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VSA CAPITAL MARKET MOVERS - Colombus Energy Resources

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VSA Morning Flow Test, 18/04/19

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Columbus Energy Resources (LON:CERP)

Columbus Energy Resources (CERP LN)# has provided Q1 2019 quarterly operational update demonstrating significant progress in progressing the SWP exploration programme with a well location chosen for Q3 2019 and advanced discussion in relation to the acquisitive growth strategy in South America.

Production for the quarter averaged 602 bopd, up 20% YoY, but down 10% QoQ to an average of 670 bopd. Although Q4 2018 had been impacted by severe weather conditions in the last quarterly update we highlighted management’s focus on producing profitable barrels. Given the production contracts under which CERP operates and relationship between the contracts, Special Petroleum Tax (SPT) and the relationship to benchmark oil prices CERP is now demonstrating this strategy effectively, in our view.     Price variation in the WTI US$50-60/bbl range is particularly important in this regard given the taxation thresholds.

In order to avoid negative impacts from this step change in taxation CERP reduced well work activity to a single workover rig being used continuously in Q1 2019 compared to up to four units being operated in Q4 2018. Gross revenues were therefore down 14% QoQ to US$2.78m (Q4 2018:US$3.23m), partly due to reduced production and a 3.3% decrease in realised sales price from operations in Q1 2019 at US$55.67 (US$57.58/bbl in Q4 2018).

However, we highlight two crucial points from this quarter; despite the decline in production and lower revenues CERP increased operating cashflow 8% QoQ to US$0.4m demonstrating the effectiveness of the strategy. Secondly, with peak production of 1,000 bopd achieved in late January and production exceeding 860 bopd on three occasions during the quarter this indicates that under more favourable economic conditions the option to increase production remains intact. Technical progress was also made with regard to the waterflood programme.

As a consequence, cash at the end of the quarter decreased to US$2.06m (Q4 2018: US$2.60m) while the Lind debt facility reduced to US$0.26m (Q4 2018: US$0.40m.  The Lind US$3.25 million loan facility which was established in July 2018, expired in early January 2019 without any drawdown as expected.

South West Peninsula

Operations in the South West Peninsula (SWP) have progressed with detailed technical studies providing information to conduct an exploratory drilling programme in the region and a well site has been identified for Q3 2019. The SWP has identified over 12 shallow and deep prospects ranging in size from 20mmbbl up to 400mmbbl with the potential for stacked vertical targets. The drilling programme will be funded from available resources and is intended to commence in Q3 2019, subject to receiving Government approvals. We previously highlighted the beneficial rig access arising from the Steeldrum acquisition which is partly why the well cost can be funded from existing cash resources. The first well will test the Middle Cruse, covered by existing environmental permits and technical consultants are supporting management with finalising preparations for the initial hole and ongoing campaign. We highlight that whilst the IPSC at Goudron has hampered recent performance, one of this management teams initial successes was to renegotiate the relevant contracts enabling more attractive returns arising from exploration success.

At the Inniss-Trinity CO2 project, the company continued to work with the relevant Trinidad authorities and partner Predator Oil & Gas (PDR LN).  Following the receipt of approval for conduct of the CO2 Enhanced Oil Recovery pilot project from Heritage Petroleum Company, PRD will commence first injections in late Q2 2019 or early Q3 2019, subject to the receipt of the remaining regulatory approvals. 

Acquisitive Growth Strategy

The company remains committed to sourcing additional M&A opportunities and CERP is in exclusive discussions for the award of a concession in a South American country, following a tender process.  The company reports the potential opportunity would involve a low cost discovered onshore oilfield in an established hydrocarbon province and management expects to be able to follow up with further detail in mid-2019. 

Although absolute production numbers have perhaps disappointed in Q1 2019, the positive QoQ impact on financials underpins our confidence in the near-term production strategy. With exploration at SWP now approaching, where the potential is significantly greater than the existing production assets, this indicates near term catalysts for the shares as this represents the realisation of the broader strategy that management has been laying the groundwork for in recent months.

We reiterate our Buy recommendation and 21.4p target price.

 

 

 

 

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