Commercial Oil Production within reach for Africa Hydrocarbons & Dualex Energy?

The “fruit flies” have finally showed up but it took longer than expected! The first time I bought DXE & NFK was back in April where I mentioned the part about the fruit flies:

“In the near term, I don’t expect the share price to go anywhere especially after the recent financing. However, once the drill bit starts, my BET is these odds will attract speculative investors like a ripe rotten banana attracts fruit flies.”

Both Trades were subsequently closed profitably and I bought back in finally in Mid-May for 30K shares at $0.12 of NFK. I’ve always liked the odds on this well and at the same time I knew this was a lottery ticket – it still is by the way. This is my lottery ticket for 2013 and I rode it up and down since then. But the odds have improved immensely and I added to my position following their last news release:

“The results of the pulse-neutron log are indicative of elevated hydrocarbon saturations throughout the Abiod reservoir section with no indication of having intersected a water contact. The pulse-neutron log interpretation was consistent with the other data and observations related to the wellbore.”

Suddenly, the “fruit flies” appeared! We’ve got oil, no water and a few more weeks of waiting before we know if the oil can be produced in commercial quantity.

An experienced investor who works in this field has already interpreted the news as a potential 1,000 bopd producer! The market seems to be pricing in commercial production as well.

So we have a dilemma now, book 50% in profits, wait for the final results or wait for a higher price on speculation? I like the last option so what could mr. market price in at this point in time?

That’s a good problem to have, so I pulled some Tunisian numbers to try and set some profit targets. Chinook is a Tunisian producer with most of its production being oil, so I pulled up their Q2 and extracted this part:

CKE Q@ netbacks

Their cash netbacks on $100 dollar oil is $73 and I confirmed with John (NFK CEO) $70 per bopd is a fair amount to use – don’t you love Brent pricing!

Let’s build a quick table with potential profit targets based on the following data:

Bouhajla Block ownership:

10% ETAP (Tunisian NOC)

90% DXE & NFK (0.475 NFK & 0.525 DXE)

At 1,000 bopd NFK’s share is 0.475*900 = 428 bopd.

At 2,000 bopd NFK’s share is 856 bopd etc.

At 1,000 bopd, the cash flow is 428*$70 per bopd * 365 = ~$11M per year & $22M for 2,000 bopd.

The CFPS (cash flow per share estimate is based on 101M basic shares outstanding and not the 138M fully diluted number)

 

CFPS

2x CF

3x CF

1,000 bopd

$0.11

$0.22

$0.33

2,000 bopd

$0.22

$0.44

$0.66

3,000 bopd

$0.33

$0.66

$0.99

…and just as a reminder to myself, 0 bopd of oil results in a target price of $0.02 per NFK share!

But there’s something for sure in this hole, is it oil or condensate? Are the fractures connected to other bigger fractures? This will determine the flow rate that everybody is waiting to see!

The target prices are only theoretical as other parameters will impact the valuation. For example, how much oil is in the structure? If the test is successful, NFK & DXE will be able to estimate the size of the prize and the market will price in future wells accordingly.

There’s no need to state the obvious (but I will anyways) the upside is HUGE!  The testing will begin at the end of October and results will be known a few days later. I wouldn’t be surprised if the market bids NFK higher into the $0.20s and at this point it’s as if sellers have already gotten paid for a theoretical 1,000 bopd discovery!

The odds are definitely looking better but it’s still a binary outcome, ARE YOU FEELING LUCKY?

On a side note, you may have noticed the posting has slowed down in the past few weeks. After my full time job, the family, research & trading what little time I have for the web has been tied up supporting the launch of my wife’s online business. For the near term it might remain the same for 3 reasons: 1. Wifey needs me 2. The ROI on my time is much higher than here 3. Refer to number 1. This is all temporary as I look forward to get back to my road-map for a major overhaul of this site.

 

 

17 comments to Commercial Oil Production within reach for Africa Hydrocarbons & Dualex Energy?

  • WC

    Funny to see what you are thinking at the moment as I was thinking the same thing myself? Take a decent profit now or let it ride and hope for further upside? I’ve decided if it hits a certain price I’ll sell half, take some profit, and let the rest ride.

    Here’s hoping the hit is commercial!!!

    • Mich

      It’s a great dilemma to have, (wish I have that with MQL haha). I have a good chunk of shares so I will be selling 50% FOR SURE before the results are out. This will lower my cost base immensely and will still provide me with exposure to a commercial discovery.

      At $0.185, the 50% profit mark doesn’t look so bad, a bird in the hand is better than 10 sitting on a tree right? :)

      After that, I’m hoping for a 3,000+ bopd flow rate!

  • Like WC, I would say sell half and let the rest ride. Even a small profit is better than a loss in my eye!

    • Mich

      Absolutely agree with you, greed plays tricks on your mind where you end up building castles in the air. I will be taking my 50% profit on 50% of my shares and let the rest ride. It’s a win-win strategy especially as I consider myself to have bought more than my usual share of shares :)

  • Alex

    Thanks for this article. The question is what price/cash flow ratio will likely be used for valuation once the result is out. For a ratio of 10, even for a 1000 bopd well, the sp will jump to $1.1. Any idea what ratio is reasonable to consider for such african oil players?

    • Mich

      Alex, it’s a little bit tricky for 2 reasons:
      1. After the acquisition of Winstar, no Tunisian pure players are left to compare with.
      2. The market might also price in the size of the prize (ie estimate of recoverable boe) which would significantly increase the potential target price and skew the CFPS multiple.

      Until we get more info, 2-3x CFPS is more of a conservative guesstimate.

  • Ben

    Doesn’t ETAP take 82.5% of the profits once all costs are paid? And further, the cost recovery in a given period is limited to a max of 40% of the gross profit? I got these numbers from the NFK website. See here: http://africahydrocarbons.com/projects/psc-terms-%E2%80%93-oil

    • Mich

      Ben, It’ll depend on the R factor that comes out of that formula. At this point, I’d have to ring John for some clarification on profit expectations as I have no idea how it would impact profit per barrel of oil.

  • WC

    Well,sold 3/4 of my NFK today for over a double at .24 and going to let the free shares ride it out. Now what to do with the profits???!!!

  • WC

    Yes,getting to be that time of year for certain. Definately an idea to sit on the sidelines for a bit and pick off good buys as they bottom out on tax loss selling that’s for certain.

    It works out quite nice actually as it gives you time to get your wish list done up so should the opportunity arrive with a particular stock your DD is done and you can pull the trigger quickly if needed.

  • WC

    Hey Mich,

    You have any comments on PFI.V?

    I got in early and up nicely so far. A risky play as it’s a very small company but lot’s of potential IMO.

    Have you looked into them at all?

    • Mich

      Hey WC,

      Money has been pouring back into our sector and I’ve been trading all over the place but not in PFI. After missing the initial spike I did not follow up on it and there was no presentation to start digging. So I missed this one!

      Besides the 2 Brazeau River sections, am I missing something?

      I should have some time to mention a couple of stocks I am building a position in next week.

      Good job with PFI btw,

      Cheers,

  • Wilson

    Thoughts on the recent news? HYX is dead isn’t it?

    • Mich

      HYX is pretty much dead, the only upside for someone buying here is getting the company sold for hopefully more than it’s trading at. For those like yours truly that held it at a higher price, well it was the perfect tax loss for 2013.

  • TM

    Hey Mich,
    I’m curious to find out were your option stands with the recent complications associated with the BHN-1 well? Would consider this a new buying opportunity to add more?

    • Mich

      Hye TM,

      I got totally out around $0.25 so I missed the highs the stock after that. I decided not to push my luck and just take the money.
      I still believe the same risk/reward still stands for this well. However, given tax loss selling is at hand, there are less risky opps out there selling at a discount. I might miss a speculative run on the stock early next year but then again tax loss selling might also provide me with interesting returns come Q1-14.

      For now, I’m going to stick with the low risk fruits.

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