Americas Petrogas (TSXV:BOE, OTC:APEOF) is a Calgary, Canada based oil producer with producing and prospective assets in Argentina. The company took an early position in a number of large unconventional oil and gas blocks in Argentina around 2007, totaling more than 2 million gross acres in the west of the country. It also produces from a number of conventional fields in eastern Argentina. It has a large presence in Argentina with the majority of management and operating staff resident in Buenos Aires and near its properties.
Value Proposition - Unconventional Assets
BOE's main asset is a large acreage holding in the Neuquén basin, targeting the Vaca Muerta unconventional shale oil and gas deposit. BOE is the third largest holder in the basin with 1.37 million net acres.
Top 6 acreage holders in the Neuquén basin (net):
BOE has a partnership with Exxon Mobil Corporation to explore its four Los Toldos blocks and a partnership with Apache Energia Argentina S.R.L. on the Huacalera block, all located in the Neuquén basin. The main target in the Neuquén basin at the moment is the Vaca Muerta (dead cow) shale, containing unconventional shale oil and gas. One of Americas Petrogas' neighbors, YPF SA, announced in February 2012 that its Vaca Muerta oil and gas shale formation contains more than 21 billion barrels of oil equivalent of prospective resources within an area of 8,071 square kilometers (1.9 million acres), a portion of its property, as independently estimated by Ryder Scott Company LP.
BOE is currently testing or has completed tests on their unconventional properties as follows (per MD&A published May 1, 2013).
I distilled the five paragraphs below from the MD&A accompanying the financials for 2012 and the MD&A for Q1, 2013.
Western Properties - Unconventional Resources
Aguada Los Loros (ALL.x-1) well (Los Toldos I block - 98,300 gross acres):
- Four-stage hydraulic stimulation in the Vaca Muerta shale (1,843 feet thick)
- 3.2 million cubic feet of natural gas with 9 to 18 barrels of oil
- Shut in for pressure build up test.
Los Toldos Este (LTE.x-1) well (Los Toldos II block - 38,400 gross acres):
- Five-stage hydraulic stimulation in the Vaca Muerta shale (1,125 feet thick)
- 254 barrels of oil per day average of high quality light sweet oil 39.6 API
- Long term production testing underway.
Agua de Afuera (ADA.x-1) well (Toldos II block - 38,400 gross acres)
- Drilling complete, well test in planning stage
- Intersected 1,115 feet of Vaca Muerta shale.
La Hoya (LHo.x-1) well (Totoral block - 293,600 gross acres)
- Three-stage hydraulic stimulation in the Vaca Muerta shale (666 feet thick)
- Liquid rate of 300 to 600 barrels per day of which 30 to 60 barrels per day is oil of high quality light sweet crude 33 API. In the first quarter 2013 MD&A, BOE management concluded after further testing that the water content comes from either the underlying Quebrada del Sapo and/or Lotena formations.
- The well will be put on production for a test period of at least 6 months.
Huacalera (Hua.x-1) well (Huacalera block - 249,900 gross acres)
- Exploration well drilled by Apache Energia Argentina
- Initial indications of overpressure were encountered with gas shows
- Since the initial testing (2011), both Apache and BOE have been mum on any further significant economic developments. My presumption here is that the well is not economically viable.
In summary, BOE has a number of successes it can point to in its development of the unconventional properties. Success on either one or all of the first three properties would prove pivotal for the company. Although the fourth property, the Totoral block, is an outlier in terms of Vaca Muerta potential, based on geology, success here would open up additional acreages and could prove the Vaca Muerta shale is potentially more economically viable than is currently assumed.
If the Vaca Muerta shale proves to be economic for BOE, and the plethora of other companies drilling in the region, estimates as to the capital needed to develop the region vary between US$25 billion to US$42 billion. The biggest deal to most likely go ahead at the moment is a partnership between Chevron and YPF, targeting a pilot program to drill 100 unconventional wells. The deal was recently increased from $1.0 billion to $1.5 billion. It is targeted to be signed by July of 2013.
Over the last few years, the potential of the Vaca Muerta shale has become the focus of increasing attention. In 2011, the U.S. Energy Information Administration (NYSEMKT:EIA) ranked Argentina third behind China and the US in shale gas resources. In June of 2013, this estimate was quantified further with an EIA estimate of technically recoverable resources of 308 trillion cubic feet of gas and 16 billion barrels of oil and condensate. In addition, the Los Mollles shale (below Vaca Muerta), is estimated to contain technically recoverable resources of 275 trillion cubic feet of gas and 3.9 billion barrels of shale oil.
Eastern Properties - Conventional production and profitability
The material impact of BOE's conventional production from its properties in the east of Argentina is relatively minor. There, the company has been quietly successful in raising production to 2,400 barrels per day net for Q1 2013, with a slight increase to 2,560 barrels per day in May. Production late least year was in the range of 2,800 barrels per day but earlier this year production problems hampered the gradual increase. On June 10th, 2013, the company announced it had discovered four new production areas which are currently being developed. The first quarter of 2013 saw BOE turn its first profit.
- Net income of $4.3 million for Q1 2013 versus a loss of $3.8 million for Q1 2012
- Net revenue increased by 58% for Q1 to $5.2 million compared to Q1 2012
- Operating netback of $13.1 million for Q1 versus $6.0 million for Q1 2012
- Funds flow from operations Q1 2013 were $9.9 million
- Current selling price of $76 per barrel ($90-$95 with Oil Plus benefits)*
*Oil Plus is an incentive program for new oil discoveries in Argentina.
All in all, the company is doing well on its conventional production and is controlling its costs as economies of scale increase. It is sufficiently funded to meet its obligations into 2014 and has $37 million of cash and no long term debt.
In 2012, the Argentine government of President Christina Fernandez de Kirchner announced she was nationalizing YPF, the country's biggest oil company and controlled by the Spanish oil company Repsol. The fallout from this action for the small to medium oil companies operating in Argentina has been devastating, with share prices slashed as much as 75% or more in some cases. A year later, the situation is somewhat more stable and slowly companies are taking another look at the potential in Argentina. Prices remain severely depressed however.
BOE is currently trading at a 52 week low. The last time the share price was this low was in late December, 2010. I believe that at this tine, the company is significantly under valued.
The company has substantial assets, proven production and positive cash flow and the potential of significant upside if and when the shale resources are brought into the picture. The company made an early investment in the Neuquén basin with a view to develop conventional oil resources. Only later did the potential of shale gas and oil come to the surface. Shortly after, all the surrounding properties were acquired by other oil companies. As an entity by itself, BOE cannot generate enough cash flow to adequately develop the properties in its portfolio. To that end, they have partnered with Apache and Exxon. If, or when, the shale prospects start to look up, I expect that BOE will either significantly expand its cooperation with some of its current partners or attract new partners. An outright takeover is probably not palatable for a major oil company as it is cheaper for them to defray risk by continuing partnerships which are on a pay for performance basis. BOE is widely held by institutions (Royal Bank of Canada, Mackie Research Capital, Toronto Dominion Bank). All of the current research reports have a target price of $5 per share or higher.
Disclosure: I am long OTCPK:APEOF.
Additional disclosure: This article was written by me and expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.