Contributor Since 2017
Panoro Energy ASA (PEN NO) - a stock opportunity that one very rarely comes across.....
.....Panoro, is a discovery most stock investors dreams about, and probably did not think was possible to find. Incredibly undervalued, and with a very interesting asset base which is in the process of rising rapidly in value......the stock has a long term past of broken promises, and is now forgotten and ignored by most stock market investors……however, as the company has been turned around, it has the potential to rise 5-10x the current share price!
Some key Panoro facts:
-Panoro is a small oil and gas company with ownership interests in two West African oil and gas fields
-The company has zero debt, and a 8-9 millUSD cash holding
-The company has 42 million shares and trades at 5.75 NOK per share => 240 millNOK market cap (29 millUSD)
-Despite its small size, the company has a good and accountable management, and a strong board with some very notable and exceptional oil industry people
Panoro Asset Overview:
-Asset 1: Aje oil and gas field:
The Nigerigan block, OML 113, with the AJE oil and gas discovery in Nigeria is one of Panoro´s assets. Panoro has a 12.1913% entitlement to revenue stream, 16.255% paying interest and 6.5% participating interest.
The field is in production and is currently producing appr. 3500 barrels of oil per day through the Front Puffin FPSO. The oil field is the «minor part» of this discovery. The Panoro net share of the oil part of the discovery is 1.7 mill boe P1 reserves and 3.1 mill boe P2 reserves. The major asset in the discovery is the natural gas discovery, which is yet to be put into production. The field holds gross 500bcf of gas, 22MMbbls of condensate and 40MMbbls of LPG in addition to the oil discovery. Furthermore, the Chevron operated West Africa Gas Pipeline (WAGP) runs very close to the of the Aje gas discovery. This makes gas production feasible as it can be exported through the WAGP. A plan for the development of the gas field is to be finalised within the short term.
-Asset 2: Dussafu:
A 8.33% ownership interest in Gabon oil field permit DUSSAFU. The Dussafu permit currently holds 4 oil discoveries named Tortue, Ruche, Walt Whitman and Moubenga. Based on the reserves report from 2014, the 2C resources (proven and probable reserves) were set at 32 million barrels for the 4 discoveries. Proven reserves of 19 mill boe, and an additional 13 m boe of probable reserves. The oil field is in shallow waters, and can be drilled by a jackup.
Based on these assets, what is the Panoro stock worth ?
The company currently has around 9 million USD in cash (appr. 1.8 NOK per share), and has a Norwegian corporate ASA tax loss carry forward of 800 million NOK which translates to a tax asset of (23% tax savings) of 180 mill NOK (2 NOK value per share 10% of 800 millNOK). Let´s call this the base value - i.e. 3.8 NOK per share!
The valuation of Aje:
Long story short, the license owners New Age, Yinka, EER, MX Oil and Panoro have been quarreling all year long about several issues. The infighting is finally in the process of being settled, which was recently announced by Panoro. The oil production volumes from the current two well production have been lower than expected, but is likely to remain around 3500 barrels per day in the coming years, assuming no new drilling of wells. Potentially, the production could be raised in the future, given better reservoir knowledge and understanding. The major part of this asset is the natural gas discovery of 500 bcf (equivalent to 160 mill boe) and 22 mboe of condensate. In contrast to the major part of offshore fields in Nigeria which are in the eastern part by the Niger Delta, Aje is in the west towards the Benin border. More important, it is very close in proximity to the Chevron operated 680 km West Africa Gas Pipeline (WAGP). WGAP runs from the Nigerian shore and the Lagos area, offshore westwards toward Benin, Togo and Ghana. This makes the discovery easy to export to onshore gas needs along the west african coast. I.e. to the Lagos market.
Panoro´s stated strategy is to divest all or part of this asset. The settlement process is the first step in this process. After this, it is likely an exit will happen in some form. The value of Aje is based on a range which stretches from a low case to a high case, based on a possible transaction value in an exit from the partnership. I expect the value range in a divestment to be in the 20-40 millUSD net of any existing cash calls in the partnership. So for valuation purposes, I use 30 millUSD. I.e. 6 NOK per share. This valuation range (20-40millUSD) is well below the transaction price when the administrators of the Afren bankruptcy, sold Afren´s share in Aje close to the bottom of the oil price cycle. It is also well below historically invested capital in the field.
Note that realignment of field operating costs with contractors in 2017, to fit the lower than expected production, makes the current oil production profitable going forward. There is a cash call from the partnership of app. 6 millUSD towards Panoro, which will be repaid from the cash-flow from the current production, and/or in an exit. The current cash call could potentially be negotiated lower as part of a final settlement with the Aje partners, which is expected sooner rather than later.
The valuation of Dussafu:
The Dussafu permit is an extremely interesting asset. Initially, I mentioned that the 2C resources (proven and probable reserves) were estimated to be 32 mill boe in 2014. This was estimated by a reserve report comissioned by the former operator Harvest Energy, a company that is now being dissolved. In late 2016, BW Energy acquired 91.66% of the field from Harvest and Panoro. As part of the deal Panoro was paid 12 mill USD for 25%-points of its ownership in Dussafu, a 12 millUSD non-recourse loan which will cover the development cap ex of the first phase (gross cap ex is 150 millUSD for the full first phase of the field, with very attractive payback), and a new field operator BW Energy which comitted to invest 150millUSD in field development and provide an all essential FPSO. The loan will be repaid from the cash flow of the field. Panoro retained a 8.33% ownership interest. BW Offshore, a 66.67% owner of BW Energy, were to provide the essential FPSO which will be used in the production of the field. Getting access to the FPSO, was of instrumental importance to get the field into production. And it enabled the Dussafu owners to get the field fast tracked into production, which will happen in the second half of 2018. BW Offshore had an idle FPSO, named Azurite with capacity to produce 40-50k bpd. The process facility of the Azurite FPSO was perfect for the Dussafu oil type, meaning only minor adjustments for the FPSO was necessary (tailoring FPSOs towards oil fields often is a major issue and often big stumbling block with delays and high cap ex. Ordering a new FPSO is also expensive and takes time to deliver. So getting Azurite was very attractive). Thus, the deal with BW Energy was fantastic for Panoro, as it provided a new field operator with cash to invest full field development and an FPSO, cash to Panoro, a non-recourse loan which is to be repaid from repayment from field production cash-flow.
In order to understand the massive value generation that is taking place in the Dussafu permit, one needs to look at what the new operator has been doing. Before buying the Dussafu permit, BW Energy teamed up with a oil management team which used to be key personnel working for the oil company Vaalco. Vaalco is operating the Etame oil field in the neighbor block of Dussafu. BW Offshore owns and leases out the FPSO which has produced the Etame oil since early 2000s.
The ex-Vaaco team has reevaluated the discoveries within the Dussafu permit, and used their experience from Etame in the process, and made a development plan which has dramatic consequences for the reserve estimates of the field. At the Q3 2017 presentation, BW Offshore, showed a 20 mill boe reserve number for Tortue phase 1 (2 wells), and an additional 40 mill boe reserve number for Tortue phase 2 and 3 based on 4 new wells in 2019-2022. I.e. BW Energy now believes the reserve number for Tortue is 60 mill boe. This is 2x higher than the entire 2C estimate for all 4 discoveries based on the 2014 reserve estimate from Harvest Energy. This is a mind-blowing and dramatic increase in reserves. Note that, the stock market did not take notice, and Panoro barely moved up on the news (the shareholder structure has barely changed in 2017, and the stock has low daily trading). BW Energy has sanctioned a new reserve report, which is expected to published and presented in January 2018. BW Offshore gave strong indications at that the Q3 presentation that the Dussafu reserve numbers presented by BW Offshore, reflected the new audit being performed for the reserve numbers.
A 2C resources (proven and probable reserves) of 32 million barrels for all discoveries in Dussafu, is now i.e. transforming to a «production» reserve number of 60 million for Tortue (which is one of the four discoveries in Dussafu)!!!
BW Offshore has been vocal on various presentations that the Ruche discovery is equal to Tortue in size. I.e. also has a 60 million barrel production potential. This was stated early in 2017 in BW Offshore´s presentations where they stated that the production potential for the existing discoveries at Dussafu was 150 million barrels of oil. Take note that the sell side analysts covering BWO, in majority have taken the stance that they either do not like that BWO has ventured into the E&P business, or simply have not cared to look into it. The reserve audit taking place is said to be for Tortue, and that Ruche is next in line in terms of being audited.
Given a series of disclosures and presentations from BW Offshore in 2017, it is evident that the reserve numbers for Tortue and Ruche is going up dramatically and heading towards 120 mill boe+. It is important to note that the Azurite FPSO can produce both Tortue and Ruche in parallell. That is a major advantage and fantastic for the field owners. It also provides lower production cost per barrels as one brings on more oil online.
BW Energy assumes 15k bpd production in phase 1 for Tortue, which will rise towards 25k bpd with additional wells (4 new wells). Thus, Tortue alone can produce appr. 10-12 years at 15k bpd initially, then towards 25k bpd from 2020 going forward.
What is Dussafu worth?
TORTUE: Given a 60 mill boe reserve number, 30 USD break even cost for the field in phase 1 (includes cap ex), and the current forward prices. One can, given the PSA regime in Gabon, put a 12 USD per barrel value for the Tortue oil. For Panoro this means 8.33% x 60 mboe x 12 USD => 60 mill USD => 11.7 NOK per share!!
For Ruche the value potential equals Tortue. Given that production of Ruche will start later than Tortue, one can at this stage give it a lower value, which will rise as production plans are made. I.e. at this stage, I use a conservative number of 6 NOK per share. I.e. a 50% discount.
For Walt Whitman and Moubenga I use zero value at this stage for conservative reasons.
Thus, the value potential Tortue and Ruche is 23-24 NOK per share, but I use 18 NOK per share as a value currently.
Adding the values of cash, tax asset, Aje, Tortue and Ruche one gets: 1.8 NOK + 2 NOK + 6 NOK + 11.7 NOK + 6 NOK => 27.8 NOK per share !!! (appr. 3.34 USD per share) Given the current stock price of 5.75 NOK, the stock can go up more than 5x from the current level!!
The exploration potential in Dussafu is massive and mindblowing!
There is a massive exploration potential in the Dussafu permit. In fact there have been identified massive seismic structures in the permit. Prospective resources are 1 billion barrels. Historic exploration has been limited by weak finances of former owners, the oil crisis, and inability to fund new wells. However, as the field is set into production, the incentive to explore is massive as a large share of the exploration drilling costs can be subtracted from the PSA tax paid to Gabon. Thus, it is very likely that the new operator will drill exploration wells soon after the production starts in the second half of 2018. As owner of Panoro you get exposure to potential huge discoveries. The enclosed map shows the structures identified and the four existing discoveries. The identified structures are very close to the Ruche ond Tortue discoveries. Prospect A (two large orange prospects), by itself has prospective resources of around 500 mill boe.
Dussafu´s massive seismic structures could possibly be 200 million barrel+ discoveries. If that was to happen, what could it mean in value for Panoro?
200 millón barrels x 8.33%= 17 mboe => multiply with 10 USD per barrel => 170 millUSD in value => 33 NOK per share !!! (appr. 4 USD per share)
Exploration is always «a big uncertainty» in terms of value creation! However, Dussafu holds 4 discoveries and large seismic structures in close proximity to the existing discoveries. Furthermore, you pay nothing for the exploration potential in the Panoro share price. The fact is that in today´s share price you barely pay for more than the cash and tax loss value i.e. the «base value».
Management, Board of Directors, share buybacks and insider buying:
Finally it is worth highlighting the company’s «new» American CEO, John Hamilton(since late 2014/early 2015), who is a good and prudent CEO, who has done a good job with the deal making securing the new partnership with BW Energy in Dussafu. He has also showed strong legal skills in the Aje dispute, where Panoro has managed the situation well. Panoro’s «new» board (who joined in fall 2014, spring 2015 and spring 2016) is exceptionally strong with members like Mr Torstein Sanness (formerly Lundin Petroleum top executive/"founder"), Garret Soden (former Lundin Group, now CEO of Africa Energy Corp), Alexandra Herger (Vice President Global Exploration for Marathon Oil until retirement in 2014), Hilde Ådland (Head of Operations Engie Norge AS), and Julien Balkany (Chairman and owner of 5.2% of Panoro). Mr. Balkany has background from investments and executive roles at energy based companies. He is a French national, with a strong network in Africa. Mr. Balkany especially, and the board in general are an active board, who supports the management of the company actively.
Panoro has also bough back its own stock in august 2017 (1 million shares) and Mr. Balkany in september 2017 almost doubled up on his holdings in the company from 1.3 million shares to 2.3 million shares. The executive management has also bought shares in the company in the fall of 2017. The focus on shareholder value is high at the board level.
Panoro is also engaged in looking at new projects, and are in a strategic cooperation with a oil service company to develop new projects. This will be done on a basis with no capital comittments from Panoro, but leveraging of Panoro’s strong west africa network and through investments from partners.
PANORO IS A UNIQUE OPPORTUNITY ONE VERY SELDOM COME ACROSS. IT HAS THE POTENTIAL TO RISE 5-10 X ABOVE THE CURRENT STOCK PRICE.
IT IS PROBABLY ONE OF THE BEST, IF NOT THE BEST, BUYING OPPORTUNITIES IN THE GLOBAL E&P SECTOR!
Disclosure: I am/we are long PESAF.