ECB's Lagarde Seeks New Policy Mix Introduction PetroTal Corp.( OTC:PTALF ) (formerly Sterling Resources Ltd.) is an international oil and gas microcap ($175mm market cap – no debt) domiciled in Canada and publicly traded in TSX-V and LSE.Source: Yahoo Finance (CAD$) Through its two subsidiaries in Peru, the Company is currently engaged in the ongoing development of oil in Block 95 with a focus on the Bretaña oil field.Additionally, the Company has exploration prospects and leads in Block 107.Source: Q32019 MD&A Why is it so cheap? First of all, the negative sentiment towards E&P companies is extreme, as it is shown in the graph below.Data by YCharts Secondly, and this is one of my favorite inefficiencies; producing assets are located in a country different to the ones where the Company’s shares are publicly listed.In addition, we are talking about a microcap, which in general has not benefited from the impressive stock return in 2019.
But what has created the recent opportunity has been a correction in 3Q results of the cash and cash equivalents held by the company:
It has come to management’s attention during the preparation of the Financial Statements that, the cash and cash equivalents amount of approximately $40 million stated in the Company’s RNS dated October 21, 2019 was incorrect.The Company’s actual cash and cash equivalents position as at September 30, 2019 was $20.5 million, and its total current assets, which in addition to the cash and cash equivalents comprise of VAT receivables ($9.9 million), trade & other receivables ($2 million), inventory ($8.5 million), and advances & prepaid expenses ($0.78 million), totaled $41.7 million as at September 30, 2019.The main reason for the difference is that the RNS dated October 21, 2019 incorrectly grouped these current asset items as cash and cash equivalents.
The first consequence was a sharp price drop, which gives us a good entry point.The second was the appointment of Mr.
Douglas Urch as CFO (former chairman of the board).Mr.
Urch, a Chartered Professional Accountant, who was an initial investor in the Company, has more than 35 years of experience in the oil and gas industry.And finally, the Company is funding aggressive growth through capital raises, which dilutes future benefits, but on the other hand, does not compromise its future financial health by issuing debt.
Assets Country Overview All of its assets are located in Peru, which is a constitutional democratic republic with an average 5.8% GDP growth rate over the last decade.Its rating is A3 Stable according to Moody’s.Source: Moody’s There is already an established oil and gas industry in Peru whose operators include Repsol ( OTCQX:REPYF ), Cepsa, GeoPark (NYSE: GPRK ), Tullow ( OTCPK:TUWLF ), Anadarko (NYSE: APC ).The domestic production is around 154 kbopd and the domestic demand is around 267 kbopd, growing at 5.4% CAGR during the last 12 years.
Source: Investor Presentation October 2019 Bretaña Source: Investor Presentation October 2019 The Bretaña oil field is the only one producing at this moment.It is located in the Maranon Basin of northern Peru, Block 95 in image above.This oil field has 330 million barrels of oil in place, as estimated by Netherland, Sewell & Associates, Inc.(“NSAI”), a qualified reserves evaluator, effective December 31, 2018.
The current estimate of 39.4 MMBO of gross 2P reserves is based on a 12% recovery factor.
Nevertheless, according to data from Petroperu S.A., analog fields show that the potential recovery could be significantly higher, ranging from 19.1% to 41.6%.Source: Investor Presentation October 2019 This would mean more than 50 MMBO of gross 2P reserves under a feasible 16% recovery factor.The 2P reserve NPV-10 of this field according to the company is $535 million.
This oil field has produced an average of 4,760 BOPD during the third quarter, reaching new record production with the last 30 days of the quarter averaging over 8,500 BOPD, with all five oil wells online.The Company expects to expand its production capacity to 12,500 BOPD by mid-2020.During the third quarter of this year, the Company has also upgraded the production facilities, expanding PetroTal’s production capacity to over 7,500 BOPD, which will be increased to over 10,000 BOPD in December 2019.Incremental implementation of phase two of the Company’s production facilities is planned for July 2020.
When fully integrated by year-end 2020, PetroTal will have the capacity to produce up to 20,000 BOPD.This field on its own would justify a much higher valuation of the company, not only because of its 2020 estimated production of 10 kbopd but because of its conservative estimated 2P reserve NPV-10 ($535mm).Osheki Source: Investor Presentation October 2019 With mean estimate unrisked prospective resources of 534 MMBO, this field is not producing yet.Farmout process is underway, with the first exploration well targeted for first months of 2020.
As this is not producing yet, I consider it as positive optionality, thus I will not consider it in my valuation.NOLs PetroTal has around $300 million in NOLs to offset tax liabilities for next 4-5 years.Valuation .
