Touchstone Exploration TAB.V 0.17 [-0.01] was presenting in Montreal last week where I had the pleasure of attending and meeting with CEO Paul Baay and COO Roy Bryant. Touchstone is a junior producer with about 2,000 barrels of oil from the island nation of Trinidad & Tobago. I found the story interesting so I thought I’d share it with you.
Trinidad is considered the Detroit of the Carribean islands but it’s more like the Nigeria of the Caribbean because of its resources. The island is flush with oil.
This shouldn’t be surprising at all given its geographic location, just 11 km north of Venezuela. Venezuela boasts the second largest proven oil reserves in the world, 211 billion barrels. The island’s geography is simply an extension of the East Venezuela Basin Provinces which holds ~11.9 billion barrels of oil.
But contrary to Venezula, Trinidad encourages foreign investments in its petroleum sector as it seeks to reverse the decline of its domestic oil production. Trinidad’s oil production dropped below 92,000 bopd in 2011 from 110,000 bopd in 2010.
It’s no surprise the petroleum profit tax has been cut from 50% to 35% last year. Oil and gas exports represent more than 40% of GDP and 80% of total exports.
In my opinion, the government’s open support of the industry reflects low political risk of operating in this country.
Trinidad has been an oil exporter since 1910 so the country comes with the proper infrastructure including an underused refinery with 175,000 bopd capacity.
Touchstone has recently acquired Primera Energy (TSXV-PTT), a smaller Canadian company operating in Trinidad. ProForma, Touchstone now produces about 2,000 bopd, holds $26 million in debt and has about 9 million barrels in proved + probable reserves.
Not surprisingly, the company is trading at a significant discount to NAV. The NPV10 of the reserves produce a net asset value of $2.30 per share net of debt. That’s based on 139MM basic O/S.
The company has 11 producing properties totaling more than 10,000 net acres, 7,000 net acres of exploration properties and 26% working interest in 2 offshore exploration blocks for a total land base of ~23,500 net acres.
Touchstone has an inventory of 130 locations that could potentially add about 7,000 bopd. On-stream costs of below $12,000 per barrel (the cost of bringing a barrel of oil on production) – an excellent number if you ask me. No fracking is involved and the geology supports multi-zone potential at varying depths.
The realized price of oil is slightly above WTI, roughly a 2% premium so the operating netback comes out to more than $55/barrel.
However, the profit quickly drops to $12 per barrel after accounting for G&A and income taxes. Combined, that’s more than $40 per barrel, a good chunk of change. This market doesn’t get too excited about these netbacks which partially explains the discount to NAV.
This means the company is cash flowing $2M a month at 2,000 bopd. The wells cost on average from $0.6M to $0.8M to drill complete and tie in. Touchstone can drill 2-3 new wells per quarter adding about 400 bopd of production.
These wells enjoy a low decline rate of about 20% in the first year and payout in less than a year.
The company’s netbacks right now are not exciting but they are growing with production since general and administrative expenses are expected to remain fixed. According to the CEO, they will be able to increase production to 3,000 bopd in 2013 by drilling only from cash flow.
That would double the quarterly cash flow and substantially increase the profit per barrel from $12 to $17.
However, the biggest issue here is not security or regulatory, it’s the price of oil plain and simple. The company is not hedged which means its cash flow will take a hit if prices correct substantially. If the realized price of oil drops to $70, net-backs would end up in the $7-$8 range. (The royalty and income tax rates follow a sliding scale based on the price of oil.)
Touchstone is planning on hedging some of its production for next year.
At the end of the conference, I asked Paul what his exit plan was and he was clear about it: Sell out to bigger fish or spin a dividend. I like it when the CEO isn’t emotionally attached to his job, that’s usually where the maximum upside lies.
As for the dividend, it would be more of a 2014 event because the plan for 2013 is to lower the debt (current D/CF is >3.3x). The offshore blocks are actively being marketed by the company. According to Paul, these blocks may fetch anywhere between $10 and $15 million dollars. Divesting these assets will be the key to a healthier balance sheet – and to the dividend.
What do you think of TAB?