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VSA Capital Market Movers - Columbus Energy Resources

VSA Capital Market Movers - Columbus Energy Resources
 

Columbus Energy Resources (LON:CERP)

Columbus Energy Resources (LON:CERP) has provided a significant update announcing the signing of a sale and purchase agreement for the acquisition of producing oil assets in Trinidad as well as a positive operational update for Q2 2018 with gross revenue in H1 2018 of US$5.65m and operating netbacks of US$1.64m. This demonstrates the successful achievement of positive operating cashflow while the announcement highlights in no uncertain terms management’s ability to deliver on the ambitious growth strategy necessary to deliver the further positive returns for shareholders we expect. Indeed, CERP now has rising production from Goudron and BOLT as well as potential additional production from onshore Trinidad properties alongside the considerable exploration potential at the South West Peninsula.

Steeldrum Acquisition

The SPA covers the acquisition of Steeldrum Oil Co. which has three assets and total current production of 200-250bopd with recoverable 2P reserves of 5.6mmbbl; 100% owned Innis Trinity field (120-150bopd with reserves of 4mmbbl), 100% owned South Erin field (80-100bopd with reserves of 1.6mmbbl) and an 83% operated interest in Cory Moruga development project expected to have recoverable reserves of 1.1mmbbl. The initial consideration for Steeldrum is £4.4m (US$5.8m), based on last close, to be paid via the issuance of 92.7mn Columbus shares (12.5% of the current share capital). A further 49.8m shares may be issued to the vendors should certain contingent actions be realised. The total potential value of the consideration is £5.8m, close to US$1.38/bbl which appears attractive, in our view. The full issue would give the vendors, who have significant expertise in the oil and gas industry, 18% of the enlarged share capital of the company which we believe will align their interests with existing shareholders, enabling CERP to pay a lower up front fee which allows the vendors to benefit from future upside. Furthermore, by transacting in shares rather than cash this is beneficial for CERP’s balance sheet.   

CERP has indicated that it believes it can enhance production from the current base level by applying the same techniques that the company has successfully employed to date at Goudron. We also envisage that cost synergies could be employed to create further value from the transaction given the geography and nature of the assets. In 2017 Steeldrum generated a gross operating profit of US$0.83m and net loss of US$1.96m (after non-cash charges).

There are two contingent scenarios which may increase the initial consideration. The first is a positive FID to develop the Cory Moruga asset where an extended well test in 2015 resulted in 120bopd of production (32.8m shares issued if exercised). The second relates to the Innis Trinity asset in the event that it is sold to a third party for no less than US$4.2m. 

Currently, the Innis Trinity asset is held within a subsidiary of Steeldrum; FRAM Exploration Trinidad Ltd. The Innis Trinity field is a mature field exploiting the Herrera turbidite reservoirs that has historically produced 23mmbbl. Currently the license stipulates 7 wells as part of the minimum work obligation up to January 2020. Predator Oil and Gas (PRD LN) has a farm in agreement in which it is expected to fulfil at least two of these wells and in addition it has the right to buy FRAM for US$4.2m until mid-2019. Should this be exercised the second consideration of shares will be triggered.

The successful completion of the transaction expected in Q4 2018 provides material production upside to CERP and further strengthens CERP’s onshore producing asset base whilst demonstrating management’s ability to complete the kind of deals that management has laid out in its company road map. Our estimates remain unchanged whilst the transaction is subject to regulatory approval.

Q2 2018 Update

In Q2 2018, CERP achieved average monthly oil production of 574bopd, 532bopd and 553bopd in April, May and June respectively with a peak of 648bopd. Significant progress has been made in relation to sand production issues which can be replicated on other wells and the increased availability of water volumes indicates the waterflood programme can be ramped up further in H2 2018. This is in line with our revised estimate of an average of 675bopd for the full year. Gross revenue of US$3.01m in Q2 2018 was up 14% QoQ while operating netbacks of US$0.94m were up 35% QoQ confirming CERP’s return to positive operating cashflow. Although only gross dollar revenues are presented in this update we believe that this demonstrates significant progress for CERP.

We note that consultants have been employed to develop a technical programme for de-risking the SWP in 2019 and identify suitable drill locations. This will benefit from the Steeldrum transaction as well since its completion makes two rigs available to CERP, one of which is suitable for SWP exploration. This technical programme follows the SPA for Icacos and the revised BOLT agreement which significantly strengthens CERP’s position in the SWP.

Total capex in Q2 2018 of US$0.5m demonstrates the continued low-cost approach to production enhancement and we also note that costs in relation to Spain were just US$0.15m in the quarter. With a cash balance of US$2.4m at period end CERP continues to be in a strong position to fully fund its activities going forward.
 

Lind Facility

In light of the SPA for Steeldrum the management team has agreed a new Lind facility which CERP could drawdown should it need to. This facility lasts just six months and is a contingency which could be utilised in the event of unforeseen circumstances (particularly in relation to the Steeldrum acquisition), we do not currently anticipate that the facility will be utilised but the flexibility is highly beneficial to CERP, in our view. However, we believe that the terms of the deal are indicative of the strong progress the team has made and the further potential that Lind themselves see in CERP. The prior facility’s outstanding balance now stands at US$0.59m.

The facility means CERP has the right to drawdown funds of up to US$2.25m for up to 180 days and a further US$1m subject to mutual agreement with Lind and the company having a minimum market cap of US$25m. For funds drawn down Lind has the right to convert at 8.1p/sh. This is significantly higher than both the current share price and the 3p/sh. conversion in the original facility from 2016 which we believe is a clear indicator or Lind’s confidence in CERP.

We reiterate our Buy recommendation and target price of 25p.

 

 

 

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