Following a significant change in strategy last September, shares in oil and gas investor Reabold Resources (LSE:RBD) have risen considerably from lows of 0.3p to their current 0.7p. Investors have responded well to the business’s decision to invest solely in European oil and gas projects, which has seen it take large stakes in UK-based Corallian Energy and Romania-focused Danube Petroleum. With both Corallian and Danube on the cusp of drilling key assets and Reabold lining up its next suite of investments, we spoke to the firm’s co-CEOs ahead of what could be a transformational period of newsflow.
Sachin Oza and Stephen Williams were hired as Reabold’s co-chief executive officers last October to assist with the launch and implementation of its new, focused strategy, which was announced just days earlier. The pair have both worked in the energy sector for more than a decade and both worked at M&G as investment analysts.
Previously, Reabold had focused on buying interests in exploration and producing projects in the natural resources sector across the whole world. However, under Oza and Williams, it is now focused solely on investing in oil and gas projects and the focus so far has been in Europe. Oza and Williams tell us their chief focus is generating returns for shareholders by closing the gap between asset quality and share price performance that has arisen among early-stage oil & gas players in recent years. As Williams put it:
‘At our heart is how you turn an excellent asset into positive share price movement. As investors, we saw company managers uncover a great new resource only to have their share price collapse soon afterwards. That is very frustrating, and we want to measure our success against positive returns to shareholders.
To do this, the pair focus on the appraisal part of the oil & gas value chain. This period tends to be lower risk than early-stage exploration but offers more potential upside than the development & production stage. The pair believes that investing in an undervalued asset at this point can provide a catalyst for its progress, leading to an extreme appreciation in its perceived project value over a short period.
For a project to qualify for investment, it must be technically de-risked, close to existing production, and geopolitical stable. Financially, it must be likely to deliver attractive returns at high commodity prices while providing protection when prices crash. It must also look undervalued and be able to develop over a short time frame. Williams tells us that investing in an operator instead of becoming a JV partner in a field minimises costs for Reabold while giving it some degree of control over capital allocation:
‘Reabold delivers capital to projects that require an appraisal well to take them to the point of being very readily valued in both industry and capital markets. The funding we provide must go towards the activity that gets the project to that point. To ensure this happens, we can establish ground rules when we invest to ensure our money gets spent in the agreed way. If it goes well, then we can look at making further investments after this.
‘Furthermore, as an investor, we avoid the issue of being cash-called as a direct minority stakeholder in a licence. Small E&P companies sometimes take part in a successful drill only to get called to help with the funding of further activity, placing them into financial distress.’
Reabold was keen to make swift steps forward after announcing its new strategy last year, raising £4m in September and £1.8m in October to invest in new projects. Shortly afterwards, in November, Reabold invested £1.5m in UK oil and gas firm Corallian Energy, giving it a stake of just over 30pc in the business.
Reabold and Corallian agreed that the funds would primarily be used to fund the drilling of a well at the Colter UK oil discovery in the first half of 2018. As the operator of Colter, Corallian estimates that the prospect contains gross mean prospective resources of 30MMbbls recoverable oil and forecasts a success case gross NPV of £255m.
Alongside Colter, the investment also gives Reabold exposure to North Sea near-shore prospect Wick. According to Corallian, which owns a 40pc stake, Wick contains an estimated 23mmbbls of gross recoverable resources.
In the wake of Reabold’s investment, Corallian has enjoyed a great deal of activity across its portfolio. In November, it announced that Upland Resources and Corfe Energy had farmed into the Wick prospect, resulting in its interest being partially carried for an initial exploration well. Then, in January this year, United Oil and Gas farmed into the Colter prospect, paying a cash equivalent of 13.33pc to earn a 10pc interest. Finally, in February, Baron Oil agreed to pay 20pc of the costs of a well at Wick in exchange for a 15pc interest in the licence, and then in March farmed into Colter, paying 6.67pc to earn a 5pc stake. Oza told us this response provided proof of concept for Reabold’s strategy:
‘Before our investment, Corallian was holding these licences for two years with no significant commercial activity. It transpired that there was genuine industry interest in both Colter and Corallian generally and our investment provided the catalyst for four more investments across the firm’s portfolio of assets. This proof of concept for our strategy will help us expand.’
The success led Reabold to invest a further £1m in Corallian in March when it carried out a raise to increase its Colter and Wick exposure to 50pc and 40pc respectively and look to begin the development of its other assets. The additional investment has taken Reabold’s total investment in the business to £2.5m, giving it a current stake of 32.9pc.
Reabold made its second purchase under Oza and Williams in December last year, investing £1.5m into Danube Petroleum, a subsidiary of ADX Energy. The investment gave it a 29pc stake in the company and the right to appoint a director to its board.
Danube is the 50pc owner of the highly prospective Parta Licence, based in a low-cost operating hydrocarbon region within Romania. The firm has scheduled a $5m appraisal campaign at the licence for H2 2018 that will see it re-drill two historical gas discoveries. These were first drilled in the 80s but did not get developed due to a lack of demand for gas and weak prices at the time.
Danube believes it can find 33BCF of prospective and contingent resources at the wells with a gross NPV of $86m in a success case. Williams told us that he and Oza were attracted to the project because the market had not caught on to the fact that the historical discoveries have significantly de-risked its potential:
‘This is extremely low-risk because of the historical discovery and the 3D seismic carried out over the wider area by ADX. We talk about investing in pre-cash flow assets, and these are typically higher risk by definition, but this is a unique opportunity. We feel like one well will crystallise significantly higher valuation on Danube’s project.’
Beyond this year’s programme, the Parta licence also contains considerable additional exploration and appraisal upside. According to Reabold, existing 2D seismic has shown it could hold total un-risked gross prospective resources of 300BCF of gas and 45MMbbls of oil. What’s more, now that they have a foothold in the area, Danube and Reabold hope to consolidate other licences in surrounding fields.
‘There is a huge amount of upside potential on the wider licence. In this area, even moderately sized historically de-risked prospects they are highly economical because the situation is very different from the 80s when the wells were drilled. We now have an extremely healthy gas market in Romania with very robust pricing. This should translate to low-cost, easy-to-drill wells with fairly fast payback,’ said Oza.
When it comes to securing funds for future opportunities beyond Corallian and Danube, Reabold benefits from a significant amount of institutional support. Indeed, the company’s biggest shareholders include money managers Miton Group (7.8pc), City Financial (6.5pc), the popular Guinness Energy fund (5.8pc), Ruffer and J O Hambro. What’s more, Reabold’s directors own a 12.3pc stake in the business, aligning their interests with shareholders.
This financial support and faith have allowed Reabold to raise cash several times over the last year ahead of identifying investments, ensuring it does not need funding once it has found an opportunity. The firm’s most recent placing came in February, when it raised £7.8m by placing shares at 0.6p each, a 20pc premium to its previous raise.
Reabold said it planned to use the money to take advantage of a portfolio of potential investments that it can execute on favourable terms in current market conditions. Although the business is yet to make an acquisition since the most recent fundraise, Williams told us that having this additional cash on the balance sheet has allowed it to make significant progress in discussions over recent months. However, as the company is not allowed to comment in detail on any deals until they complete, he added that this has also led to a notable lack of news for investors:
‘We have been able to go out and start building up to our next investment opportunity- this takes a little bit of time to get right. That means news flow is absent while we are getting those next set of investments ready to go. We have been in a sort of passive situation where we have been watching the share price moving without being able to do anything about it. We can’t talk about investments when they have not completed.
‘We expect to have a bigger portfolio than we do today by the time Corallion or Danube announce their first drill. At this point, we will have regular newsflow from our underlying projects, solving the situation we have had in the last few months where there hasn’t been that regularity of information. Reabold’s unique approach has already piqued the interest of many institutional investors, and we are entering a period of potentially transformational activity.’
Proof of concept
With Reabold having yet to publish a balance sheet since updating its strategy last year, it is difficult to get an idea of its cash burn. However, with the firm’s unique model positioning it more as an investor than a traditional E&P player, it seems right to assume that operating expenses will be relatively low. Furthermore, with the business yet to deploy the cash it raised in February into any new investments, it seems likely that it will still have a considerable amount of money on its books.
Reabold is undoubtedly a different prospect and the progress made by both Corallian and Danube following investment provides an encouraging proof of concept. The real test of whether the market is buying into the firm’s potential will be when its investment companies begin drilling wells, allowing it to put out potentially value accretive news flow.