President Energy has now released their final results for the year ended 2018.
Revenues increased when compared to last year due to a $27.5M increase in Argentina revenue and a $1.7M rise in US revenue. Depreciation was up $2.8M but there was a $1.8M release of the abandonment provision before royalties and production taxes increased by $5.8M and well operating costs grew by $4.3M to give a gross profit $18.2M higher. Staff costs reduced by $375K but there were $700K of legal expenses and other admin costs grew by $404K which meant that there was a $17.4M swing to an operating profit. A $3.9M swing to an impairment credit meant that the actual operating profit saw a $21.3M improvement. There was a $1.4M increase in the forex loss and a $592K reduction in loan fees was more than offset by a $1.4M increase in loan interest so that after there was a $6.4M deferred tax charge for on future tax provisions and a $4M reduction in deferred tax income from the same, the profit for the year came in at $120K, an improvement of $8.9M year on year.
When compared to the end point of last year, total assets increased by $20.3M driven by a $20.1M growth in property, plant and equipment and a $5.1M increase in trade receivables, partially offset by a $3.1M decline in other receivables, a $2.1M fall in cash and a $1.3M reduction in assets held for sale. Total liabilities also increased during the period as a $7M reduction in the acquisition payable for Puesto Flores was more than offset by an $8.9M increase in borrowings, a $4.6M growth in drilling, workover and operations accruals, a $6.6M increase in deferred tax, a $4.2M growth in trade payables and a $3.2M increase in license payables. The end result was a net tangible asset level of $41.8M, a decline of $196K over the past six months.
Before movements in working capital, cash profits increased by $18.4M to $14.4M. There was a slight inflow from working capital and after interest receipts increased by $143K the net cash from operations was $15.1M, an improvement of $22.4M year on year. The group spent $15.8M on licenses in Argentina and $7.9M on development and production to give a cash outflow of $8.7M before financing. The group had to pay $2.7M in loan interest so had to take a new net $9.5M to cover it. This cave a cash outflow of $2M for the year and a cash level of $2M at the year-end.
Overall group production more than doubled, reaching 2,279boepd which was driven by acquisitions and higher production rates in both Argentina and the US. Higher average prices of $59.6 per boe compared to $50.6 last year supported the growth in sales.
The operating profit in Argentina was $9.5M, an improvement of $15.6M year on year. The price achieved per barrel was $63 compared to $53 last year as the transition to a fully de-regulated market progressed. In total the group produced 721.8mmboe compared to 302.8mmboe last year, the majority of which was oil. Reserves reduced by 1,621.2mboe due to a 3,679.6mboe downward revision following reduced capex at Salta as the group focused on the higher value added Rio Negro fields.
Well operating costs before workover expenses were managed down to $22.7 per boe compared to $34.6 last year. Depreciation fell from $12.3 to $9.6 due to higher production from Puesto Flores which has a lower depreciation charge. A move to a deregulated oil price environment in Argentina in early 2018 triggered the reassessment of the functional currency in the country, changing to USD.
The operating loss in Paraguay was $63K, an improvement of $28K when compared to last year.
The operating profit in the US was $1.9M, a growth of $1.4M when compared to 2017. The price per barrel achieved was $48 compared to $42 last year. In total they produced 110mmboe compared to 71.8mmboe last year as a full year of production from the Triche well more than offset the sale of the East White Lake wells at the start of the year. Reserves reduced by 91.3mboe due to a 179.9 disposal.
Well operating costs excluding royalty related expenses fell by over 40% to $7.8 per boe as the higher cost East White Lake production was replaced by the lower cost Triche operation. This switch also had a corresponding reduction in depreciation which fell by 58% to $3.1 per boe.
Admin expenses included $700K in legal expenses arising on the settlement of the DP1002 dispute in Argentina. This well was impaired in 2016 so consequently the outstanding accruals included in the $10.9M impairment have been reversed resulting in a gain of $2.6M.
At the end of the year the group acquired the Puesto Prado and Las Bases concessions. They are adjacent to the Puesto Flores and Estancia Vieja concession and include access to reserves, infrastructure and a strategic pipeline. The acquisition was funded through additional borrowings of $4M from the chairman and the issue of new shares, netting $4.6M.
During the year the Pirity licence was extended by two years through to September 2020 in return for additional work commitments. While the farm out process continued to attract interest, no firm agreement has yet been reached. The group remains committed to drilling a well towards the end of 2019 or early 2020. A geological review has been completed with a review completed in early 2019. This has determined the prospect and well site location for the well so the exploration asset continues to be capitalised at $102M.
In Paraguay the group has entered into a farm-in agreement on the Hernandarias concession to earn the remaining 40% working interest. The remaining work commitment on this license is for one well to be drilled before October. As of the year-end the remaining capital commitment was $8.9M which would not be payable if the rights were relinquished. They expect drilling the remaining commitment well on the Pirity concession during 2019.
At the year-end the group was committed to funding an exploration programme on each of the Matorras and Ocultar licence areas surrounding Puesto Guardian in Argentina. The licenses have a combined work commitment of $2.4M.
During the year an impairment review was triggered at Puesto Guardian as a result of a reduction in 2P reserves. Following a review no impairment was required. Following the sale of the non-operated interest in East White Lake field during the year an impairment of $1.3M was recognised at the end of 2017.
After the period-end the group announced more share issues to accelerate the expansion programme in Rio Negro. Applications for 43,770,415 shares at a price of 8p per share were received, raising $4.6M. At the same time the Chairman capitalised $1M of his loan through the issue of 9,950,000 shares at the same price. A shame the group still seems to be some way off being self-sufficient.
At the current share price the shares are trading on a PE ratio of 692 which falls to 7.3 on next year’s consensus forecast. There is no dividend here. The year-end cash balance was $2M.
On the 27th June the group released an AGM statement where they maintained their target of a 2019 year-end production rate of 4,900boepd. The province of Rio Negro has agreed to the reunification of the separate areas of Puesto Flores and Estancia Vieja fields by the inclusion in that concession of the area situated between those parts known formally as part of Loma de Kauffman.
The workovers of wells have now been progressing for three months. The primary purpose is to stabilise the inevitable natural decline in production of the well stock. Five workovers in Puesto Flores have been completed and placed back on production. The group have now added a second workover rig so that work will be carried out in more than one field at a time.
There has been inevitable disruption to production as the workovers of producing wells continues but it is expected that Rio Negro production will return to 2018 year-end levels before the end of Q3 from which point production is expected to increase from the new wells. In the meantime production from the existing Puesto Prado and Puesto Guardian fields remains stable.
It is expected that drilling operations will begin before the end of the European summer. The first wells to be drilled in Rio Negro will be in the Puesto Prado and Estancia Vieja fields and will be a mix of oil and gas production, appraisal and exploration wells. Las Bases will follow. In Puesto Guardian it is expected that in the latter part of this year, drilling will start on a two well programme at the Dos Puntitos field.
In the US the results of the seismic re-processing look promising and it is now expected that drilling operations at Jefferson Island will start by the end of September with an initial firm two well drilling programme and further contingent wells thereafter subject to results. In the region, production was recently shut in and production suspended due to high flood waters which have now receded with normal service expected to resume soon.
Significant steps have been taken to progress the plans to start gas production at Rio Negro. The first gas compressor has been ordered and it is anticipated that it will be installed and working at Las Bases by the end of September. Good progress has also been made at the Las Bases plant itself and it is expected that this could be recommissioned by the end of the year. Permits have been obtained to build the 16km new section of pipeline to open up the Estancia Vieja field gas to its full potential.
In Argentina the full benefit of the workover and drilling programmes will be seen in the second half. Turnover for April and May is $8M giving a figure of around $20M for the first five months. The estimated cash generation from core operations in Argentina after capex over the two months was $5M giving a figure of $12M for the first five months and adjusted EBITDA for April and May is expected to be $3.3M.
On the 16th July the group released an Argentina update. They have recently conducted a hydraulic fracturing of well PFO-16 in the Puesto Flores field. The frac has proved to be at the high end of initial expectations. The oil cut is 95% and whilst this is clearly a depleted reservoir, the daily test rate of oil production at 175bpd is treble the pre-frac level. The group has now started planning for other frac candidates.
On the 25th July the group announced the entry into a new offtake arrangement with Trafigura. Under the arrangement they are selling Trafigura certain of their production from their assets in the Rio Negro province. Trafigura have also agreed to make an advance to the group repayable on commercial terms.
These arrangements have created the flexibility to pay off the $3.6M outstanding on the high interest Hipotecario loan which leaves the group with $4.8M bearing a lower interest rate of 7.5%. At the same time the group repaid $1.5M of debt owed to the Chairman’s company.
On the 6th August the group released a trading update covering the first half of the year. Sales were 7% up on last year with EBITDA of around $8M. Bank debt reduced to $4.8M and average group production was 8% up on last year’s average at 2,500 boepd. With an improved second half in prospect, the group is on track for an adjusted EBITDA of $20M for the full year.
Overall then this has been a decent year of progress for the group. Production, selling price and profits all increased. The net tangible asset level declined somewhat, however, and despite the operating cash flow improving there was still no free cash generated. And that really is the crux of the issue here. Despite the clear operational improvement in Argentina, the group is still not generating enough cash to be self-sufficient and is instead relying on high interest loans and equity raises. Given this, the forward PE of 7.3 is probably about right, if a little on the high side.