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:
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.
