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Touchstone Exploration: A year on AIM with all still to play for (TXP)

TXP

A Teathers App Case Study

On 26 June 2017, Touchstone Exploration (LSE:TXP) completed a dual-listing on London’s AIM market at 7.25p a share, giving it a market cap of £6m. As part of this, the rm completed a fully subscribed £83,500 Live Market Bookbuild via the Teathers App. This allocation was part of a private placement that saw Touchstone raise £1.45m from UK investors to support its plans to increase production to 2,000bopd by the end of 2018 across its assets in Trinidad.

At the time of listing, Touchstone was already one of the largest onshore independent oil producers in Trinidad, producing c.1,300bopd with proved reserves of 8.97MMbbl and 208 drilling locations in its war chest. However, it hoped that a London listing would provide its stock with greater liquidity and give it access to the additional funding needed to maximise crude oil recovery across its 11 developed/ producing blocks, as well as developing its nine undeveloped and exploration blocks.

In the 12 months following the AIM listing, which has seen Touchstone raise a further £300,000 via the Teathers app as part of a £3m fundraise in December, the business has used the money it received to deliver on its plans. After nishing a highly successful four-well drilling programme in 2017, it is currently embarking on an extended 10-well drilling programme for 2018 and is on target to reach 2,000bopd production by the end of the summer, ahead of schedule. By 27 June 2018, the company’s market cap had nearly trebled to £19.4m, and its shares sat at 15p.

The progress Touchstone has made re ects the success the company has had in raising money on AIM. Private investors have had the opportunity to bene t from this by participating in the allocations offered through the Teathers App. This goes to show once again the bene ts of blending retail support alongside institutional investors in a successful fundraising strategy.

Touchstone Headline Stats

Exclusively in Trinidad
– 11 producing blocks
– Five signifcant exploration prospects
– 208 drilling locations
– Approximately 64,000 net acres

Progress since listing
– Ten new wells and 24 recompletions in 2018
– Netbacks per barrel up by 42pc to $33.53
– Drilling costs per ft down by 36pc
– Production at 1,821bbls/d

People and culture
– 76 employees in Trinidad
– 14 employees in Canada

Capital Diversity
– Dual listing on TSX and AIM
– Listed on AIM in June 2017 raising 1.45m
– Raised £3m on AIM in December 2017
– Nearly 500,000 shares traded per day on AIM

“Our primary focus in raising money was to attract institutional funds, but working with the Teathers App enabled us to expand our reach to include private investors in a balanced manner. This has also had the added benefit of helping improve awareness of our company in the secondary market.”
Paul Baay, Touchstone Exploration President & CEO

A ‘Transformational’ 2017

Aside from listing on AIM, 2017 saw Touchstone focus on a $9.3m exploration and development programme. This saw it drill two wells on its Coora 1 block and two wells on its WD-4 block as well as completing 20 well recompletions. Throughout the year, the four new wells contributed a combined average of 312 bbls/d of incremental production over 177 production days, outperforming forecasts. All-in-all, this additional production led Touchstone to become pro table at the PLC level in 2017, generating free funds from operations of $3.1m in what CEO Paul Baay called a ‘transformational’ year for activities. The scale of this progress becomes even more apparent when you dig deeper into Touchstone’s operational numbers for 2017.

It achieved average crude oil production of 1,375bbls/d, up 6pc from an average of 1,300bbls/d in 2016 and well on the way to its 2,000bopd target. This jump helped petroleum revenues rise to $32m, a 33pc more than the $24m generated in 2016. Most importantly, the company entered 2018 with a solid footing for its ambitious goals, armed with $13.9m worth of cash on its balance sheet and 42pc less debt than at the start of 2017. Furthermore, an updated report carried out earlier in the year revealed that the rm’s total proved reserves had jumped by a fth to 10,733Mbbl. Meanwhile, total proved and probable reserves have grown at a compound annual growth rate of 38pc since 2010 to reach c.18.5Mbbls.

Moving Confidently Into 2018

Originally, Touchstone had planned to drill four new wells on the Coora 2 and WD-8 properties in 2018. However, in December 2017, the business decided to increase this target to 10 wells and launch a 24-well recompletion programme to be carried out throughout the year. The schedule added new wells to Touchstone’s Coora 1, WD-4, WD-8 and South Palo Seco properties. Touchstone took this decision to increase the rate of its production growth following the success of its four-well programme in 2017. The company also argued that drilling ten wells would increase cost efficiencies and easily satisfy its lease operatorship agreement for minimum work obligations through to 2020. To fund the new wells, it raised £3m at 12.25p a share, a 6.1pc discount to its market price at the time and a significant premium to its listing price. Included in this placing was a £300,000 allocation to private investors via the Teathers app.

The extended programme began in February with the spudding of a well on Touchstone’s Grand Ravine WD-4 block. It had already drilled the rst ve of these wells by May as a result of securing a second drilling rig in March to speed up the programme even further. In its results for Q1 2018, the business said it had achieved stabilised production rates from all of these sites and was now preparing to drill wells six and seven at its Coora block. With strong production also continuing from the four wells drilled in Touchstone’s 2017 programme, overall Q1 2018 output came in at 1,543bbls/d, up 21pc from Q1 2017. Furthermore, the company also managed to realise an operating netback of $33.53 per barrel, a 42pc increase relative to the $23.66 generated in last year’s comparable quarter. Production increased even further in May to 1,772bbls/d, and by June it had reached 1,821bbls/d, breaking through the all-important 1,800bbls/d pro tability barrier. In line with these increasingly impressive results, Touchstone’s share price has risen steadily throughout 2018 to 15p as at the time of writing this case study, giving it a £19.4m market cap. As the graph shows, private investors who took part in Touchstone’s 26 June 2017 placing via the Teathers app at 7.25p- and held on to their shares- were sat on a return of more than 100pc precisely one year later. Likewise, those who used Teathers to get exposure to the company’s November 2017 placing will have seen their shares rise by more than 25pc by 27 June 2018.

Strengthing Oil Price

Touchstone’s production growth continues to be further enhanced by favourable macro conditions in the oil sector. The supply-demand balance has been restored, with the depletion of excessive inventories which now stand below ve-year averages. OPEC and non-OPEC countries have been compliant with the limits they agreed to in late 2016, and due to a lack of investment during the oil sectors bear market, additional spare capacity is likely to become increasingly restricted. This exposes oil supply, and subsequently, it’s price to geopolitical events such as the crisis in Venezuela or the recently renewed US sanctions on Iran.

Although US production has been rising at quite some pace in recent years, this growth is likely to slow due to lack of investment against continued increases in global demand. The International Energy Agency (IEA) has previously stated that if current trends continue, spare production capacity in 2022 could fall to its lowest level since 2008 when oil nearly reached $150. Touchstone sells its oil using the Brent benchmark. The company’s operating netback jumped signi cantly in Q1 2018 to $33.53 during which Brent averaged $66.8. This will again increase in Q2 2018 with Brent expected to average around $74.5, adding to Touchstone’s bottom line.

Why Teathers?

The Teathers app provides mutual bene t to retail investors and the companies they invest in. Private investors who own stocks on AIM often feel a sense of injustice at being left out of placements. Offering them the chance to participate in a fundraise can help improve liquidity in the secondary market, as genuine retail investors often talk positively across social media about their investments in companies and the opportunity to participate on the same terms as institutional investors. Genuine retail investors are also more likely to hold on to purchased stock for longer than some other funding options available.

Giving existing shareholders the opportunity to participate in fundraisings via a Live Market Bookbuild on the Teathers App can replace the need to conduct an open offer. If handled correctly, In addition to being a more cost effective alternative to an open offer, Live Market Bookbuilds can help stimulate demand in the secondary market and help boost sentiment among existing holders.

What’s Next For Touchstone?

At the time of writing this case study, a total of ve more wells are due to be drilled as part of the programme. Baay expects all of these to be completed by late July, allowing Touchstone to pass through its 2,000bopd production target by late summer, well ahead of schedule. The business will remain focused on developing production at its four onshore lease properties- Coora Block 1 & 2, WD-4 & WD-8- as well as its Fyzabad coastal property. As at the end of Q1 2018, the rm still had a cash balance of $10.4m and a working capital surplus of $3.9m. It has said that this money, used alongside cash generation from its new wells, could even allow it to extend its current drilling programme later this year to make the most of the cost reductions associated with using two drilling rigs at once. From 2019 onwards, Baay has stated that Touchstone will aim to drill 20 wells a year. To achieve this, a lot of future effort will lie in the development of two of its large exploration blocks – East Brighton and Ortoire. These sites will be crucial to Baay realising his next ambition- turning Touchstone into a 5,000bopd producer by the end of 2020. East Brighton is a 14,412-net acre near-shore block where Touchstone owns a 70pc working interest.

In its 2017 results, the company announced that it had identi ed an onshore area at the site that can be drilled horizontally to hit the primary target. With Touchstone initially committing to the drilling of one offshore well at East Brighton to secure its licence, this onshore option will be much cheaper. Touchstone also announced that it was able to reduce its $6m letter of credit relating to the permit to $2.15m and had secured a nancing facility to support the full amount. Meanwhile, Touchstone also owns an 80pc interest in Ortoire, a 35,765 net acre exploration site containing four established mixed oil and gas pools called Balata West, Mayaro, Maloney, Lizard Springs. Although Ortoire is structurally complex, Touchstone has said it is seismically well de ned, containing structural traps, stratigraphic traps, and turbidite deposits. Work at Ortoire is in its early stages, but Baay has said the rm with on the area towards the end of 2018 and into 2019. Encouragingly, a prosperous collection of three gas discoveries known as the Central Block containing 500BCF of gas lies just beyond Ortoirs’s borders. Carapal Ridge – one of these discoveries – is Trinidad’s largest onshore gas/ condensate discovery in 50 years, containing 25MMboe. Meanwhile, a nearby development called Catshill contains 30MMbbls oil and another called Navette includes 60MMbbls. If these discoveries are anything to go by, then Ortoire could house some serious potential.

Authors: Daniel Flynn & Stuart Langelaan

Disclosure: Daniel Flynn does not own shares in the company covered in this article. Stuart Langelaan does own shares in the company covered in this article.

A downloadable PDF version of this report is available by clicking here

 

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