VSA Morning Flow Test, 15/04/20
Columbus Energy Resources (AIM:CERP)
In light of the recent events Columbus Energy Resources (AIM:CERP) has announced that it has taken commensurate measures with a focus on cash preservation. There are two fundamental aspects to the approaches taken; direct cost cutting and payment in shares in lieu of cash where possible. With a cash balance of US$2.56m the company has a modest cushion, however, this package of measures will help to ensure that stakeholders and shareholders are able to benefit when a recovery takes hold.
On the former, staff headcount has been reduced by 15% while salaries for the remaining staff have been reduced by 40%; this will initially be maintained for three months with a review at the end of June 2020. All non-essential capital expenditure has been ceased.
Executive management for the same period to June 2020 will receive no cash salaries, with 100% taken in shares. Furthermore, other contractors have agreed to take fees in equity (9.50mn shares) while as stated in the funding agreement with Lind, CERP is able to make repayments in shares rather than cash at its own election based on the prior 20-day VWAP; in this case CERP will issue 13.0m shares for the April 2020 payment. The contractor and Lind shares take the number of outstanding shares to 895.47mn. Whilst the circumstances that all junior E&P groups are currently experiencing are unprecedented, the decision by CERP to put the Lind funding agreement in place in November 2019 as an insurance policy against unforeseeable issues, largely in relation to Saffron drilling, reflects the experience of CERP’s management team.
CERP has also stated that in relation to Saffron it will update the market in full on the 27th April. Success on the Saffron well makes up an important part of our risked valuation (3.2p/sh. revised), modeled at US$60/bbl WTI long term. With indications of commercial potential from previous updates we continue to anticipate success although we do not rule out the prospect that some changes may be necessary owing to current events resulting in adjustments to capital spending, timing etc.
Our valuation is updated to reflect recent additional share capital reducing our target price by 6.9% to 20.1p/sh. We reiterate our Buy recommendation.