Touchstone Exploration (LSE:TXP), an oil & gas exploration and production company, is currently listed on the Canadian TSX. On Thursday the company announced it is coming to AIM on 26 June. It is well known that the TSX is nowhere near as liquid as AIM, so the company no doubt hopes its dual listing will lead to a rerating in its share price. Some obvious comparators suggest this could well be on the cards.
Touchstone’s admission price to AIM will be 7.25p, a 30% discount to its prevailing share price on the TSX (allowing for currency conversion, assuming CAD$0.17 per shares). The company is going to raise £1.45million, by issuing 20million new shares, causing it to have 103million shares in issue. Assuming a mid-price of 7.25p, this suggests Touchstone will have an implied market cap of about £7.5million. By comparison to some of its soon-to-be peers on AIM this valuation could look attractive.
Touchstone is one of the largest oil producers in Trinidad. Its latest production figures show it is producing c.1,300 barrels of oil per day (“bopd”) and that its latest 2p reserves are 11million barrels of oil (“MMbbl”). These figures are an obvious place to start analysing the potential of the stock, since there are already three other oil production companies on AIM with operations in Trinidad. These are Trinity Exploration (TRIN), LGO Energy (LGO) and Range Resources (RRL).
At least one of these stocks is likely to provoke a sharp intake of breath from serious AIM investors, but the fact remains they provide some useful benchmarks against which to judge Touchstone.
The following three tables provide a simple peer review of the four companies. Data for Trinity and LGO is drawn from the companies’ latest annual and quarterly reports. Data for Range is drawn from its latest half yearly and quarterly reports, while the data for Touchstone comes from yesterday’s admission document.
Starting with the four companies’ market caps and Touchstone has both the lowest valuation and the tightest share structure:
|Company||Share Mid Price||Shares in Issue||Market Cap|
|Range Resources (currently suspended)||£0.0034||7,595,830,000||£25,825,822|
Touchstone’s comparatively low valuation becomes particularly interesting when one starts to compare its daily production figures to its peers. Based on its current run rate of 1,300bopd, this implies the market values each of its barrels of oil produced per day at £5,572. This is less than a third of the value the market assigns to Trinity (arguably the highest quality company of Touchstone’s three peers):
|Company||BOPD Produced||Market Val. per flowing barrel|
|Range Resources (currently suspended)||567||£45,548|
The market discrepancy in valuation of Touchstone versus the three other AIM-listed Trinidadian oil producers continues when one compares the comparative valuations of the four companies’ proven oil reserves (“2p”). Here the market currently assigns a value of 68p per barrel to Touchstone’s 11MMbbl of proven reserves, whereas it assigns a £1.03 valuation to LGO Energy’s 11.79MMbbl of proven reserves:
|Company||2P Reserves||Market Val. per 2p barrel|
|Range Resources (currently suspended)||24,400,000||£1.06|
Of course, to any peer review there is always a flipside. Just because there is a marked discrepancy in market valuation between two or more companies, this does not necessarily mean one company is undervalued. The other company or companies could be overvalued.
With this being AIM, that is always risk, but what catches the eye about Touchstone is that is producing oil at a relatively quick pace, from decent looking reserves. This suggests the company has potential to generate meaningful free cash flow in the near term.
My next piece will assess Touchstone’s business plan.
The author of this piece has subscribed for shares in Touchstone’s forthcoming fundraise.