TomCo Energy - raising our DCF valuation
TomCo (LON:TOM) is an oil & gas exploration and production company that operates in the Uinta Basin in Utah. The Uinta Basin and adjacent formations hold some of North America’s largest deposits of oil sands with the potential to yield some 10 billion barrels of oil. In June 2020 the company announced the formation of a joint venture (JV) called Greenfield Energy LLC to unlock the potential for oil sands development within the area using an innovative new production technology.
The Greenfield JV has been operating a test facility producing up to 180 barrels per day (bpd) of output, which has provided the necessary data to evaluate a full-scale production plant capable of producing 5000 bpd. TomCo has reached an agreement to acquire a site for the full-scale plant, including the oil sands excavation. The company has recently released two reports providing more details:
- A front-end engineering design (FEED) study produced by Valkor LLC
- A third-party technical verification report produced by Kahuna Ventures LLC
The reports provide:
- Confirmation of US$110mln capital expenditure (capex) cost estimate for a 5000 bpd plant
- New estimates for the ongoing operating expenditure (opex) cost, pointing to a cost per barrel (excluding capital cost) of US$22 per barrel. This compares with our previous estimate of US$30 per barrel that formed the basis for our valuation work in our report dated June 28th
- More details provided on the process for cleaning tailings sand
Although the economic analysis in these reports does not factor in the saleable value of the sand, we believe we now have enough information to factor sand sales into our model. We assume that each barrel of oil generates 1.6 tons of sand, of which 70% will be suitable for sale as "frac" sand for the oil & gas industry, at a price of US$15 per ton. In addition to including sand in our model, we have updated our discounted cash flow (DCF) to apply the reduced estimate of US$22 per barrel opex. Our new DCF is outlined on p2.
New details on the oil sands project
The system that TomCo is working with offers unique advantages as a process for commercialising oil sands:
- Comparatively low requirements for water, and a saleable clean sand by-product rather than expensive waste disposal obligations
- A low capex, modular production system which can readily be scaled up in future
- An end product of asphalt and diesel that can be sold straight to market without further refining
During the remainder of 2021, the company will complete the acquisition of the site for the new plant (expected during August), and decide on the strategy for financing the full-scale plant. We believe that various options exist for financing the plant. We detail these on p2, and we conclude that there is considerable upside potential for shareholders on an NPV (net present value) basis.
Investment conclusion
In our detailed report dated June 28th 2021, we provided an analysis of the proposed production process and its economics. We are now updating our assumptions to incorporate the new information from the FEED study and third party validation report. Based on our calculation for the sale of sand from fracking, we arrive at a value of US$11.80 of sand by-product per barrel, being US$16.80 gross value of sand, net of US$5 transportation cost. We treat the US$11.80 as an item to be netted off the process production cost, meaning the process produces diesel and asphalt at a net cost of US$10.20 per barrel.
The following chart shows the gross profit per barrel under our new assumptions. Our new gross profit calculation of US$50 per barrel compares with our previous calculation of US$35 per barrel.
Revised DCF calculation
Cost and profit, per barrel
Source: Proactive Research
Applying the new assumptions, our DCF comes out at US$433mln, compared with US$251mln previously. The following table summarises.
DCF summary
Source: Proactive Research
This is a DCF for a 5000 bpd plant, on an unleveraged basis.
The value that finally accrues to the TomCo shareholder will depend on the financing structure. We argue that the plant could be substantially financed without additional equity or without bringing in an equity partner. Financing options include — resource-based financing linked to the oil sands on the TomCo site, asset-based financing based on the off-the-shelf equipment that will be used in the plant, and potential forward sale of the output product.
Although it is not possible to give a per-share valuation until the financing structure has been determined, we argue that any reasonable financing structure would offer significant share price upside potential compared to the current level which represents a market cap of £7.5mln.