With results imminent and drilling underway, is Amerisur worth a punt as weakness continues? (AMER)

Due to an operational issue that impacted production earlier this year, Amerisur Resources (LSE:AMER) has declined by more than 30pc since the beginning of January to 14.8p. However, with the issue now resolved and a strong set of H1 results looming on the horizon, the Colombia-focused resources player could soon see its fortunes change. With Amerisur also embarking on a major drilling programme in the search for additional upside, its current £182m market cap could present a great buying opportunity.

Production problem

At 14.8p a share as of writing, Amerisur is down considerably from the 20p it sat at in May and the 25p it last placed at in March 2016. As mentioned, the business’s decline in recent months (as seen below) has been driven by a falloff in production at its 100pc-owned Platanillo-22 well in Colombia’s Putumayo basin, where it also holds additional acreage. In Amerisur’s own words, this was caused by ‘severe degradation of the cement sheath’ at the well.

Average monthly production began to fall as a result of the issue in March, but became particularly noticeable in May when it fell to 4,807bopd from 5,794bopd in April, hitting Amerisur’s shares by 14.7pc in one session. By August, the issue was resolved thanks to a successful workover. However, the firm decided to leave the well at a low pump rate pending the determination of long-term well parameters. As a result, average production has remained around the 4,800-5,200bopd level.

Expected turnaround

Based on the information Amerisur has released to the market so far this year, a potential catalyst for a reversal in its decline could be the release of its H1 2018 results on Thursday.

The firm’s monthly production updates for the first six months of this year suggest an average production of c.5,980bopd over the period. Meanwhile, according to Statista, average Brent prices in the first half came in at $70.60/bbl, which translates to $63.5/bbl when a 10pc discount is applied. On this basis, a best estimate puts Amerisur’s H1 revenue at c.$69m ($63.50 X 5,980 X 182).

Comparatively, this places Amerisur considerably ahead of where it was both at the end of H1 2017 and the beginning of 2018. In FY 2017, it reported average production of 4,857 at an average realised sales price of $50/bbl, creating full-year revenue of $92.5m. Likewise, in H1 2017, it revealed average output of 4,457bopd at an average price of $47.3/bbl, translating into revenues of $38.2m.

Moving beyond revenues, Amerisur’s 2017 results state that netbacks at $60/bbl oil are more than $40/bbl because cash costs of production and transportation come in at below $20. This low cost can be put down in part to Amerisur’s strategic OBA oil transfer line into Ecuador, which has reduced average transport costs from $14/bbl to $3.90/bbl and has reduced OPEX per barrel to $15.

Assuming the costs associated with getting the oil out of the ground and sold are fixed rather than pegged to oil prices, it seems a strong bet that the increase in Brent prices this year will lead to significantly enhanced netbacks. Given that the business’s production only enjoyed a moderate growth in H1 2017, this macro dynamic could really see profits shine in Thursday’s results.

Additional potential

At this point, many will be likely to point out that, while Amerisur may have grown in H1 2018, the firm was not hit by much of the production damage until after the results period ended. That’s as may be, but here it is worth weighing up the negative impact of Platanillo-11’s production problems on Amerisur’s share price against the potential offered by its ambitious work plans.

The firm is currently carrying out a fully-funded 2018 drilling programme at an expected cost of $61m. First of all, it will drill up to three wells targeting the N Sand anomaly at Platanillo, which is estimated to hold P50 resources of 11.4MMbo. Then it will move into the more extensivePutumayo basin, drilling two wells at Putumayo8 targeting 5.63MMbo, three wells at Putumayo 9, targeting 37.8MMbo, and three wells at Putumayo12, targeting 71.56MMbo. Finally, it will drill three wells at its 30pc-owned CPO-5 block, targeting 5.1MMbo.

The programme began at the end of August with the spudding of Pintadillo-1, targeting the N sand anomaly. Amerisur said it will make a further announcement in due course once the well has been drilled and logged. Although there are a lot of numbers to get into there, what remains clear is that Amerisur has big plans for its acreage beyond its current operations.

Indeed, as chief executive John Wardle has previously put it: ‘Our fully funded 2018 work programme will see increased drilling across our blocks, including the drilling of up to three N Sand anomaly wells further north on the Platanillo block, three new wells in CPO-5 and a further well in Put-8, all of which have the potential to substantially grow the company’s reserves and resources base.’

On top of the potential offered by this programme, in July, Amerisur announced a farm-in with Gulfsands Petroleum for a 100pc working interest in the Putumayo 14 block. The site covers 46,361 hectares and is located to the south of Amerisur’s ownTerecay block, further consolidating the firm’s strategic position in Putumayo by adding prospective acreage.

The bottom line

So, is all this potential being priced adequately into Amerisur’s market valuation? Perhaps not.

With a market cap of £182m, investors are presently valuing Amerisur’s portfolio at around £164m based on net current assets of $23m (£17.7m) as at 31 December 2017, the date of its last results (Current Assets ($61m) – current liabilities (c.$38))

These are all quite rough calculations that do not include cost of sales, and it will be worth re-evaluating on Thursday with more up-to-date financial information. However, based on our $69m revenue estimate for H1 2018, this enterprise value covers less than two years of current portfolio turnover. This figure already seems undervalued, and with Amerisur’s drilling programme also offering the potential for plenty of imminent upside across its portfolio on top of this it could soon look very cheap.

Amerisur’s management certainly appears to believe so, with directors including Wardle collectively snapping up around £230,000 worth of shares between April and May when it sat at between 15-20p. Neither does the weakness look to have shaken the faith of Amerisur’s significant institutional investors base. Indeed, Fidelity (8.6pc) River & Mercantile AM (6.3pc), Axa Investment Managers (5.7pc), Hargreave Hale (6.1pc), and Invesco Asset Management (3.8pc) all continue to hold onto large stakes.

Technical indicators lining up

We highlighted Amerisur as a potential buy at around 14p in August based on technical analysis of its share price chart. The stock is moving in a very established Falling Wedge pattern that has been forming since early 2015. Having already touched the base and top of the pattern at least the requisite five times, Amerisur also double-bottomed at 13.4p earlier this year, indicating it may be about to make a sprint for breakout.

Usually, a successful closure to the Falling Wedge pattern suggests potential upside can be equal to the height of the wedge. This would give a target of 39p, the longer-term resistance established in June 2015.

The Relative Strength Index (RSI) is also closing in on a decision with the indicator coiling up into a triangle. Previous price action suggests notable resistance along the way is around 22.5p and 32.75p. With the company’s fundamentals appearing to validate a trend reversal, and the wider oil market appearing very buoyant, now could be the time to consider Amerisur for exposure to the sector.

Authors: Daniel Flynn & Stuart Langelaan

Disclosure: Daniel Flynnr does not own shares in the company mentioned in this article. Stuart Langelaan does own shares in the company mentioned

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