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Market starts to wake up to Touchstone drilling programme, but shares could offer much more value TXP

TXP

Today saw Touchstone Exploration (LSE:TXP) report that it has begun its accelerated 10-well drilling programme at a previously successful site in the Republic of Trinidad and Tobago. The resources firm said it spudded the first well of the fully funded programme on 3 February. Drilling is expected to reach total depth within 10 days and production is due to start shortly after that. With 10 new producing wells on the cards, Touchstone is well positioned to reach its profitable production level of 1,800/bopd (barrels of oil per day) – just above its current production level of 1,500/bopd.

After months of being ignored by retail investors, Touchstone’s shares rose 11.7pc on the news to 1.3p. Encouragingly, volume exceeded its three-month moving average. Could this finally be the start of a long-awaited rerate of Touchstone’s stock.

Fully funded potential

Since listing in London last June, Touchstone’s shares have soared by around 75pc, having hit a high of 17p in September. This has mainly been driven by interest from institutional interest. Specifically, Norway-based North Energy Capital has regularly been buying chunks of shares and recently increased its stake to a hefty 11.1pc.

Despite this, Touchstone hasn’t yet caught the consistent attention of retail investors in the UK. Short bursts of interest have quickly waned. Indeed, when the firm posted a strong operational update with positive details of its drilling programme last month, shares fell 9pc.

Today’s announcement finally confirmed a number of the positives that Touchstone had previously put on the table, and it seems like some of AIM is starting to catch on. However, with its market cap still sitting at just £11.6m, Touchstone could have plenty more upside, especially with the current drill programme offering the potential of a significant increase in oil production and concurrent growth in cash flow generation.

According to the company the programme is expected to be fully funded by current cash balances and cash flows from operations. This follows a £3m fundraise in December. The firm has also secured two rigs for the first four wells to be drilled in the programme, essentially doubling the speed at which it will be able to deliver potentially value-creating news flow.

What’s more, the business has rather sensibly taken advantage of strong oil prices to purchase $55 Brent ICE crude oil put options effective March 1 until December 31. This will protect 500 barrels a day of production during this period, around a third of current field estimated production

Hitting targets

Aside from the profitable production estimate of 1,800/bopd the magic number for Touchstone and its investors in 2018 is 2,000bopd, its annual production target. If the latest campaign is able to replicate the results of last year’s four-well drill programme, then Touchstone could comfortably surpass this target by the end of summer.

As we reported last month, last year’s programme delivered an average production increase in November and December of 283/bopd. Total average production over the same period was 1,435/bopd. If we round these figures down to 250/bopd and 1,400/bopd respectively then, assuming the 10-well campaign delivers the same success, then Touchstone could be on course to be producing 2,025 by late summer. ((250*2.5) + 1,400 = 2,025) This is rough calculation, but it shows that Touchstone’s ambitious targets are in fact highly achievable.

Attractive pipeline

The drilling programme that commenced today represents a significant step for Touchstone that, arguably, has not yet been fully priced in by the market. However, the firm’s potential news pipeline does not stop there.

For example, in today’s announcement, chief executive Paul Baay said that ‘if conditions allow’ then he hopes to drill even more wells before the end of 2018. This is the same chief executive who has already gone on-the-record to say that he plans to build Touchstone into a 5,000/bopd producer by the end of 2020.

These goals are no doubt ambitious, but if the firm keeps going at its current pace, and the oil market continues to strengthen, then there is little to stop them from being achieved. At 13p a share on the offer, with a market cap of £16.7m, there appears to be plenty of scope for a strong rally if Touchstone hits its targets.

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