Annual Results and Quarterly Update
Pan Orient (OTCPK:POEFF) reported annual results and an operations update before market open on March 28th, 2013. A link to the full results can be found here. All in all, the financial results were in line with my expectations, with cash flow from operations in the $35 million range from average production for the year of about 1400 bopd. Current production is roughly 1000 bopd (including the impact of asset dispositions and new wells in 2012) with one well awaiting testing and tie-in if it is successful. Netbacks going forward should be in the $70-75 range at current oil prices.
Cash on hand plus working capital at the end of 2012 was $126 million, which is about $2.20 per share. Capex for the year is expected to be $80 million versus cash flow of $26 million ($0.46/sh) if you assume 1000 bopd average production (i.e., in line with current production) for 2013, so net cash burn should be about $54 million, which would leave the company with about $1.20 in cash per share at year end. Pan Orient's production has historically been difficult to predict with any accuracy given that individual wells have been shown to produce at rates in the 100-1000 bopd range depending on reservoir quality and water cuts.
The capex program in 2013, is expected to set up another active year in 2014 with multiple exploration targets to be drilled in Thailand and Indonesia, where success on any exploration well can potentially have a material impact on the company.
Without going into the well-by-well detail in the reported Q1 2013 operations update, I would summarize the update as mixed to negative. Two Indonesian targets have been drilled, with Shinta-1 dry and abandoned and Buana-1 unsuccessful in the main target reservoir. Thailand operations have reported a mixture of unsuccessful wells and successful ones, but nothing really material either way in my view. Essentially, the high-impact upside has been taken off the table in the near term, though 2 exploration targets are still expected to be drilled in the coming quarter in Thailand plus one in Indonesia (Cataka-1A).
Sawn Lake Update
Sawn Lake reported contingent resources were unchanged year over year, at 214 mmbbls gross and 154 mmbbls net. Sawn Lake is a heavy oil asset that is going into a pilot thermal production (OTCQB:SAGD) phase in H2 2013. The net NPV10BT for Sawn Lake is $351 million. This high NPV is typical of large heavy oil assets, but not typically reflective of actual market value. The results of the pilot production program later this year will provide significant insight into Sawn Lake's economic viability and until that time the market is likely to view Sawn Lake as a "freebie" - perhaps with some nominal value of $0.25/sh in the eyes of most shareholders.
All-in-all with the stock at $2.70 as I write this, the pendulum of sentiment for Pan Orient has swung back into negative territory. Some investors appear to be willing to move on at this stage rather than wait for additional data out of the ongoing Thailand program, the Cataka-1A exploration well in Indonesia, the SAGD pilot at Sawn Lake, and Indonesian target generation for 2014. Such is the nature of Pan Orient. I continue to view the stock as a long-dated call option on the company's exploration asset base that, despite the negative near-term sentiment, continues to have significant potential. Given the strength of Pan Orient's balance sheet, the company is well-funded to complete their entire 2013 program plus an aggressive 2014 program.
If there's one thing I've learned from Pan Orient over the years, it's that the company has the ability to surprise, often in either direction. Given that the prevailing market view is that POE will generate little to no return on their 2013 capital program (as evidenced by the current share price), those with longer time horizons may want to take this opportunity to brush up on the remaining exploration portfolio as those looking for a near-term game-changer will likely move on.