Trinity Exploration and Production PLC (OTC:BEGYF) is an oil exploration and production company operating in Trinidad and Tobago. It trades on the US pink sheets with a market cap of $164mln (£98mln). This article demonstrates there is more than 100% upside with no growth in reserves or production - Trinity is an unloved gem.
Key Facts (link):
- Largest independent E&P company focused on Trinidad
- Operates 12 licenses (11 in Trinidad, 1 in South Africa)
- Based in San Fernando (Trinidad) with a corporate office in Edinburgh (Scotland)
- Led by Monty Pemberton (CEO) and Bruce Dingwall (Executive Chairman)
- 270+ employees
- 2013 average production of 3,798 bopd
- Net 2P reserves of 48 mmboe (at December 31, 2013)
- Net 2C resources of 38 mmboe (at June 30, 2012)
This is an easy to own name with a solid management team generating a profit with growing revenues, production and reserves.
The current share price is $1.82 (£1.08) down -22% from $2.35 (£1.39) at the beginning of 2014. The current enterprise value (EV: mktcap + debt - cash) is $164mln (£97mln) with 95mln shares in issue. Since the merger (link) in Feb 2012 production has increased from 3,000 bopd to 4,000 bopd. Revenue increased from $77.75mln (£46.06mln) to $123.82mln (£73.39mln) and reserves increased from 35.6mmboe to 48.6mmboe. The share is trading x4.72 EV/EBITDA below the x6.14 EV/EBITDA seen in 2013.
*Trinity conducted a share consolidation and capital raising when merging with Bayfield Energy Holdings Plc in Feb 2012.
Convergence with International Peers
The Oil & Gas Financial Journal (link) is an excellent resource for monitoring M&A deals. Using this source and the financial reports of other operators, I have found a broad industry average of $90,000 for EV/BOPD and $9 for EV/2P. The amount can and does vary depending on the gas ratio of production, the operating region and many other factors. However, largely speaking, solvent companies generating revenue from ongoing production have EV metrics at or above these levels.
The current share price indicates that Trinity has the following valuation metrics:
- $41,306 EV/BOPD
- $3.38 EV/2P
Convergence with my benchmarks implies a much higher valuation for Trinity:
- $9 EV/2P implies a share price of $4.71 (£2.80); +158%.
- $90,000 EV/BOPD implies a share price $3.90 (£2.32); +114%
From here, Trinity could double its share price and still be reasonably priced at $3.60 (£2.14).
Production and Reserves Outlook
The company has issued guidance of 3,800-4,200 bopd for FY14, which is broadly inline with current production. There are some longer term catalysts beyond 2014. Trinty are developing a Field Development Plan for the recent TGAL discovery that is estimated to be ready for Q1 2015, following seismic data processing and a remapping of the license.
Trinity recently reported that the B-9X infill well on the Trintes field encountered virgin-pressure in the targeted horizons. Trintes is a well developed field and virgin pressures were not expected, this bodes well for the future exploration of the asset. It will take a couple of months to beef up the topside equipment to handle the extra pressure and bring production online safely. The well is expected to flow 200-300 bopd. Furthermore, the same well targeted deeper unexplored sands which had to be shut in as they encountered high formation pressure. This was disappointing since the company couldn't perform further testing but encouraging as logs indicated potential exploration upside in these deeper sands.
The efficiency of the infill programme is also being looked at; a horizontal well for the B-13X drill and a J-shaped well for the B-18J drill. Management hopes these new strategies will improve recoverable reserves and initial production rates.
Management Skin in the Game
From the company's website (link):
As of May 22, 2014 the total number of ordinary shares in issue is 94,799,986 of which 21.6% are not in public hands.
20mln shares are not in public hands. Looking at the top shareholders in the company you see members of the executive and non-executive board are significant shareholders:
- Bruce Dingwall, Executive Chairman: 5.8mln shares 6.1%
- Anthony Brash, Non-executive Director: 5.6mln shares 5.9%
- Jon Murphy, Non-executive Director: 4.9mln shares 5.1%
- Finian O'Sullivan, Non-executive Director: 3.6mln shares 3.8%
I love to see management with significant holdings alongside mine. If I hurt - they hurt.
There have been some negatives weighing on the company that could explain the drag on the share price:
The production target for FY14 was set inline with current production which has disappointed the market. Unreliable drill equipment at Trintes, tortuous local bureaucracy and exploration misses all forced management to temper investor expectations.
The company had some drilling disappointment in early 2014 with the El Dorado drill. This removed a big near-term catalyst to production growth. In isolation this would not be a problem since they landed a big win finding oil in TGAL. The rub is that investors need to wait until Q1 2015 to see the TGAL development plan and estimated reserves. Small cap energy investors are not known for their patience.
The operators in Trinidad all suffer from the operational inefficiency of the state owned entity Petrotrin with which they must process permits and approvals. The company has ceased drilling onshore while they try to improve the permit approval process - another drag on production growth.
I believe that Petrotrin is a significant factor in the discounting of all Trinidad oil operators. Other operators such as Range Resources (OTC:RGRLF), Leni Gas & Oil (LGO), Niko Resources (OTCPK:NKRSF) and Parex Resources (OTC:PARXF) have interests in the region. They have all been bogged down in Trinidad despite a Government trying to stimulate flagging production with strong netbacks and improving fiscals.
Should these players start to make ground or a spat of regional M&A then the rising tide could float all boats.
Trinty is an unloved gem of a company:
- solid balance sheet and tight capital structure
- management own 20% of the shares in issue
- new technology and approaches being applied to proven fields to improve efficiency
- EV/EBITDA < x5 and EV valuation metrics less than half of international averages
- exploration upside albeit in Q1 2015
- M&A could provide near-term growth catalyst
Trinity could easily trade $4 (£2.38). If management can demonstrate further drilling success I think this name will rerate quickly. The upside potential from today's price of $1.83 (£1.08) greatly outweighs the downside.
Disclosure: The author is long BEGYF, RGRLF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long the London listed equivalents of these securities; TRIN and RRL.