When it comes to undervalued oil and gas producers, you don’t have to look much further than Touchstone Exploration (LSE:TXP; TSX:TXP).
The firm has been producing oil in Trinidad and Tobago since 2010, going public on the Toronto Stock Exchange in 2013. It joined London’s AIM market four years later, with an opening price of 8.5p.
Repeated good news from Touchstone’s prospects has seen trading volumes rise consistently. The TXP share price has consolidated on steady volume, with plenty of buying support around the 31p mark. This has lent the Calgary business a current UK market cap and valuation north of £56 million.
Touchstone is a high-producing company making significant revenue, and it is now at a large enough stage to attract the attention of institutional and wealthy private shareholders.
Huge gains in Trinidad
The Canadian oil and natural gas developer went off like a rocket in December last year, spiking 60% in a day to 21p when it announced a significant crude oil discovery at its Cascadura-1 well in Trinidad.
At the time, chief executive Paul Baay said it was a great find that “far exceeded” any pre-drill expectations and was monumental enough to “establish a new development stage for onshore drilling in Trinidad.”
These were big words at the time. But Baay’s predictions are ringing true.
At the same time, Touchstone reported gas flow rates at its Coho-1 well of 46mmcf/d — results that would double the company’s daily production rate. However, these results would soon be dwarfed by the results at Cascadura-1, with final testing in March 2020 delivering a combined average of over 10,600 boepd.
With the world still in lockdown, most offices remain shut. But there is much to look forward to at Touchstone in spite of such delays.
Across its Ortoire block, the firm has several producing wells in play. Cascadura and Coho have already given the firm a great base with which to work.
The major news on 5 May that brought investors flocking to the table was a Framework agreement signed with the National Gas Company of Trinidad and Tobago (NGC).
Speaking to ValueTheMarkets, Baay noted:
“We’ve agreed to make it a depletion contract. What that means is that any of the gas that’s found on the [Ortoire] block will get sold to NGC and in exchange for that, they will build all the pipelines in gathering systems for that gap in production.
A key document will be produced over the next month, Baay says. This will describe pricing, time, and any deductions necessary. Both sides want this deal done quickly, before the end of May.
So, what’s next?
“We’re still in lockdown until 15 May, so, from an operational point of view, we’ve still been able to produce,” says Baay. “We haven’t been able to pull the recorders [pressure gauges] at Cascadura, so we had to come up with a plan B: we’re going to drill Chinook.”
Drilling at Chinook should be started by Q2 2020, Baay told us.
Baay has said previously that the structure at the Chinook well — about a mile south of Cascadura on the southern edge of the island — looks to be four or five times larger than the formation at its neighbouring well.
If Chinook turns out to be anything close to what came out of Cascadura, it’s going to be a booming year for Touchstone. It would add heavily to 2021 production, too.
Favourable tax conditions in Trinidad and Tobago have also given Touchstone a windfall, along with the fact that the government is highly motivated to source new producers after 20 years of dealing with supermajors Royal Dutch Shell and BP with their aging wells and faltering LNG production.
Gas prices strong
How have gas prices performed in Trinidad, then?
“They’ve held up fairly well,” Baay tells us. “Most of them have a fixed two-year term.”
So that means steady revenues. But there is another thing to consider, says Baay:
“They’ve built all these LNG facilities and they built all these other petrochemical facilities all along the USA Gulf coast. They’re counting on really cheap gas prices. Well, now the gas price is moving up. So, it’s pushing all those product prices up around the world, which is a benefit to Trinidad. So, I think we’re in a pretty timely place. I don’t think we’re going to see higher gas prices than what we were looking at before in Trinidad, but I think it puts a really nice little floor on them for us.”
And there remains a severe shortage of gas in Trinidad and Tobago, Baay explains.
Experts believe it may end up being the case that between 30% and 35% of all natural gas production is curtailed.
This, of course, is very encouraging in the medium-term for Touchstone.
“We’re actually seeing really strong prices in the US for natural gas, which flows through to strong world [natural] gas prices.”
Touchstone is actually sitting on $13.5 million in cash and has no debt payments due until January 2021. That puts it in very good shape to come out of the Covid-19 lockdown crisis in a strong position.
Year-end results published on 26 March 2020 highlighted how well Touchstone has fared since the incredible oil demand destruction brought on by the coronavirus pandemic and the walloping of global oil prices that for a brief moment turned crude oil futures negative.
Baay reported how production was up 6% over the previous year to around 1,825 barrels of oil per day. One key point here is that Touchstone didn’t have to drill any extra wells in 2019 — keeping production flat at a low level of capital expenditure.
But the bonus from discovering both natural gas and oil across the Ortoire block shouldn’t be understated. The Touchstone CEO explained:
“At current oil prices, we basically break even. And then what happens is these gas wells are just going to be the additives to it. So, all the cash we’re sitting on will be used for the capital programme.”
Many oil explorers and producers have been shutting up shop, desperate to preserve every last scrap of cash so they have a hope of being able to start up again once lockdowns are lifted.
Not so with Touchstone.
It knows what it has in front of it. And it now has an agreement for the country’s government to buy its gas.
Things are looking good. Very good.