Portfolio Overview: State Of Play

by: William Sirett


Gulf Keystone; growing production undermined by regional and boardroom politics.

Tag Oil; steady as she goes with some exciting catalysts coming up.

Trinity E&P; steady as she goes and very unloved.

It's a waiting game. So how am I doing?

Terribly; broadly speaking the market (S&P 500) continues to rally and international exploration and production companies continue to underperform.

Not exactly uplifting (no pun intended).

If the thesis for my original investment holds, then I hold. I have larger investments in the broader stock markets and my E&P portfolio is there for some added sparkle. Not so twinkly of late.


Main listing on the TSE as TAO.

Stock at 52 weeks lows at $2.39 USD ($2.54 CAD). The stock is the cheapest it has been in terms of EV/2P and the EV/BOPD is $61k. This is very compelling for a company making $59.63 netbacks per BOE with no debt. Production is struggling to grow in net terms, stuck at 1,500 but guidance is set for 1,800 bopd from shallow production only. Tag as a shallow producer only is a little stale but these strong revenues drive a large exploration programme. Each play in this programme could have transformational impact.

1 - Following the completion of the 2nd East Coast well, to spud this month, the rig comes back to Cheal to test the upper two target horizons of Cardiff-3. These 2 horizons are significant producers elsewhere in New Zealand and the company has every confidence of flowing gas. Any production will be ready for market as the company can leverage its production facilities at Cheal. This is a great example of the overlooked potential in Tag Oil.

2 - After completion of the 3rd East Coast well later this calendar year, the company will undertake to test all 3 East Coast wells. Any evidence that the East Coast is commercial will mean a large re-rate for Tag. By large I mean many multiples of the current price. The East Coast potential OIP is measured in billions and the current 2P reserves of 48mmboe will be totally eclipsed. It is not all home runs; they have a tightening operational environment to contend with and to say that fracking in New Zealand is unpopular is an understatement. However, the East Coast play also has a component of conventional resources that may not require fracking.

3 - In addition, Tag also has an offshore play; a further deeper prospect in Heatseeker and further work to do on Cheal and Sidewinder.

Conclusion: Undervalued today based on shallow production ignoring several exciting exploration plays that are well underway. By Christmas Tag could be a very different company with regards to production and reserves. Dare to dream - if the East Coast even looks close to commercial I expect fireworks.

Loss of Sleep Factor: 0 out of 7 nights. They have plenty of money, a competent management team and solid baseline production to fund the operation going forwards.

Gulf Keystone Petroleum Ltd (OTCQX:GUKYF)

Main listing on the LSE as GKP.

Upfront I am a long term holder of this stock and started buying under $3 USD (170p GBP). The stock is currently off 52 weeks lows but not a long way off at $1.57 USD (90p GBP). Production continues to grow and the company looks to be on target for 40,000 bopd with gross production at ~25,000 at last report.

Battering this stock is Iraqi politics as militants have seized control of large portions of Iraq and driven the government close to collapse. The Iraqi army is in pieces and the Shia-Sunni-Kurd alliance has all but collapsed. Kurdistan has remained stable and received a lot of press on its possible declaration of independence. It is all balancing on a knife-edge. At the end of the day I expect the Kurds to do a deal but if they go for independence then the cat will truly be amongst the birds. It will take time for the dust to settle. Broadly speaking if the new state survives opposition from Iraq and Iran then it will be profitable for Gulf in the long term. I don't expect Gulf to be around much longer but I've been saying that for a couple of years.

Not everything can be blamed on the politics. The boardroom of Gulf recently saw Mr Kozel step down as CEO, two non-execs leave (fired?) and another quit not long after the CFO departed. The Chairman looks to be trying to steady the ship but the AGM next week will be pivotal as to the reelection of Mr Kozel as an Executive Director. Things are so bad that the Kurdish Ministry of Natural Resources deemed it necessary to publish a letter in The Sunday Times (link) accounting for recent reports of interference in Gulf's operation. The MNR in the same letter threatened to convert its profit stake into equity and remove Gulf's operatorship of their key asset.

Conclusion: It's never boring as a Gulf shareholder. Compared to Genel Energy (OTCPK:GEGYF) our current production and reserves are overvalued. However there is large upside to both and if the company delivers on the EOY targets of 40,000 bopd then we are in good shape.

I can only hope that what remains of the board can steady the ship. The silence last week from the company was deafening and the contents of the MNR letter disturbing. The conversion of the government's profit stake in Gulf's Shaikan asset and removal of operator status is not all bad in my opinion. Gulf net interest would drop but the profit per barrel would increase so it would net out. Furthermore they would receive development costs to date and the asset would probably receive a large boost as the government shoe-horns in an oil major. Would I like to see Gulf hold 30% of a Chevron operated Shaikan field targeting 250,000-300,000 bopd? You are damn straight I would.

In many ways it would remove the responsibility from a board of directors that look at the moment to be struggling. I hope they prove me wrong and come sailing through with a new big name CEO/CFO, a solid mandate from the Kurdish government to develop this key asset and an operational update that blows my socks off... still waiting.

Loss of Sleep Factor: 7 out of 7 nights. In honesty, I live in Hong Kong and the London market closes at midnight, so I lose little sleep but the swings in price, political complications and boardroom battles do not make for a happy investor.

Eyes on the prize at the end of the road for this investor.

Trinity Exploration & Production PLC (OTC:BEGYF)

Main listing on the LSE AIM as TRIN.

At 52 week lows. Production tops out at 3,800 bopd but recent discoveries can add more upside; once the equipment is up-rated for reportedly higher pressures and the new style wells are spudded in the coming months. At EV/2P $2.95 and EV/BOPD at $35,000 this name is cheap compared to international peers and locally it's a bargain. Leni Gas & Oil (LSE:LGO) and Range Resources (LSE:RRL) trading at EV/2P $14.32 and $4.15 respectively and EV/BOPD $159,000 and $280,000 respectively. Both have been head cases in the past but LGO looks to be ramping up production heavily so its numbers should normalise and Range with an entirely fresh CEO/CFO and operational team look to be turning the corner. Netbacks in Trinidad are very reasonable but a tight rig market make things tricky. I'm stunned that Trinity has not be approached for M&A given its undervaluation and unique focus as a pure play offshore Trinidad driller.

Conclusion: Stock currently playing dead but expect production to modestly grow and looking for new-shape wells (j-type and horizontal) to bring some fresh growth in the near term. A great company making money and growing revenue.

Loss of Sleep Factor: 0 out of 7 nights.

Disclosure: The author is long GUKYF, BEGYF, TAOIF. 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 actually long the main listing securities of LSE.GKP, LSE.TRIN and TSE.TAO.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.