Touchstone Exploration (LSE:TXP) sounded a cautiously positive note in its first major shareholder update of 2020 after closing 2019 at multi-year highs. The Canadian oil and natural gas explorer reported on Monday 20 January how a test of its onshore Cascadura well in Trinidad and Tobago had yielded “significant pressures and natural gas volumes”.
Chief executive Paul Baay noted that the first stage production test was designed to evaluate a potential oil zone but the gas discovery instead represents “the best possible outcome” for Touchstone. Trinidad has seen a shortfall in domestic production of liquid natural gas (“LNG”) in the last five years and yet it remains incredibly important to the country’s wealth. More on that below.
This news comes off the back of a very positive period for the Canadian firm. Touchstone shares surged 60% to an all-time high of 22p in December 2019 after the company reported gas flow rates of 46mln cubic feet a day from its Coho-1 well in Trinidad. Baay said this “greatly exceeded expectations” and would double the firm’s daily production rate. Chief operating officer James Shipka added at the close of 2019 that Coho would “materially contribute to our near-term growth”.
The pressures reported at Cascadura are higher than Coho and so this could represent a significant earner for Touchstone. Add in the fact that under Trinidad’s fiscal regime natural gas is subject to low taxes, and we can see why Baay said these newest results were “extremely encouraging” for the future of the company.
Trinidad’s LNG sector has been under significant strain in recent years, so positive noises from smaller producers who are able to move quickly to capitalise on good test results will be a boon for the country’s under-pressure economy.
Atlantic troubles in Trinidad LNG market
Trinidad exported 12.4 million tonnes of LNG in 2018, but poor drilling results in its largest and longest-established plant has put severe pressure on the country’s energy ministry to find new outlets. FTSE 100 giants Shell (LSE:RDSB) and BP (LSE:BP) and are the majority shareholders in Train 1 of the Atlantic LNG export terminal, which came online in 1999. Shell took a 46% shareholding in Train 1, BP 34%, while Trinidad’s state-owned National Gas Company took a 10% slice and Chinese sovereign wealth fund CIC owns 10% as the other major shareholder.
An LNG ‘train’ is an LNG plant’s liquefaction and purification facility. The Atlantic terminal has had four trains squeezed out of it over the last two decades and industry commentators suggest this is a bridge too far. It represents 20% of the country’s entire LNG supply.
In 1999, optimism was high as Trinidad and Tobago became the 10th country to export significant volumes of LNG. In the last two decades Trinidad has seen its competitive advantage in LNG dwindle on the world stage as rivals in the form of Qatar, Australia, Algeria, Indonesia and Malaysia came to the fore with greater reserves and better infrastructure.
When signing the 20-year contract for the Atlantic terminal the Trinidad and Tobago government included a two-decade tax holiday for the British-listed conglomerates. With these generous benefits ending in 2019 and signs not all well for the facility, energy ministers have been furiously renegotiating terms.
The government now has a serious problem. LNG outputs in Trinidad hit a high of 43.5 billion cubic metres in 2010 but have fallen away in the last 10 years as depleted reserves at older fields have not been replaced. Limited feedstock and the complexity of the four-part ownership of Train 1 at the Atlantic plant has seriously hampered overall production in the last decade. In May 2019, the news went from bad to worse when BP reported poor infill drilling results at its Cannonball and Cashima fields. BP warned Train 1 of the Atlantic production facility might have to be shut altogether.
June 2019 saw crisis talks in the Netherlands between BP and Shell executives and the Trinidad and Tobago prime minister Keith Rowley, leading to a full company restructure of the Atlantic joint venture, the results of which are still rippling through the country’s LNG production market.
While its capacity is nominally 14.8 million tonnes (19.7 billion cubic metres), exports only hit 15 billion cubic metres in 2018. The fact that BP has now raised serious questions about the future viability of the Atlantic plant because of its unreliable supply of LNG is a concern to everyone in the industry. This however represents a significant opportunity for newer suppliers and smaller producers to take a strong position in the marketplace.
Looking ahead
The fact that two pretty significant discoveries have come from Touchstone’s latest explorations in Coho and Cascadura represents good news for current shareholders. The wider issues in the LNG sector in Trinidad and Tobago could also contribute to a very positive 2020 as well. In terms of pricing, the shares are holding steady at 22p but there appears to be a significant amount of upside here, and my conservative target would be 30p over the next six months.
With Touchstone fully funded from its operations as Paul Baay confirmed to ValueTheMarkets earlier this month, there is no need to raise additional capital or dilute existing shareholdings. A full report on the value potential in Touchstone is here, for investors looking for a deeper read on the situation.