not included in the reserves or resources classifications as it is too immature, and this is confirmed by its own RNS.

hh rns

UKOG does talk about 3.6bn barrels of OIP, however this is total oil in place and with today’s technology only a fraction will be recoverable. Taking a conservative recovery factor of 20% this gives 730m barrels, which granted if were to be included as prospective resources then it’s $ per Boe would be below that of Genel Energy, which I believe is a value stock. It is not clear to me when UK Oil and Gas will be able to firm up this lead to prospective resources and have a CPR on the figures though so I am very cautious.

Ultimately, for me I would not be considering an investment here until I see a clear timeline towards a booking resources or reserves on Horse Hill. To me one major bottleneck will be building the onshore facilities needed to extract the oil, this discovery with where it is located I cannot see extensive facilities gaining planning permission, at least without a lengthy process. Just look at how close we are at getting a third runway in the south east, extracting 700m barrels of oil in Sussex will be equally as protracted in my opinion.

Sound Energy
I have not included this company on the chart above as it is so far off the chart, its current resources are priced in at $586 per Boe! However, none of its recent discovery in Morocco is included in prospective resources or contingent resources, again I would be looking to understand when work can be done to move this discovery into these categories before jumping in here. Watch closely but not a BUY in my opinion.

Summary

You should never only look at Enterprise Value vs Reserves & Resources when making investing decisions but this screening method can identify over and undervalued companies, as long as you are prepared to understand what additional factors which may be behind valuations.

Disclaimer – I have a position equal to 2% of my net assets in Genel Energy. I have no further positions in any of the other stocks mentioned and to my knowledge nor do any close family, friends nor associates.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

88 Energy – Who were the Institutional Investors?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


On 22nd April 2016, 88 Energy raised A$25m (£14m) through a placing of some 715 million shares. This was an increase to total the number of shares in issue by 22%. 88 Energy took delight in informing us of the ‘high calibre of the proposed investors’. I have highlighted the parts from the RNS on that day:

88e Placement Extract 1

88 Energy went even further by specifically mentioning institutional investors:

88e Placement Extract 2

Let me ask a question, what does the phrase ‘institutional investor’ mean to the typical private investor? Are you picturing BlackRock, State Street or some other ‘high calibre’ long term investor? Did you think ‘Great! If these guys backed this placement then that should give your typical private investor some confidence right?’

So why then in the four months since the placement have we seen no ‘TR-1’ forms filed as RNSs? The share capital has increased by 22%, you would therefore naturally assume that if any institutions had taken part and retained their holdings then at least one would have surpassed a 3% holding, whereby a TR-1 should be filed. A quick check of the shareholder register (Source: 88 Energy Website) confirms my suspicions:

Capital Structure

Top 20 Shareholders as at 13th May 2016

Rank Name Balance % of Total Units%
1 HARGREAVES LANSDOWN (NOMINEES) LIMITED 276,948,113 7.11
2 BARCLAYSHARE NOMINEES LIMITED 238,282,131 6.12
3 HSDL NOMINEES LIMITED 201,774,421 5.18
4 HARGREAVES LANSDOWN (NOMINEES) LIMITED 185,512,950 4.77
5 HARGREAVES LANSDOWN (NOMINEES) LIMITED 172,012,530 4.42
6 TD DIRECT INVESTING NOMINEES (EUROPE) LIMITED 170,569,345 4.38
7 HSDL NOMINEES LIMITED 115,265,654 2.96
8 HSBC CLIENT HOLDINGS NOMINEE (UK) LIMITED 91,418,190 2.35
9 INVESTOR NOMINEES LIMITED 88,304,241 2.27
10 TD DIRECT INVESTING NOMINEES (EUROPE) LIMITED 82,519,208 2.12
11 SHARE NOMINEES LTD 77,535,063 1.99
12 INVESTOR NOMINEES LIMITED 73,687,281 1.89
13 NATIONAL NOMINEES LIMITED 51,697,564 1.33
14 J P MORGAN NOMINEES AUSTRALIA LIMITED 51,575,912 1.33
15 CHASE NOMINEES LIMITED 46,703,299 1.2
16 JIM NOMINEES LIMITED 44,827,954 1.15
17 CITICORP NOMINEES PTY LIMITED 43,022,753 1.11
18 ELOTEN GROUP LTD 40,000,000 1.03
19 CHASE NOMINEES LIMITED 36,546,860 0.94
20 LAWSHARE NOMINEES LIMITED 34,264,399 0.88

The major shareholders are all nominee accounts, i.e. private shareholders using a third party broker.

So using the terms ‘high calibre’ and ‘institutions’ looks to me like nothing more than PR guff. The ‘institutions’ that took part in this placing, which was at a 14% discount to the share priced on 22nd April, i.e. 1.90p placing vs 2.20p market price we must assume to have flipped their subscriptions straight into the open market. I can’t see any evidence of intuitions in the top 20 shareholders, note ELOTEN GROUP took place in a prior placing and appears to be a BVI registered vehicle

The questions I have therefore are: 1) Were PIs suckered in to buying based on ‘institutional investors’ to support the share price whilst these ‘institutions’ flipped the stock? 2) Did 88 Energy have awareness that those taking place in the equity raise were flippers? 3) If so why did it use the misleading language above? 4) Why were existing shareholders not able to participate in this discounted issue through open offer?

I actually like 88 Energy as a company and I believe it is probably one of the best speculative resource stocks on AIM at present. CEO Dave Wall comes across well and there is an exciting news flow due over the next 12 months.

I’m not going to give an overall verdict on this stock but it would be nice to see a much fairer and clearer approach to 88 Energy’s next fund raise.