It's no secret that the cyclical nature of the oil industry provides significant opportunities for those companies that time things right.
After the oil price slump in 2014, there is now an opening for juniors with no debt, to get leaner and fitter, and to pick up discounted assets in the sector ahead of the certain uplift in the oil price.
One such company doing just that is Permex Petroleum, which is aiming to raise between $C2.5mln - C$10mln in an initial public offering (IPO) this month on the CSE to further its ambitions in the Permian basin in the US.
A delicious cocktail...
It aims put the money raised to work on a delicious cocktail of advancing the assets it already has alongside making new strategic acquisitions to grow value.
“In our opinion these downward cyclical corrections are a necessity to the survival of our industry," explains Mehran Ehsan, Chief Executive and President.
"Let me elaborate, during these low-price environments oil and gas operators begin creating efficiencies in all operations starting at the wellheads, decrease risky CAPEX programs, decrease burn rates, avoid debt and overall the industry aggressively pursues advances in technology to create efficiency”.
"These downward commodity price corrections weed out the weak and allow the strong whom have minimal or no debt to prosper, Permex Petroleum is one such company.
"We believe that every dollar we spend on capital expenditure is a dollar we could have spent on acquiring assets at a discount, while oil prices are depressed”.
"We all know that the price is not going to stay this low. Inevitably it will go back up and as a company that has no debt we are in an aggressive, hawkish position looking at other assets owned by companies with high debt and no way of utilizing revenues to service the debt”.
Ehsan suggests such firms typically divest at between 20 to 50 cents on a dollar or market valued of the assets, meaning the margins are attractive.
Some enviable assets..
And the firm already has picked up some enviable assets during its time being private in Texas and New Mexico, and spending about $10mln.
It has 5,200 acres, seven fields, and is producing about 150 barrels of oil equivalent, from 98 wells, 24 of which have output.
It has 58 shut-in wells, where there is an opportunity to lift output, 14 salt water disposal wells and two water supply wells, which can be used for water floods.
It also has the luxury of not being under any drill or CAPEX clause on its contracts due to it owning 100% Working Interest on its held by production (HBP) properties as the operator, therefore having no obligation to drill more wells, but can simply exploit those it has already to enhance production or drill new wells at its own pace.
The attraction of being involved in America's Permian basin would be obvious to anyone who knows the market. It is the second largest oil field in the world, comparable to Saudi's Ghawar field, and accounts for around a quarter of the USA's oil production.
Last year, US$28bn was invested in the basin, including from the likes of Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) and current output is around 2.5mln barrels per day.
It's also significantly cheaper there to produce the black stuff for a number of reasons, including the “stacked formation” which in turn allows operators to produce from 5-7 different zones within one drilled wellbore, versus drilling 5-7 wells with only one pay zone each.
The huge number of service providers and buyers already there, low transport costs and the fact less refining is needed on the light sweet crude that lies beneath the ground also attribute to the benefit of operating in this area.
Ehsan says it will cost his company about US$24 a barrel to produce there.
The plan is that at least 75% from Permex's upcoming financing will go into the first phase of the development program, while the rest will go towards potential acquisitions in the basin.
The initial low-cost program will see existing wells re-entered and enhanced and should see output lifted to around 900 to 1100 barrels of oil equivalent (boe) per day by the end of 2018, says Ehsan.
The second phase will require more cash - a bank underwritten raise of between C$35 and C$40mln - to really scale up the business, as it carries out horizontal and infill drilling, possibly fracking, and then Ehsan is forecasting output to go above 5,000 barrels a day in 2019.
Significant discount to peers
So, there should be much investor interest created from this energy firm, which already boasts an independently verified reserve base of US$119mln from 7.2mln barrels of oil equivalent, and which is going public at 50 cents a share, giving a valuation of about C$19mln.
When comparing this firm to its peers from the Enterprise Value (EV) per 2P reserves (BOE), there is a significant discount the firm is being offered at current valuation.
On average its peers are being traded at $10.42 EV per 2P reserves (BOE), where Permex is looking to list at $2.64 EV per 2P reserves (BOE).
As Ehsan points out that IPO price represents less than 20% of the group's reserve valuation, underlining the firm's discount and upside for investors.
The group's Texas properties are the Pittcock north and south leases, the Bullard, McMurtry & Loving, and the Peavy with a combined 2P (proved and probable) reserve estimate of 1,724,503 barrel of oil equivalent (boe).
In New Mexico, it has the West Henshaw and Oxy Yates with a combined total 2P reserve estimate of 5,479,473 boe.
With ambitious plans, this is one oiler that certainly looks like one to watch in 2018 and beyond.