2P Reserves, Aventine Resources, Bruce Rowan, bubbles, Cathal Friel, Cove Energy, FAST, Fastnet Oil & Gas, Independent Resources, Island Oil & Gas, John Craven, Jubilee Field, junior resource stocks, Kosmos Energy, Michael Nolan, Minco, Minmet, Mizzen Basin, Molly Malone Basin, oil, Oisin Fanning, Orogen Gold, Paul Griffiths, Petroceltic, prospective resources, Raglan Capital, Rathdowney Resources, San Leon Energy, shipping forecast, short sellers, shorting, Sterling Green Group, Terra Energy, TGISVP, Tiger Resource Finance, US Oil & Gas, USOP, value investing
I eyed up US Oil & Gas (USOP) here (‘I swear, yer ‘onor, I wuz just looking…I nevah touched ‘er!‘), and promised to return to Fastnet Oil & Gas (FAST:LN)… Ooh er, collywobbles - what’s he going to say about this one? Well, I really don’t know, we’ll just have to see where this post takes us – a reminder I never have an agenda when taking a first look at a company. My only wish is to find an undervalued & interesting company, regardless of sector or business. That, to me, is sheer bliss..! On the other hand, finding a ridiculously overvalued company is simply a fascinating glimpse of (in?) humanity. Because shorting such a stock would be all too rare for me.
And no, I don’t think shorting stocks is the inverse of good (value) investing. In fact, I can’t emphasize that enough! I believe there are v few investors with the aptitude & fortitude to regularly short stocks successfully. And there’s whole other dimensions to that skill, anyway – as I’ve noted about overvalued stocks:
‘…there’s always a chance, on their journey to oblivion, that they’ll bubble higher & longer than you might ever expect. After all, you can’t analyze irrationality, and you certainly can’t analyze stupidity…’
Right, back to the job at hand: Aah, Fastnet… That really conjures up childhood memories of the shipping forecast. ‘Specially on a stormy night. It’s amazing the drama one could wring from such rigid & clipped broadcasts. Comfortably sprawled in front of a blazing fire – half asleep before bed-time… Drifting away to the cadence of the names – Fastnet, Malin Head, Dogger. Thoughts of far-off barren rocks, mournful lighthouse flashes, giant crashing waves, and lonely fishing boats adrift in the black night, were sure to send a delicious thrill down one’s spine. Seems I’m not the only one who fell under this spell – just take a look here: ‘Influences on Popular Culture’. Here’s another fond tribute... And finally, here’s a marvelous Economist piece on the Fastnet lighthouse.
Fastnet Oil & Gas was originally Sterling Green Group (SGG:LN), a cash shell, earlier this year. In June, it announced a takeover of Terra Energy, a placing to raise a gross GBP 10 million (at GBP 11p per share), and a name change to Fastnet. This was a deal orchestrated by Raglan Capital (majority owned by Fastnet’s Non-Exec. Chairman, Cathal Friel).
The pitch here is that Fastnet may turn out to be Cove Energy (COV:LN) Part II. Directors include Dr Stephen Staley, a Cove NED, and Michael Nolan, Cove’s Finance Director. Cove’s CEO, John Craven, is also a Fastnet Adviser – he was also the former CEO of Petroceltic (PCI:LN). Paul Griffiths is another Adviser (and has since been appointed EVP of Exploration) – he was CEO of Island Oil & Gas, which was acquired by San Leon Energy (SLE:LN) (run by the inimitable Oisin Fanning). Overall, I reckon directors/employees/advisers now own about 16% of Fastnet, while a wider Concert Party (comprised mostly of directors, advisers, Terra investors & Raglan/ex-Merrion folk – see page 99) owns about 25%.
Of course, the Irish resource stock world’s v small, so there’s plenty more connections! Staley was former MD of Independent Resources (IRG:LN), and still has an 8% shareholding. Nolan currently has directorships in Orogen Gold (ORE:LN), Rathdowney Resources (RTH:CN), and Tiger Resource Finance (TIR:LN) (a Bruce Rowan investing vehicle). His ex-directorship in Minmet plc (MNT:LN) is rather alarming, but further reading reassures – he departed in 2007, before the rot set in with that piece of filth...
[I recommend you read Minmet's story. Mid-2007, it had $16.2 mio of Cash, $15.1 mio of Shares (most/all of which was subsequently converted to Cash), and $10.8 mio of net Exploration Assets. In fact, it was almost a success story at that point. But resource directors almost never reward long suffering shareholders with cold hard cash (just look at Minco (MIO:LN), a pitiful example). Instead, they prefer to piss away cash on bloated salaries & expenses, on related party deals, and on (of course) quixotic ventures thousands of miles from home!
This strategy was far too hum-drum for the scum who assembled to feast on Minmet. Far better to just nakedly rape & pillage the company as fast as possible... It becomes a little harder to trace after that - the last RNS was in 2008 & the last results were released some years back also. But it's abundantly clear that pretty much every penny has been long bled from the company & its shareholders. After a few dubious (& aborted) takeover attempts, and a name-change to Aventine Resources plc, the company's web-site (http://www.minmet.ie) disappeared a few months ago! Just another '**** you' for long-trapped shareholders (yes, of course, it's long de-listed). The story remains on this rather forlorn site - an entertaining read.
And the moral of the story? If you can believe it, the police, the SFO, the FSA, the authorities in general have all done absolute zip in response to this blatant...travesty!?! If that's the justice shareholders receive with such an egregious story, the average resource investor is just dreaming if they think they enjoy some kind of protection when money's simply pissed away, marvelous exploration assets turn to dust, and share prices collapse...]
So, what does Fastnet own? First, it’s got a 0.6% Net Profit Bonus Agreement in the Connemara licence, offshore Ireland. SLR Consulting values this at $5.3 mio, on a Best/2C basis, based on contingent/prospective resources. How does this stack up? Well, I usually assign zero value to such resources – at best, I’d peg them at 12.5% of the value of Proved Reserves. But in my recent USOP post, I caved, and v kindly opted for 25% – akin to the valuation I might, on occasion, use for Possible Reserves. Let’s model 12.5% here (noting I normally value proved reserves at an avg. $10 per bbl):
949 mio bbls 2C resources * 0.6% * $10 per bbl * 12.5% = $7.1 mio
Considering the v large & small numbers we’re working with, these figures are remarkably similar. However, considering the development history in the Connemara/Porcupine Basins, and the fact San Leon’s the ‘operator‘ here, I prefer to opt for a value of zero.
Fastnet then acquired Terra, which had three exploration licences awaiting approval from the Irish Petroleum Affairs Division (PAD). This deal illustrates how aggressively such assets are discounted: Just take a guess what price Terra achieved, based on internal estimates of up to 4.6 billion barrels of oil in place? A grand total of GBP 7.1 mio (or $11.5 mio), mostly paid in Fastnet shares! Since then, the Fastnet Basin application was confirmed as unsuccessful, but the Mizzen Basin & Molly Malone Basin licences were awarded to Fastnet.
An independent technical report (by SLR) has also been published, upping the best case in-place resource estimates to: 0.957 bio (gas case) or 2.4 bio (oil case) boe for Mizzen, and 3.6 bio (gas) or 12.5 bio (oil) boe for Molly Malone. This is obviously a huge upgrade vs. the internal estimates a month earlier when Terra was acquired for $11.5 mio. However, Fastnet’s $51.8 mio market cap. tells you how ‘highly prospective‘ these resources are currently being valued in the market.
Also, in July, Fastnet acquired Pathfinder Hydrocarbon Ventures, which has an 18.75% net interest in the Foum Assaka, offshore Morocco, licence. This is operated by Kosmos Energy (KOS:US), which had great success with the Jubilee Field, offshore Ghana. The consideration was $8.0 mio, mostly in shares. This licence is also characterized as ‘highly prospective‘.
Let’s put this all together: Wow, Fastnet’s literally got billions of barrels of highly prospective resources! I really should offer a prize to the first reader who finds a muppet boarder heroically calculating Fastnet’s really worth a trillion dollars plus..!!! But it’s really not… Whatever your opinion, $19.5 mio worth of acquisitions/resources (paid for in shares) doesn’t magically transform into multiples of that value mere months later.
Obviously, some/all of these projects could be de-risked in due course into something significantly more valuable. But at this v early stage, with 2P/3P reserves still a v distant prospect – and considering the likely exploration expense, farm-outs, cash-raising & dilution to come, I think it’s best to treat investment to date as simply a sunk cost. [Note: In terms of dilution, Fastnet's share count has exploded almost 2,500%, from 8.0 to 205.9 mio shares, in just over 3 months!] We’ll therefore fall back on Fastnet’s cash value, taking into account likely cash burn in the next year. That equates to something like:
GBP 8.9 mio Cash (post Pathfinder acquisition) – GBP 1.5 m Foum Assaka spend – GBP 0.5 m Mizzen/Molly Malone spend – GBP 0.3 m Admin – GBP 0.6 m ($1 mio guarantee payment) = GBP 6.0 mio Net Cash, and:
GBP 6.0 mio Net Cash / 205.9 m shares = 2.9p Fair Value per share
Compared to the latest GBP 15.5p closing price, Fastnet appears to have a Downside Potential of 81%. [If you violently disagree: Please note, even if we generously include the NPB value, plus total acquisition consideration paid in the last few months, that's only a GBP 10.3p FV per share - so FAST appears significantly overvalued to me, regardless]. OK, this catches us up on TGISVP – now I just have to recall/figure out how to insert USOP & FAST into my TGISVP spreadsheets for the rest of the year..?!
But wait, I mentioned being kind in my US Oil & Gas valuation…
In my USOP post, I arrived at a GBP 3.5p & a second far more generous GBP 257p fair value. To avoid confusion, note my TGISVP target was an average – that is, a GBP 130p fair value per USOP share. Versus the GBP 620p write-up price, that suggested a Downside Potential of 79%.
Since my post, the share price has fallen pretty relentlessly: Now down 23% to GBP 480p, which has wiped $92 mio off USOP’s market capitalization. Ouch! Nothing good about that – well, I suppose my suggested Downside Potential is now a slightly little better 73%! Rather worryingly for shareholders, the USOP share price is now 30% off the recent high. If you happen to be a shareholder who’s managed – heaven forbid! – to wangle some credit/margin, or a T+20 settlement, that must be really starting to hurt…
It also now leaves USOP on a $318 mio market cap, based on 67 mio recoverable bbls of prospective resources (or a max. 189 mio bbls of Oil-Initially-In-Place (OIIP)). On the other hand, we’ve got Fastnet on a $52 mio market cap, based on a possible resource of up to 15 bio+ bloody bbls?!?
I’m sorry… What, bloody what..?!
Sure, maybe Fastnet’s a year or two behind US Oil & Gas, but how on earth do you reconcile these two market caps?! Maybe they’re both overvalued – I guess that’s my analysis within the context of TGISVP. But everything’s relative, and maybe this is really a question for USOP shareholders? If they believe their company’s fairly/undervalued, well then, surely they’d value Fastnet at some huge multiple of USOP? For a smart investor, wouldn’t long FAST/short USOP be a hell of a low-risk & v profitable play? Short USOP is a bit of a tall order though… But hell, no matter how you slice it, shouldn’t USOP shareholders be selling? Consider:
a) USOP is overvalued? Sell!
b) USOP is fairly valued? Sell! Buy FAST instead – far more undervalued!
or c) USOP is undervalued? Sell! Buy FAST instead – it’s hugely undervalued!
Aaah, the topsy turvy world of junior resource stocks…