Oil and gas company Phoenix Global Resources (LSE:PGR) was formed last August from a reverse takeover involving AIM-listed Andes Energia and Petrolera El Trébol S.A (PETSA). Phoenix aims to become one of Argentina’s leading E&P firms, launching a whopping $190m accelerated business plan last month to appraise its unconventional acreage while increasing existing production. We asked CFO Philip Wolfe about Argentina’s globally significant Vaca Muerta shale formation and how Phoenix plans to put its 480,000 acres of unconventional exposure to work and lift its shares from 31.9p.
Phoenix controls 6.5m working interest acres in Argentina containing 2P reserves of 61.7m barrels of oil equivalent (boe). It produced an average 11,070boepd last year with an average netback of $18.59/b netback in the first half of 2017 – figures for the second half are yet to be released. According to Wolfe, Phoenix represents an impressive 1.6 pc of Argentina’s total oil production [c 1% of oil & gas production], making it one of just a few AIM organisations to offer significant direct exposure to the country’s exciting growth story.
Argentina has been on the rise since the election of current president Mauricio Macri in December 2015. Macri has introduced a series of tax, labour and capital market reforms to reverse Argentina’s weak growth and sovereign debt crisis. Although progress still needs to be made, the country is now moving in the right direction- its stock market rose 77pc last year alone, making it one of the world’s top performers.
One of the primary beneficiaries of the Macri government has been the oil and gas sector. Macri has used subsidies and fiscal stimulus to encourage domestic energy production and reduce Argentina’s reliance on imported hydrocarbons. Argentina is an established oil & gas producing region, with production sitting at more than 1m boepd.
The support has turned Argentina into fertile ground for oil players. Phoenix now sits alongside operators like Exxon, Shell, Total, and BP and services companies like Halliburton, Baker Hughes, and Schlumberger. Wolfe told us that Argentina’s growing oil industry and the increasing presence of major players benefit medium-sized firms like Phoenix:
‘International businesses now have fracking crews in country, and there is an existing local rig market – so less products and services need to be imported. As more players come into the country, they bring more of the equipment and technology that is needed, which helps to bring unit operating cost down. This enhances the improving netback generated by increased production and strengthening oil prices.’
Side of beef
Argentina has the second largest recoverable shale gas resource and the fourth largest recoverable shale oil resource in the world. Key to this is the whopping 7.5 million acre Vaca Muerta shale formation. Phoenix has more than 480,000 working interest acres of Vaca Muerta exposure and has decided to focus its resources on this unconventional resource base going forward.
Vaca Muerta – which means ‘dead cow’ due to looking like a side of beef – is one of few economically producing shale oil formations outside of North America. Its current production is more than 80,000boepd, accounting for an impressive 60pc of Argentina’s 27 billion barrels of technically recoverable shale oil reserves.
As the chart below shows, Vaca Muerta has more oil, greater thickness, and higher pressure than many major US shale plays.
These attractive fundamentals are leading Vaca Muerta to attract a great deal of attention. Operators committed around $7bn of investment in 2017, $12-15bn in 2018 and more than $20bn is expected every year after that. Energy researcher Wood Mackenzie has estimated that by 2032 Vaca Muerta’s production will sit somewhere between 750,000 boepd and 1.3m boepd. Wolfe said Phoenix benefits from both the exposure to extensive un-tapped shale acreage and the government support that comes with it:
‘The US moved from negligible shale oil production 10-15 years ago to around 5m bopd today, whereas Argentina is expected to reach 1m boepd from nothing. Given that Argentina has a population of around 40m people compared to more than 320m in the US, this 1m boepd shale revolution has the potential for much greater change and development in Argentina. The Macri government understands how Vaca Muerta and the unconventional oil and gas industry can be an engine of growth that turns around Argentina’s fortunes. To help this happen, it has introduced reforms that encourage shale development.
Phoenix announced an accelerated 2018 business plan in February to develop its Vaca Muerta. It created a new convertible revolving credit facility of $160m with Mercuria and converted an existing $100m bridging and working capital from Mercuria into new Phoenix shares at 37p each. Considering Phoenix’s share price was 30p at the time and now sits at 31.9p, this deal suggests Mercuria has a great deal of faith.
The plan is for Phoenix to increase capital expenditure from around $90m in 2017 to $190m in 2018, funded from existing production, debt, and cash. It will spend some of this on advancing conventional assets and gas projects, but the majority (around $120m) will go towards developing Vaca Muerta and unconventional assets in Argentina’s Neuquén basin.
Phoenix’s most advanced unconventional project is Puesto Rojas in Argentina’s Mendoza province, which engineer W.D. Von Gonten has given an estimated resource of 1 billion boe. Following a successful unconventional well drill in 2016last year, four wells were drilled here to completed to appraise Vaca Muerta and another unconventional formation called Tight Agrio. In 2018, Phoenix plans to drill and complete vertical development and exploration wells at Puesto Rojas, using seismic data to prepare them for large-scale unconventional development. In the second half of the year, the firm hopes to drill and complete its first horizontal well and proceed with unconventional exploration and development plans elsewhere in the province.
Further exposure to Vaca Muerta comes from Phoenix’s partly-owned Mata Mora and Corralera licences in the Neuquén Province, which are near a large, unconventional Chevron operation. Pilot wells drilled at the two licences by operator YPF have been highly prospective, locating productive Vaca Muerta source rocks. Progress here is in its early stages, but Phoenix is currently negotiating with the government and other stakeholders to convert non-operated positions into operated. It also hopes to drill its first horizontal well on the Mata Mora block in the middle of the year. Wolfe said one of the primary purposes of the current drilling programme is to ‘crack the code’ of Vaca Muerta and lay the groundwork for operations and production going forward:
‘We are trying to appraise the Vaca Muerta and prove up our resource. It is about working out how to crack the code so we can drill and frack to get the most out of the resource. For example, if we drill eight wells at Puesto Rojas this year and we learn a great deal about it, then in a year or two we would be in a position to run a pilot development programme and start putting down many more wells every quarter. The more wells you do, the better you get at it, meaning you extract more production out of them at a lower cost.’
So, from where will the money for these future drills come?
Nearly 40pc of Phoenix’s 2P reserves are made up of lower-risk, mature proved producing reserves, and 28pc is made up of gas reserves. These provide a stable production base of conventional assets, and in the six months to 30 June 2017 – the period covered by Phoenix’s last results – they generated revenues of $88m and EBITDA of $15.6m. However, even with energy prices rising and an ongoing work programme set to double conventional production by the end of 2021, these revenues are unlikely to cover further sharp increases in future capex alone.
Another option is a premium listing on the London Stock Exchange- with a current market cap of £792.4m, the company is on AIM’s larger side. When Andes and PETSA merged into Phoenix last year, it said it intended to make an application to obtain a premium listing within 12 months. It claimed that this would give it better access to additional capital from both debt providers and equity investors.
However, in last month’s accelerated business plan, the firm said a move to the official list of the London Stock Exchange would be unlikely until after the one-year anniversary of Phoenix’s creation. Whatever happens, Wolfe says Phoenix is likely to have a lot options on the table:
‘If we are successful in what we are doing then we will need to and want to invest a lot more capital. Whether this will be from bank debt, shareholder debt or equity. I don’t think we are opportunity constrained; we will have to see. Investing in the future is crucial.’
He also rules out the option of farm-in with a larger operator as a way of mitigating development costs, explaining that Phoenix is happier as the master of its devices:
‘A farm-in in the future is possible, but for now, we like to be in control as operator of our assets. As a medium-sized firm, when you are the operator, you have so many millions of dollars to put to work, and you can dictate whether you go a bit faster or slower. In a JV, your asset might not be your operating partner’s primary focus, so the speed they advance at is out of your control. One of our key drivers is to consolidate acreage and operate it, especially on the unconventional side.’
Whatever decision the company makes going forward it will be under the watchful eye of a highly experienced boardroom, outlined in detail here. Most notable is perhaps non-executive chairman Sir Michael Rake, brought in following the reverse takeover. A familiar name in the city, Rake is the former chairman of BT Group and Worldpay Group. He has also been deputy chairman of Barclays and president of the CBI.
Shale I invest?
Rather than its conventional oil and gas assets, Phoenix’s future lies in the world-class, unconventional Vaca Muerta formation. Although it has a whopping 480,000 acres of exposure to Vaca Muerta and the formation’s future is encouraging, much work still needs to be done to firm up this potential up. That being said, the 1 billion boe estimate at Puesto Rojas is encouraging; if the rest of Phoenix’s acreage replicates this success, then Phoenix could offer a lot of long-term upside. The strengthening oil market and Argentina’s attractive macro backdrop are also promising.
Shale revenues and profits may be some way off, but if you buy into Vaca Muerta and Phoenix’s potential, then it could be worth having a punt before newsflow from its $190m work programme starts to flow. As Wolfe put it to us:
‘In the medium-to long-term we think we are undervalued, but we have to prove ourselves. When we start putting down more vertical wells and do our first horizontal wells and get the results from those, that could be an important catalyst. If we can secure more acreage and operatorship of crucial acreage that’s important too.’