Thursday, 7 November 2013

#TRIN Trinity looks well set for 2014

Trinity Exploration and Production

Trinity is an independent oil company with onshore and offshore assets in Trinidad and South Africa. The core focus is Trinidad where the company operates producing assets on the West and East coasts. The portfolio includes production, significant low risk near term production opportunities and multiple exploration prospects with meaningful reserves potential. At the end of 2012 Trinity acquired Bayfield energy in a reverse takeover when Bruce Dingwall, a venture capitalist, snapped up Bayfield for what could be considered a bargain price (see below). Institutional investors put additional funds in and the enlarged Trinity Group was born.

Key stats:
  • Largest independent E&P company focused on Trinidad. Operate 12 licences (11 in Trinidad, 1 in South Africa)
  • 270+ employees based in Trinidad and a corporate office in Edinburgh
  • 2012 exit production rate of 3,965 bopd, current production of 4000 boepd, 2013 exit guidance of 4200-4500 boepd.
  • Net 2P reserves of 36 mmbbl, Net 2C resources of 38 mmboe
  • H1 Revenues of US$54.5 million
  • H1 EBITDA of US$15.8 million and cash flow from operating activities of US$11.2 million
  • H1 after tax profit of US$1.8m (Pre-exceptional negative goodwill see below)
  • H1 Cash balances of US$57.4 million 
  • Market Cap of £115m currently
  • Secured additional US$25 million undrawn debt facility with Citibank to fund future growth
  • Trinidad government announced additional capital allowance incentives in 2014 budget which enhance project economics and increases Trinity's core NAV
  • Two major projects completed; Brighton field automatic metering and oil transfer system and MP-8 platform refurbishment
  • Two jack-up rigs secured to drill two 2013 exploration wells
  • Two significant prospects being drilled, with potential to double the company’s value. First one has spud, second one due shortly.

Notable members of the Board have significant experience:

Bruce Dingwall, Executive Chairman: Over 30 years’ experience in oil and gas. Began career with Exxon as a geophysicist in the North Sea. Founded Venture Production in 1997 which grew to produce 45,000boepd and was sold to Centrica in 2009 for £1.3 billion. A Trinidadian national. Founded Trinity in 2005

Joel “Monty” Pemberton, CEO: Became CEO in 2009. Began his career with E&Y where he qualified as a Chartered Certified Accountant with a focus on energy. Moved back to Trinidad working in the energy finance division of RBTT Merchant Bank prior to joining Trinity. A Fellow Chartered Certified Accountant ACCA.

Finian O’Sullivan, NED: An international career in the industry over 33 years with Chevron, Geophysical Systems, Olympic Oil and Gas and Burren Energy. Founded Burren Energy in 1994 and developed its business leading to a flotation in 2003. Expanded Burren and in 2008 was sold to Eni for £1.7 billion. Finian joined Bayfield Group in July 2008.

David MacFarlane, NED: More than 25 years experience in financial control and management in upstream oil and gas. Joined Dana Petroleum in 2002 and was FD of Dana Petroleum when it was acquired by Korea National Oil Corporation in 2010 for £1.87 billion.

Charles Anthony Brash Junior, NED: Involved in the industry for over 25 years and is MD of Well Services Holdings Ltd, the owner of a large drilling rig fleet in Trinidad. Offers a range of oilfield services as well as being a material onshore oil producer. Has directly negotiated and managed service contracts with BP, EOG, Repsol and Petrotrin.

Corporate shareholders:

The total number of ordinary shares in issue is 94,799,986. A good proportion of these are not in public hands.

"Management and the Board own 21% of the company's shares and we take dilution very seriously" quote from Monty Pemberton, CEO

Trinity operates eleven licences in Trinidad with assets onshore and offshore the East and West Coast. Trinity operates approximately 300 producing wells across these licenses.

Onshore Licenses
Trinidad’s Forest Reserve area began production in 1910 and onshore Trinidad has produced approximately 1.6bn barrels of oil to date. This represents a low recovery of estimated OIP, due to under-investment and limited application of modern techniques. Trinity’s onshore assets therefore provide low-risk development opportunities. Trinity’s plan is to pursue a programme of drilling and recompletion to grow production from its onshore assets. Last reported operational update from this area (interim results published September):
  • Average H1 2013 net production for onshore was 1,997 bopd and c.2,300 bopd at the end of July
  • Six wells brought into production in H1, contributing c.500 bopd to June's production. Since the period end a further two wells have been drilled in the WD-5/6 block and one in the WD-2 block. 
  • Trinity's onshore assets have multiple producing horizons creating follow-on opportunities following initial completion. Trinity undertook 52 workovers and recompletions in the 1st half adding c.300 bopd of production. Trinity's most recent wells also offer significant potential as many have not perforated the primary production target with deeper zones initially being targeted.
  • Trinity plans to drill at least five more onshore wells this year and is considering taking on an additional rig to expand the programme
Offshore Licenses – West coast
The Brighton Marine field was discovered in 1951. Nine offshore platforms were installed to access further undeveloped reserves. The field was developed without seismic but in 2009 Trinity acquired 3D over the block. A number of infill drilling opportunities and well defined fault blocks have been identified. Some of the fault blocks extend into the PGB licence. In total 20 drilling locations have been identified with an initial development phase of 6 development wells and 1 exploration well planned.

The PGB licence acreage was acquired in 2012 following Trinity’s review of seismic over Brighton Marine which suggested the play may extend into PGB. Trinity is currently producing from two wells. The licence also holds a heavy oil (16° API) discovery, ALM-22. The recent Jubilee discovery by Petrotrin near the Cluster 6 platform estimated at 48mmbbl demonstrates the potential of the area. In order to delineate the ALM-22 discovery and identify future drilling locations Trinity intends to acquire 3D seismic over the block during 2014. Last reported operational update from this area (interim results published September):
  • Average H1 production from West Coast was 452 bopd and is currently c.760 boepd including gas production from the MP-8 platform.
  • H1 focus was the installation of a new deck on the MP-8 platform ahead of a heavy workover programme which commenced in June
  • Since beginning of July four wells have been worked over adding production of c.160 bopd in line with budget. A further three wells will be worked over in the coming weeks and Trinity is reviewing an additional three candidates. In aggregate, this project is expected to double production from the Brighton field and significantly extend the field's life
  • Given the encouraging preliminary results to date, Trinity is reviewing whether other platforms could be similarly upgraded.
Offshore Licenses – East Coast
The Galeota block is situated within an established oil play of the Columbus Basin in shallow water. The Trintes field commenced production in 1972 and consists of five main reservoirs. Trinity intends to revitalise the Trintes Field and grow production with a series of planned work-overs, side-tracks and modern artificial lift methods as well as infrastructure upgrades. The Galeota block has a number of undeveloped discoveries and exploration prospects. Trinity plans to drill up to 5 exploration wells in 2013 and 2014 to assess the blocks full potential and identify a full development concept once total resource is more clearly defined. Last reported operational update from this area (23rd September):
  • Average H1 2013 production from the Trintes field was 1,075 bopd and is currently c.780 bopd
  • In February Trinity experienced numerous issues including a generator outage at the Alpha platform which adversely impacted production. The team have been working to rectify these issues and restore production from impacted wells. A total of eight workovers were completed which added 350bopd. Trinity has continued to experience issues with electrical supply and pumps and the field is operating at around 80% capacity
  • Drilling operations on B5 began on 8 February. This well was designed to access reserves in the "N" sand with an expected production of 250bopd. During drilling operations a crack was found on the casing with severe corrosion. The well was temporarily suspended pending an engineering design to install a new housing
  • Drilling operations on B11 began on 8 April. After reaching TD it was decided that the well should be side-tracked. Logging resulted in 70 metres of net hydrocarbon pay. Initial gross production was 265 bopd. The well took longer than expected to drill due to issues with rig uptime and people transfer. To rectify these issues, Trinity has temporarily halted operations. The rig is currently demobilised to upgrade the mud systems and will recommence drilling later this year.
South African Licenses
The exploration licence for the Pletmos Onshore block covers approximately 11,000km2 and was awarded to Trinity in April 2012. Trinity holds a 100% interest although PetroSA has a 10% back-in right and Historically Disadvantaged South Africans could also take up a 10% stake. No exploration has occurred in the block since 1990. Trinity has identified potential gas prospects and plans to reprocess the existing seismic and acquire new 2D/3D data during the first exploration phase of 3 years. Last reported operational update (Interims end of July):
  • Trinity has initiated a farmout process to find a partner for the exploration phase on this license.

Outlook & Share price catalysts:

There are some exciting and potentially significant catalysts that if successful could see a re-rate to the share price. Broker targets seem to suggest anywhere between 180p and 280p.

Trinity will continue with the onshore development drilling campaign and drill a minimum of five new wells by the end of 2013. On the West Coast, Trinity will complete the remainder of its workovers on the MP-8 project (three additional wells). On the East Coast drilling will recommence in November 2013 and Trinity expects to complete one development well before the end of the year.

Trinity are looking to broaden their existing portfolio through the upcoming licensing rounds and selective acquisition opportunities. In addition to these initiatives, Trinity is working to further improve the commercial terms on its core licences.

Trinity should drill two offshore exploration wells during the fourth quarter of 2013: TGAL-25 in the Galeota license offshore the East Coast which has already commenced drilling, and El Dorado offshore the West Coast on the PGB license due imminently.
  • The TGAL-25 exploration well has begun with a projected TD of 6,500ft in the Galeota license. Three primary reservoirs are being targeted, the M, N and O sands, all of which are high quality sandstones that offer the potential for high recovery factors. TGAL-25 will be drilled as a vertical exploration well to test nine stacked sands between 300 ft. to 4500 ft. Formation testing will be accomplished by mini-DST rather than a conventional cased-hole DST. Management estimates the GAL-25 well is targeting gross un-risked P50 prospective resources of 32mmbbl (net 20mmbbl) with a chance of success estimated at 64% in the primary reservoirs. If successful TGAL-25 would be a fast-track development of a Trintes NE discovery that would possibly open the area for mid-term 2015 development drilling and satellite exploration drilling into adjacent undrilled fault-blocks.
  • The El Dorado exploration well is planned to spud in the fourth quarter of 2013 with a projected TD of 6,138 feet in the PGB license. The well will test the presence of hydrocarbons in stacked sands. The El Dorado well will be drilled vertically, evaluated, and plugged and abandoned. With success, the proposed well will be tied back to the re-furbished MP-8 facility and could be put onto long-term production as quickly as 4 to 6 months. Management estimates the well is targeting gross unrisked P50 prospective resources of 13.4mmbbl (net 9.4mmbbl) with a chance of success estimated at 51%. This is based on primary recovery only. Trinity is currently undertaking an study to examine whether water-flooding could improve recovery rates which could potentially double the resource potential of El Dorado.

My thoughts and why I rate this a buy:

For Bayfield share holders the reverse takeover by Trinity was financially painful. Bayfield seem to have been financially restricted at the time and short of negotiating power - Trinity picked them off for a price which on reflection looks a bargain. Note they have had to financially account for a $62m goodwill credit for the "bargain" price they achieved. The "10 Bayfield shares for 1 new Trinity" offer at the time means anyone holding at that time is still significantly underwater, further reflecting how good a deal it was for Trinity. That’s tough for investors from Bayfield and it feels like Trinity have spent 2013 to date off the radar dealing with the integration of Bayfield.

But looking in 12 months later, what struck me is how strong the Trinity board are - they are seasoned professionals, they hold 21% of only 95m shares in issue, the CEO states in the below interview that avoiding dilution is of significant importance to the board, and there is plenty of upside on offer here with high impact potential drills underway and a 2014 drill programme that should drive production and profit upwards by some margin. The company remain almost debt free, with cash to cover all planned drills, and an undrawn debt facility. Production underpins ongoing costs and any successful drill result before year end should see significant upside. Even without success, ongoing production and profitability growth should protect downside into 2014. For RBC capital Markets view of this upside/downside potential/risk, see below.

Whilst production costs look high, due to a heavy reliance on workovers and infrastructure upgrades ongoing, the recent government announcements on financial incentives have had no impact on profits yet, but should help Trinity with their economics in coming years. And most developments can be reasonably quickly brought on stream due to existing infrastructure.

This company seem to be coming in from the cold and getting some good coverage. Small buys are shifting the share price as there are relatively low numbers of shares in free float. I will be taking a position here before the drill results and keeping fingers crossed for successful results and a quick profit. In the event it is unsuccessful I will be comfortable to hold into 2014 when I would hope production and profit is well ahead of 2013 levels and the share price is ahead of what is currently still the same price as the start of the 2013.

But DYOR and take your own risks please!

Footnote: The bargain that was the Bayfield takeover

In the interim results the following caught my eye. Negative goodwill was accounted for as an exceptional item to the tune of $61.8m. This arose from the difference between the $40.5m purchase price of Bayfield, and the fair valuation of all of Bayfield’s assets post deal. Whilst this isn’t cash in the bank, it does demonstrate the bargain that Trinity secured, and as the share price at the time of readmission in February is almost the same as it is now in my mind this suggests that this is still not priced in.

From results:
Details of the fair value of the assets and liabilities acquired are as follows:

Purchase consideration (refer to b)
Fair value of net identifiable assets acquired (refer to c)
Negative goodwill (refer to c)

b) Purchase consideration
The purchase consideration is calculated as the fair value of all equity instruments of Bayfield (21,647,945 ordinary shares) prior to the acquisition, based on a share price of GBP 1.20 which was the value of placing shares traded on the day of the admission and the acquisition being unconditional. An exchange rate of USD: GBP is used, being $1.56 on the date of the acquisition.

c) Assets and liabilities acquired

Acquiree's carrying value and fair value
Deferred tax asset/(liability)
Exploration and evaluation assets
Property, plant and equipment
Decommissioning liability
Fair Value of Net assets

At the date of these interims provisional values were included for Property, plant and equipment and Exploration and Evaluation assets as management requires supplementary work to be done to assess the fair value attributable to these identifiable assets.

d) The negative goodwill recognised represents the gain arising from the bargain purchase of Bayfield where the aggregate fair value of the identifiable assets and liabilities as at the acquisition date exceeded the fair value of the consideration transferred. In accordance with IFRS, the gain has been recognised immediately within the consolidated statement of comprehensive income as an exceptional item.

Footnote 2 - RBC Capital Markets broker note on potential upside / downside from current drilling:

Trinity E&P (Outperform, Speculative Risk, 200p Price Target)
Having spud the TGAL-1 well on 30th October, we anticipate a well result from Trinity at the end of November. The well, which was previously called GAL-25, is targeting an up-dip extension of the producing Trintes field and will be drilled vertically to a TD of 6,500ft to test nine stacked reservoir sands. Management estimates TGAL-1 is targeting gross unrisked P50 prospective resources of 32mmbbl with 64% chance of success and the well is expected to take 30 days to drill. We include upside/risk of +73p/-8p per share for the well in our 265p/share NAV, albeit management holds a 64% chance of success.
The El Dorado exploration well may start drilling in November. This 30-day well is targeting the El Dorado prospect on the PGB acreage offshore the shallow water West coast where Trinity holds a 70% working interest. Management estimates gross unrisked P50 prospective resources of 13.4mmbbl and a 51% chance of success. The El Dorado well will test an undrilled fault block on the West flank of the Trinity operated producing Brighton field. We view the well as higher risk and include upside/risk of +30p/-7p per share for the well in our NAV.

Two links to press coverage of Bruce Dingwall, and Legal and General’s ii holding.

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