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Touchstone CEO Paul Baay on why the firm will ‘absolutely’ reach profitability in 2018 (TXP)

Earlier this week, Trinidad and Tobago oil and gas firm Touchstone Exploration (LSE:TXP) released its operational update for  January and February. In a strong report the company revealed it is well on its way to meeting its profitable production target of 1,800bopd. The company has brought into production the first well of its accelerated 10-well drill programme for 2018, and with the results of nine wells still to come the company could find itself within touching distance of being profitable. We caught up with chief executive Paul Baay to discuss this week’s results and the plans for the rest of the year and beyond.

This week’s results top off a strong period of news flow for the company, which last week revealed a 20pc jump in its total proved reserves across its portfolio. This follows on from its successful four-well drill programme in 2017. So far the market hasn’t really reacted to Touchstone’s developments and the shares can still be bought for 12.5p. With results excepted at the end of March, this situation could well be about to change.

Proof of concept

This week’s operational and drilling update saw Touchstone report crude oil sales of 1,521 and 1,552 barrels per day in January and February respectively at realised prices of  $61.17 per barrel and $57.79 per barrel. A large portion of this production was generated from the four wells Touchstone drilled in 2017, which have now been optimised and contributed an average of 280bbls/d to January and February production.

This brings current field estimated production to 1,705bbls/d, well above the c.1,300bbls/d Touchstone was producing when it listed on AIM in June last year and just below profitable production levels of 1,800bbls/d. It is also just short of the 2,000bbls/d production the firm is targeting by the end of 2018.

Baay told us the four wells drilled in 2018 are the part of the update he is most proud of as they provide proof of concept of what the business is trying to do in Trinidad.

‘We built these wells up and kept everyone in the know and they have now gone from around 250bbl/d to 400bbl/d at a sustained rate. This should give shareholders a really good idea of the robust economics of drilling a well for under $1m,’ he said. ’It also shows that we are conservative when we bring the wells on. For us, it is really about reservoir management as we are in this for the long term, not just the one-month press release. Rather than reporting initial production rates, we tried to manage the reservoir and make sure we get the most from it and are able to report genuine growth. We are focused on long-term value creation.’

On course to be profitable in 2018

Touchstone’s strategy is already clearly delivering solid gains for the company, even if the market hasn’t quite woken up to the potential yet. This week’s update confirmed that, in February, Touchstone drilled, cased, and completed the first well of its 2018 drilling campaign, which has been fully funded from a placing in December and existing cash. This first well is currently in initial production and pumping at a field estimated controlled rate of 56bbls/d. If Touchstone can repeat that on an average basis across its 9 other wells of the current campaign, this would add 560bopd production at a stroke. However, if the current campaign delivers similar results to last year’s 4-well programme, then the overall production increase could potentially be double. If Touchstone is able to deliver this it would smash its 2,000bopd target before the year-end.

The question now is how long Touchstone will need to complete its campaign. There have been some recent delays, as confirmed by the company when it confirmed that its second well will spud this week following a delay of around three weeks due to some rig issues. Following drilling of this well, the rig will move on to a second location while a second drilling rig is expected to drill a further two wells throughout March and April. The company had hoped to secure the second rig sooner, but it is good news it now has access to it. This should further accelerate news flow over the coming months.

We have already written on how Touchstone should be able to hit its 2,000bbls/d target by late summer if it is able to replicate the results of its 2017 campaign, leaving plenty of potential drilling upside throughout the rest of the year. Baay confirmed this to us this week, claiming the business will ‘absolutely’ be able to reach profitable production this year. What’s more, he expects to pass through 2,000bbl/d production by the middle of 2018, with the 10-well programme expected to finish by the end of July.  With this completion coming in around three or four months ahead of schedule, Baay said it opens up plenty of additional upside drilling potential for Touchstone.

‘By having two rigs to accelerate completion of the programme, we are bringing on production earlier, which brings on cashflow earlier in the year. Volumes then ramp up, which gives us more cash to drill further wells in the second half of the year. Having two rigs operating in tandem also reduced costs by around 20pc a well,’ he said. ‘What we want to do after this programme is to continue drilling up our inventory. If we can keep these two rigs active we could drill up to 30 wells a year and, given that we have around 208 drilling locations, that gives us around 7 years worth of work.

‘If we see oil prices move to $40 then we will have to look at whether we drill any more wells, but if they remain where they are then I think we will keep going forward. This is fully funded with our current cash flow and the cash we have got on hand. About 65pc of our costs are fixed, so as we increase the volumes like we have done, these fixed costs go down dramatically per barrel. We don’t want to be in the game of issuing equity to drill wells. We obviously raised some capital up front so we could fund the programme and get it going. But at oil prices of around $60bbl, our programme becomes self-sustaining when you get north of that 2,500bbl/d production levels. You really start to create shareholder value when you reinvest cash flow on a 3:1 basis.’

Going forward

Touchstone’s core focus remains on developing production at its four onshore lease properties- Coora Block 1 & 2, WD-4 & WD-8- and it’s Fyzabad onshore property. But Baay points out that this is not all Touchstone has in its war chest, with the firm looking to increase its focus on its Ortoire exploration property in Trinidad towards the end of the year and into 2019.

He told us: ’We do have projects in the queue behind what we are already working on. We have a large exploration block on the other side of the island called Ortoire, and we are continuing to do a lot of work on that. You will hear a lot more about that area as we move toward the end of 2018 and into 2019. There are some very exciting things on that block and it is going to be our focus between 2019 and 2020.

Baay also said the company’s valuation is still lagging its peer group despite shares jumping by around 62pc since the business listed on AIM last June. However, he expects this to change over time.

‘We were able to survive $28/bbl oil without having to restructure, proving how conservative we are. The key thing is we are the new guy on the block. We are new to the London market. I have never done anything here and neither has our management team, so I think there is a bit of proving ourselves to be done. I’m OK with that and I think the numbers will speak for themselves,’ said Baay. ‘We do not want to be a weekly press release company. I know some retailers would like to see an announcement every time we see a well, but I think they need to look at what we are doing more a programme and see the potential that way.’

Authors: Daniel Flynn & Ben Turney

Disclosure: Daniel Flynn does not own shares in the company mentioned. Ben Turney does own shares in the company mentioned.

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