Good post by AE. AE regularly has discussions with TXP.
ActiveEurope New: Yesterday, 5:05 AM
Analyst
Cascadura
Year end 2022 2P reserves were 75.1 MMboe and an NPV10 of U$993.7m pretax or U$450.6m post tax. It’s our understanding about 70% of that was attributable to Cascadura (52.1 MMboe) based on the area up to a fault line close to pad C. The two upcoming wells have the potential to move reserve numbers up substantially. Roughly speaking the first well (drilling from Cas C pad back towards current production 2 wells), if successful, would move 3P reserves to 2P reserves of about 35m MMboe (out of the 3P number 120.6 MMboe reported in reserve number), that’s a very significant value uplift. The next well after has the potential to bring new 2P reserves (not in 3P at all) focused on the area outside the fault line but up to the licence boundary (it drills from C pad towards licence boundary), and again if successful it could add 30-35 MMboe to 2P reserves. Lastly, if they receive final government sign off on the Rio Clara block they could drill a well from Cas C pad towards and across the current licence boundary and again if successful this could add a further circa 35m Mboe to 2P, all are approximate type numbers. Hence all 3 upcoming wells have the potential to add very significant 2P reserves and valuations, back of the envelope if all 3 were successful this could add circa 90 MMboe (80% share so net 72 MMboe) more to the existing Cas 2P of 52 MMboe (their 80% net share already). The share price/valuation is currently ‘disappointed’ with Royston result, delays across the board and little upcoming exploration drilling newsflow but is completely missing how material the Cascadura drilling could be.
All 2 or potentially 3 Cascadura wells are also primed for quick production (6months tie in Cas-C to Cas-A and separators etc) into existing facilities spare capacity, the current 2 producing wells are combined at 60mmcfd gross and may potentially increase to 90mmcfd gross in the future assuming there are no geological issues. The next wells are budgeted at 20 mmcfd gross each but are actually drilling into what management interpret as a slightly more gassy (less liquids) up-dip and potentially better area of relevant reservoirs for gas. They are budgeting minimal liquids although likely there will be some. Current 60mmcf and associated liquids provides U$4m a month, a move to 90 subject to successful geology at existing 2 wells moves this to U$6m a month and if all 3 new wells are on budget that’s 60mmcf/d and another U$4m a month: in total that’s U$10m a month possible at some point in late 2024/early 2025. Annualised that’s U$120m cashflow from Cascadura possible after the next 3 wells if drilled successfully. Obviously there can be delays and poor drilling results but this should be a relatively low risk development work and there are reasons it could surprise to the upside too. Its also worth noting the next well will be deepened to a new sheet as an exploration addition, we’d value this at zero but it’s worth mentioning.
Tax and Investment
Petroleum Operators ‘…entitled to capital allowances as follows….tangible and intangible exploration and development expenditure is computed on a straight line basis over 5 years (20% per annum)’ This means that if Touchstone spends U$100 on drilling and other related costs in one year, each subsequent year U$20 can be offset against taxable income so that over 5 years all the capex is effectively offset with taxable income. This is designed to encourage energy companies to keep investing in their business. Another way of looking at this is that if Touchstone invests U$100 in drilling its actually worth U$155 (100*55% (PPT+UEI rate)) over the 5 years to them. This is important to think about in the above Cascadura NPV reserve valuations pretax and post tax. The reality is the real value over time is somewhere in between these two NPV’s as there are some tax offsets from the full tax level modelled in the after tax valuation. Management are often questioned by investors ‘when are you going to pay a dividend or even do a share buyback?’. It’s worth pointing out both of these activities are ‘relatively expensive’ things to do when set against the tax incentives to keep reinvesting in the business. If touchstone reinvests nearly all its cashflow in growing the production of the company over several years it all gets ‘paid back’ in a lower tax rate. It’s for this reason investors and management ought to be reinvesting in growth rather than focusing on cash payback to investors. The reality is Touchstone are now self financing and have a plethora of new investment opportunities over the coming years, investors should be asking management to embrace growth capex for most of its cashflow. It’s the payback period on capex that’s actually the most important variable, ie how fast would capex on Cascadura payback. For instance 3 wells 80% share capex is 3*U$5.6m plus 80% of 5m for separators and pipes etc totals circa U$20.8m, if this adds 20mmcf/d each well totalling 60mmcf/d and U$ 4m a month then it takes somewhere around 5-6months to payback which is excellent use of cashflow (even less if including tax credit value).
Exploration
Cascadura has clearly been a huge success and as discussed above most likely still has more to give. In the recent presentation management put slides on several other future prospects, many are near drill ready but also some fall within the hoped for new licenses and asset swap deals that could be approved anytime between tomorrow and 12 months time depending on the Trinidad authorities timelines. Recently BP/Shell offshore licence was government approved and Touchstone management are hoping onshore licenses are next in line but there can be little predicting when this might be as the authorities appear to want to tie up all the licenses together meaning only once the last agreement is set up can they all be announced together, not doing companies or licenses individually. Coho 2 should be drilled 1H 2024 with a cheaper second rig and following that Coho 3 which includes the Gibba gas prospect at P50 circa 40-45BCF, these wells should fill the Shell spare capacity of 20mmcf/d. To the West of Cascadura they have named Char, Pike, Sturgeon and Muskallunga which all could be reached from one central pad (not yet permitted) and have promising on trend seismic with Cascadura. Equally Steelhead already has a drilling license already. Kokanee is up-dip from Chinook and needs a permit but is from an old drill pad so an easier permit exercise.
Valuation
I have always felt that Cascadura easily covers the valuation of the whole company up to somewhere around 120-150p per share (233.46m shares*120p or 150p=£280m to £350m). This does though include an implicit view that the next 2 wells will both be successful in proving up a much larger reserve base, the third not counted until licence agreement and drilling. The NPV10 post tax current value of U$450.6m could be at least twice that if all 3 wells come on prognosis. Most share prices trade at a wide discount to 2P valuations currently but you can easily argue for 120-150p. Alternatively you might pay 2-4*cashflow (single asset in high tax jurisdiction): here you have U$48m PA as current Cascadura (60mmcfd plus liquids) run rate and possibly U$120m annual run rate if ramped up by 3Q 2024 to 150mmcf/d. This gives valuations of U$96m to U$192m at low end production to U$ 240m to U$480m at the high end in about 12months time. Maybe Coho is U$20m, legacy assets U$20m but also current net debt offsets a lot of this. Lastly if the 200mmcf facility is filled up its 160mmcf/d net to them so about U$130m. The answer is valuation ranges can be very widely drawn, typically resource based valuations tend to be higher than just using trading multiples currently as the whole sector trading multiples are quite depressed currently. Further upside can clearly come from the continuous drilling campaign and we would hope that exploration wells from 3Q2024 and beyond might be possible.
