2P Reserves, Brian McDonnell, Caveat Emptor, Chris Comerford, delisting risk, disorderly market, Eblana, Fastnet Oil & Gas, FBD Holdings, GXG Markets, intrinsic value, junior resource stocks, Karim Akrawi, Las Vegas, M&A, Nevada oil & gas, Petroneft Resources, PLUS Markets, prospective resources, TGISVP, US Oil & Gas, USOP
I missed 2 Irish stocks earlier this year for The Great Irish Share Valuation Project (& here’s the latest TGISVP post). The first was Fastnet Oil & Gas plc (FAST:LN), which only IPO’d in June. The second was US Oil & Gas plc (USOP), which was actually suspended at the time (and finally delisted in April)! I must admit, I’ve put off looking at them for the past month or two – TGISVP gave me a real bellyful of junior resource stocks! I wasn’t feeling too hopeful about the analysis & prospects of these candidates either. My bloody bad..! Sorry, Fastnet, right now USOP’s beckoning!
Picture the desert, feel that heat, that blazing sun – you’re just a poor thirsty investor, simply trying to stay alive… You’re on your knees. But wait… What’s that you see? A shimmer, a glint just there on the horizon? You painfully stand, stumble, begin to walk, and then break into a shuffling trot. You begin to hope, against hope – maybe it’s water, an oasis, can it be..?
Nothing else matters, you stagger on as fast as your weakened body allows, and still you see it! That shimmer begins to solidify, begins to seem more real, it even draws closer, maybe just maybe you’ll make it… But suddenly that image, your goal, flickers and changes. You no longer see the water that’s been driving you crazy, that you were almost able to taste in all its cold glorious wonder. But wait, what do you see instead? Yes! Oh yes, it’s far far better, it’s amazing…it’s OIL!!!
Yes, US Oil & Gas (via its wholly-owned sub., Major Oil Intl. LLC) has rights to exploration & development acreage in Hot Creek Valley, in Nye County, Nevada. The majority of Nevada’s oil & gas production comes from Railroad Valley, located about another 30 miles to the east. This begs some questions:
a) Why on earth did an Irish company decide to go exploring for oil & gas in Nevada?! Well, I can’t really answer that – but it’s certainly within the grand tradition of tiny Irish resource companies taking on far-flung & dauntingly ambitious projects! And Nevada seems as good a place as any – Mike Soden certainly thought so…
And b) Again: Same question?! Just like Mike, when I think of Nevada the v last thing I think of is oil & gas. But what do I know, let’s take a closer look – well, well, turns out the popular perception is dead…right! Nevada accounts for only 0.02% of total US crude production. Yes, you read correctly, it’s a mere rounding error. And natural gas production’s not even worth talking about.
But so what, faint heart never won fair lady… What’s US Oil actually discovered to date? Well, in Mar-2011, the company released a preliminary estimate based on a report from Akrawi et al. This identified Total Prospective Resources of 187 mio barrels, which boiled down to Expected Probable Recoverable Reserves of 47 mio barrels. Nice! But doesn’t that name seem familiar? Well, yes… Dr. Karim Akrawi’s a current/former director of the company(s) providing state-of-the-art technology/surveying services to US Oil. He was subsequently appointed US Oil’s Exploration Manager in Jun-11, received shares in lieu of payment shortly thereafter, and was then appointed a USOP director in November last year. Er, right…
I hate to be a fuddy-duddy, maybe it’s best to wait for the Competent Person’s Report (CPR). Hmm, I guess investors are still waiting… Only a cover letter to the CPR appears to have been published by the company. This was authored by Forrest A. Garb & Associates in Feb-12 (prior to any drilling by US Oil). It details a gross hydrocarbon estimate of 189 mio barrels of OIIP (Original Oil in Place) and, fortunately, it confirms a higher recoverable oil estimate of 67 mio barrels. The report goes on to stress:
‘Due to the lack of discovered hydrocarbons in the prospect area, it is FGA’s opinion that estimated hydrocarbon volumes should be classified as Prospective Resources and, as such, carry a low level of confidence.‘
Right oh…but let’s focus on the silver lining here. 67 mio barrels of recoverable oil, that’s bloody awesome..! Let’s consider how truly awesome this discovery really is: It significantly exceeds the entire 51 mio barrels (p. 134) of historic production in Nevada. Seriously! And boy, that production is pretty ‘historic‘ – over 90% of those barrels were pumped pre-2002! And it dwarfs Nevada’s largest ever field: Grant Canyon, with a cumulative 21.2 mio barrels pumped. Trap Spring (in Railroad Valley) is now the leading field, producing over 40% of Nevada’s total current output, and v representative of the state’s production history:
A chart of wells completed in Nevada tells a similar story, and confirms the heyday for Nevada oil & gas was back in the late ’80s/early ’90s:
Yes, that’s how amazing this new discovery is for Nevada! The CPR must have been like a goddamned miracle for them (and for US Oil & Gas too). At Nevada’s current 427 K barrel rate of total annual production (painfully eked out at a measly daily average of 16.5 barrels of oil per well), it promises 157 years of brand new recoverable oil production for the state & the company. Praise the Lord!
Even more exciting, US Oil just completed drilling its first well (Eblana #1) about three months ago. Perusing a wide variety of drilling reports, I think it’s fair to say a net pay reservoir interval of 100 feet plus would be an excellent result. Separate/cumulative net pay intervals well in excess of this would be an absolute bonus, of course! And that’s why US Oil’s drilling results to date again illustrate how amazing their discovery is! Drilling to a depth of 8,550 feet, they encountered nine potential reservoir intervals with a cumulative 1,100 feet of net pay. Wow!
You know, going back some years, I guess nothing would have led me to believe such an amazing discovery would occur in Nevada. Then again, a 100 years back, I’d scarcely have believed a city like Las Vegas would spring up in the Nevada desert – full of neon, gambling, dreams, and hookers..!?!
Hats off to Brian McDonnell, US Oil’s CEO. It’s been a difficult & lonely road he’s been forced to travel…
All of his original co-directors (Liam McGrattan, Nial Ring, James Guiry) have departed the company, or even this mortal coil. Most have since disposed of their shareholdings also (inc. 1 mio shares gifted back to the company for nil consideration..!?). Since then, he gritted his teeth, and added Chris Comerford (of ex-Greencore fame) as a director. Only to have him depart also… This has kept McDonnell pretty stretched over the past couple of years – for quite some time, he rather bizarrely took over the duties of Finance Director, concurrent to being CEO! At least there’s been some reward for him along the way, with a 25% reduction in his personal shareholding.
Finally, 3 new directors were appointed (Peter Whelan, Karim Akrawi, Andrew Harwood) at the end of last year. Harwood’s firm, CFS Independent Ltd., had previously reported a 4.5% stake in USOP. Paul O’Callaghan has since replaced him (appointed as Finance Director). His biography puzzled me, detailing he was ‘…more recently Financial Director & CEO of FBD Holdings plc.‘ I’m an FBD Holdings (FBD:ID/FBH:LN) shareholder, but this didn’t ring any bells… Turns out it’s almost a decade since he was CEO of FBD!
McDonnell must be feeling slighted by some of his shareholders too… I’m sure he expected billet-doux for his efforts to date - instead they’ve rewarded him with EGM resolutions and solicitor’s letters! In fact, digging deeper, all departed directors (except Harwood) were actually voted off the board by the shareholders! Or they resigned in the face of EGM resolutions to remove them… On the other hand, shareholders keep bidding the shares higher & higher – clearly a real love/hate relationship!
To add final insult to injury, PLUS abruptly suspended the company’s listing in Aug-11! They then left things hanging for 8 months, before finally deciding to de-list US Oil in April this year. Wow! The reason given by PLUS for the suspension was a ‘disorderly market‘. And nothing much else has been said about it! Smart move, some people love to dwell on stuff like that… Far better to just sweep it under the carpet, and move on! It’s pretty exceptional to see a suspension, investigation & de-listing on PLUS – it certainly looked like the end of the road for US Oil shareholders…
So, no surprise they celebrated so exuberantly when US Oil bounced back on a new platform – GXG Markets, a regulated Danish (electronic) market focused on small/medium sized companies. US Oil began trading on the OTC level in April, and graduated to the MTF section of GXG last month.
Duh, I’ve probably spent far too long on the company’s story & fundamentals! Shoulda just focused on the share price – it offers even greater excitement. And as the textbooks confirm – markets are efficient… The share price tells you everything you need to know – just ride the momentum! Very little commentary needed here – let me just present a little timeline:
Jan-2010: At GBP 5p, raised a net GBP 239 K. Listed on PLUS, with 26.6 mio shares shares outstanding, and a GBP 1.3 mio market cap.
Jun-2010: At GBP 5.5p, raised a gross GBP 280 K.
Nov-2010: Company confirmed ‘an estimate of potential reserves that could exceed 25 million barrels of oil‘.
Mar-2011: At GBP 36p, raised a gross GBP 2.1 mio. Signed Heads of Terms to put in place a secured convertible loan facility of up to $5.1 mio (GBP 3.2 mio). Confirms ‘Expected Probable Recoverable Reserves…are 47 million barrels.‘
Jul-2011: At GBP 64p, raised a gross GBP 2.5 mio.
Jul-2012: At GBP 400p, raised a gross GBP 1.1 mio.
13-Sep-12: Now trading at GBP 620p (& indicated at $10.00 OTC in the US, ticker USLGF:US). US Oil now has 41.7 mio shares issued (& 0.7 mio treasury shares), for a net 41.0 mio shares outstanding, and a GBP 254.0 mio ($410.1 mio) market cap.
In the past 2 months, since the last placing, the share price is up over 50%. Versus the placing prior to the PLUS suspension, it’s up over 850%. Of course, that’s nothing compared to the original IPO price - the shares are up over 12,000% since then! The market cap’s scaled up even more impressively from GBP 1.3 mio – a 19,000% increase! And these increases are exponential, with 95% of the cumulative price gain coming in just the past 18 months!
But so what?! The company started with a dream, and a coupla hundred grand. It’s a v different, and far more amazing, beast today – with 67 mio barrels of recoverable Prospective Resources surely now in the bag? Hence the rally… But that info’s been known for some time now: It’s really rather amazing the share price has increased over 1,600% since March 2011, vs. a mere 43% increase in the corresponding recoverable oil estimate.
Really, what analysis is needed here? This company, this share, is red-hot! Haven’t you read the bloody message boards? It’s going to the moon! Every day you hold off, the share price is likely to vault even higher..! Analysis is for losers anyway, sentiment & savvy trading are far more important. And we’re looking at a new paradigm here anyway – for Nevada, and for US Oil investors! This time is, most definitely, different… How on earth do you put a price on that?!
If US Oil manages to pump out those 67 mio barrels, it’s worth 6.6 billion dollars. Yes, that’s 6.6 BILLION DOLLARS, MY FRIEND..!#$#%!!!
Except, it’s not….
Except…it’s like f**king a fattie…
It’s getting late, everybody’s leaving – but the drinks & laughs are going down well, there’s plenty of flirtation, she’s got a pretty face, and she’s positively nailing that alcohol diet (you reckon she’s lost 40 pounds already tonight…). Great, she’s taking you home! Except… Except… You’re tempted – but no matter how you spin it, delay it, close your eyes, or simply lie about it, you know the truth. There’s scary stuff coming – that you may not want to face, talk about, or even remember. Ever!
Sure, share price & performance are absolutely amazing… But what’s US Oil really worth? Well… There’s a huge spectrum of opinion on that. At the extreme, we unfortunately have the nutters who, at best, laboriously calculate out the (multi-) billion valuation upside for this type of company:
Resources * Current Commodity Spot Price = Intrinsic Value
(Intrinsic Value – Mkt Value) / Mkt Value * 100 = Upside Potential %
This method a) inevitably highlights every single resource stock’s dirt-cheap, and b) is pretty irrelevant for genuine valuation purposes. It also prompts far too many frenzied investors, and their peers, to indulge in further idiotic buying…
An oil company, for example, is only worth that kind of value if you magically pumped every single barrel of reserves/resources in a single day, at zero cost, and sold them immediately. Even if the baby Jesus came down to help, I’m still not sure you’d manage that particular feat..!
I prefer long-established & reliable rules of thumb for valuation. These are easily confirmed in the general market, and via oil and gas M&A transactions. They recognize the geological uncertainty attached to all resource bodies, the possible political risks, the business risks, the multi-year/decade timescale, the significant capital/operating costs, the cash/debt/share dilution required to fund them, the volatility of commodity prices, etc. This discounting of time, price & risk often boils down to an underground value that equates to about 10% of the above-ground market price. And that’s just for proved reserves. For example, an average M&A benchmark of $10 (maybe $12) per barrel of proved reserves is relatively easy to ascertain.
But US Oil has zero proved reserves. And it has zero probable reserves. What it has are ‘…classified as Prospective Resources and, as such, carry a low level of confidence.‘ How do we deal with this? Based on my observations, a 50% haircut for probable reserves is about right/average as per the market, to reflect significantly increased geological & economic risk. On a v good day, I might assign a 75% haircut to possible/prospective reserves/resources. We also need to factor in cash, annual cash-burn, and debt. But Nevada leases are dirt-cheap, and drilling only commenced 3-4 mths ago – so, counting cash on hand/raised, vs. annual expenses & projected drilling costs, I reckon Cash will soon net out around $2.3 mio:
(67 mio Barrels * $10 * 25%) + $2.3 mio Net Cash = $169.8 mio / 1.6147 = GBP 105.2 mio GBP / 41.0 mio Net Outstanding Shares =
GBP 2.57 Intrinsic Value per Share
At this point in US Oil’s development, and based on the facts, this represents a v optimistic valuation. On a regular/bad day, I’d probably assign a zero value to prospective resources – which turns out to be true far too often, especially with junior resource stocks. That would slash Intrinsic Value to around GBP 3.5p per share. Shocked..?! Well, if sentiment changes (as it can, v abruptly) and investors are nervous of cash demands/dilution from the next (inevitable) share placing, no share price may be too low to hit…
Exactly the situation Petroneft Resources (PTR:LN) finds itself in… A comparison is instructive. Its proved, probable & possible reserves are a multiple of US Oil’s estimate, but sentiment’s turned & investors are fearful of further cash-raising. As a result, the share price has now been hammered by a colossal 90%! This leaves PTR, despite far larger reserves, on a GBP 30.4 mio market cap. – a mere fraction of US Oil’s GBP 254.0 mio cap. USOP now appears somewhere between 142% over-valued, to almost 18,000% overvalued..! To put it in a less scary, but equally deadly, manner:
Downside Potential: A 59% to 99% likely decline vs. the current GBP 620p share price.
All I can say, finally, is: Caveat Emptor!
Even the baby Jesus probably couldn’t help here if you’re an investor…