With its workover programme recently reaching completion and more developments in the pipeline, President Energy (LSE:PPC) is fast approaching its goal of becoming a mid-sized Argentinian oil and gas producer by the end of 2018. Against a background of increasing oil prices and an improving Argentinian economy, President has been embarking on a transformative development programme since acquiring a large new asset and raising £6.1m at the end of 2017. The firm’s shares have risen by nearly 50pc in the last year, with investors buying into its strong management experience, significant existing production, and bold acquisition strategy. Can the company sustain this momentum?
With President well positioned to take advantage of the booming domestic Argentinian oil market, through both consolidation and the continued development of its existing assets, there is an argument is shares could be under-valued when taking a long-term view. If you are willing to stick around, President’s current 9.2p share price could mark an attractive entry point.
Eye of the storm
As it stands, President is one of the only ways for AIM investors to get direct exposure to Argentina’s economy as it continues to rapidly grow.
The election of current president Mauricio Macri in December 2015 marked a turning point in Argentina’s prospects. Since the election, Macri has focused on a series of reforms aimed at reversing Argentina’s weak growth and sovereign debt crisis. These efforts have included measures such as cutting taxes and encouraging the repatriation of money held offshore. These remains much progress to be made, but things seem to be moving in the right direction. Indeed, the country’s stock market rose 77pc in 2017 alone.
A large focus for Macri has been the encouragement of domestic energy production through subsidies and fiscal stimulus in a bid to address Argentina’s over-reliance on imported hydrocarbons. This has greatly benefitted energy firms in the country and President has recently found itself operating alongside major players like Exxon, Shell, Total, and BP. In an exclusive interview with ValueTheMarkets.com, President Energy’s chief executive Peter Levine said the company has found itself in ‘the right place at the right time’:
‘The oil majors are ramping up their activity in Argentina because it now has a forward-looking government. In the past, Argentina has been known for its boom and bust economy, but there has been a sea change in the investing environment. From an investor’s perspective, there is no clearer way of accessing this growth story. We are of scale and we are pure Argentina. There are not many ways that people can play this trend in the London market.’
Sound structure
With two large producing assets in Argentina, President’s foundations for its ambitious growth plans in the country are undeniably strong. Its Puesto Flores/Estancia Viela fields alongside its Puesto Guardian asset and combined exploration licences have whopping total prospective resources of 194mboe and 7.68tcfg.
With President expecting to see progress advance with pace over the coming years there is no suggestion that this potential is by any means pie-in-the-sky. Indeed, based on a 2P case, President expects its Argentinan EBITDA to jump from around $28m in 2018 to more than $40m by 2020, with production is expected to reach nearly 4,000boepd in the country by 2020- almost double its current level.
What’s more, the company has already laid the groundwork for many further years of operation in Argentina. For example, the business is partnering with the Rio Negro Province’s own energy company and recently received its first lending arrangement from two domestic banks worth $8m. Puesto Guardian has a 35-year production concession lasting until 2050.
Through near-term development at its current assets, President hopes to become a mid-size Argentinian oil producer by year-end. But this could just be the start of a long growth story. Many major oilers are now disposing of their non-core conventional producing assets in Argentina so they can focus on shale production. President plans to leverage its existing presence (see slide 8) and experience in the country to become a consolidator of these sites.
Levine told us: ’The firms already producing and operating here have got an advantage over those coming in from the cold. We have significant management here, the tax environment is getting better, and the opportunities are increasing as more companies are drawn in. This opens up the possibility for us to invest in conventional items being offloaded by others before using synergies and critical mass to extract more profits. President’s future definitely lies in Argentina.’
Double trouble
Recently, much of President’s news flow has been stemming from it Puesto Flores/Estancia Viela fields in Argentina’s Neuquen basin. It acquired the fields in the second half of last year and has a 10-year operating licence on them. Following a £6.1m placing in October, President completed a three-month long, four well workover programme on the Puesto Flores field, which finished in January.
Once the successful workovers have stabilised at the end of this month, President expects to be producing 1,700bopd from 20 wells at Puesto Flores. In January, the field generated between $1.3m and $1.5m cashflow with a $33bbl netback against a realised price of $64bbl.
President believes production across the two fields could reach 3,000bopd within three years. To achieve this, it will undergo a fully-funded, multi-well, in-field drilling, re-completion, and workover programme that will complete in 2021. At Puesto Flores, the first part of this programme will begin in the second quarter of this year with further workovers. The firm is then planning a development and appraisal well drilling campaign in the second half.
The business has also begun testing the Estancia Vieja field, which remains shut-in after being closed by its previous operator. Estancia Vieja was previously a prolific producer of both oil and gas, and at one stage produced over 18,000boepd. Following initial results later this month. President is planning to pilot test up to four oil wells with a more ambitious future programme due to commence in the second quarter. This will include workovers and reactivations and will be fully funded by President’s existing resources and cash flow.
Levine is happy with the progress of the acquisition so far, and told us the two fields could hold much more potential: ‘This was an excellent acquisition and has effectively ensured that President will make very significant progress this year. We are going to see some very positive EBITDA figures. It is too early to tell what contribution Estancia Viela will make, if any at all. However, we know reserves are there so it is just a matter of how to tease them out. From 2019 we expect to see drilling at both fields.’
Guardian angel
President’s other producing asset in Argentina is the Puesto Guardian Concession, located in the country’s Salta province. The company is currently producing around 600boepd from the site across five separate fields, which contain proven resources of 12MMboe with an NPV10 of more than $300m.
While this is already profitable and helping President to generate free cash flow, the firm believes that it can get production from the wells up to 1,200boepd. Not that there is any rush; its licence at the site lasts until 2050 and President has already satisfied the required financial commitment level for the work programme. This means it can wait until the optimum oil price environment before developing the fields with new wells.
Drilling of existing wells, however, is planned to recommence next year after being delayed by surface facility issues. These issues were constraining production from the site’s flowing wells and further wells have yet to be put on stream. Through drilling, President expects to finds proven undeveloped reserves and significant exploration upside.
Skin-in-the-game
Aside from its promising asset base, President boasts a highly skilled management team and impressive investor base. The company’s chief executive and chairman Peter Levine was the founder of former FTSE 250-listed firm Imperial Energy. Levine was Imperial’s executive chairman and largest individual shareholder until its $2.4bn sale in January 2009 and has also been chairman of Severfield, the largest structural steel specialist in the UK.
Through his family investment fund PLLG, Levine is also President’s largest shareholder, with a 31.9pc stake. This is an enormous amount of skin in the game, effectively guaranteeing that industry veteran Levine’s interests will be in line with those of investors.
Levine aside, President’s chief operating officer Miles Biggins worked for Shell for 14 years and group chief financial officer Bruce Martin was a senior member of staff at Fortune 500 oil and gas major Schlumberger.
The business also counts the International Finance Corporation (IFC), part of the World Bank, as one of its biggest shareholders, with a 11.7pc stake. The IFC holds President to its audited environmental, social, and governmental disciplines, ensuring it is operating to the highest standards of corporate governance. JP Morgan and Schroders also have significant stakes.
As Levine puts it: ‘The fact that we have serious institutions such as the World Bank investing in us is a badge of honour. The compliance we have to adhere to as an IFC investment is very significant.’
Presidential campaign
As it stands, President offers a very strong foothold in the strengthening Argentinean oil market. With current production of 2,500boepd in the country, the company is already more cash generative than many of its peers and has the resources to pay of its $21m debt without necessarily having to dilute shareholder value.
The firm’s fully-funded work programme is expected to bring production to nearly 4,000boepd by 2020, and with work also expected to soon resume at Puesto Guardian, short-term upside in Argentina is clear. Indeed, there is little reason to doubt the achievability of President’s goal to become a mid-tier Argentinan producer by the end of the year.
But with President looking to consolidate the assets of its larger peers in Argentina going forward, it is the firm’s long-term potential in the country that could something truly special. With the business holding plenty of operational experience in Argentina, this niche strategy could really reward investors.
President expects to generate a turnover of between $55m and $60m in Argentina this year alone and this figure is expected to rise significantly in the near future.
The last six months have seen President’s share price rise from 6.2p to 10.3p, giving it a current market cap of £109.1m. If the firm can produce news flow and deliver on its goals over the next couple of years then this bull run could well continue. If the favourable oil price environment also continues to boost the business, then this current valuation could end up looking very cheap.
President boasts a management team with plenty of skin in the game and an exceptional track record. It also has the backing of the World Bank. With this in mind, reasons to doubt is chances of success are few and far between. This means it could be well worth listening to Levine when he says that President is in ‘the best position it has ever been in’. He finishes:
‘We are very happy with our progress but that does not mean we are sitting on our laurels. There are savings to be made, margins to maintain and there is production to increase from our existing fields. Just like we ended 2017 in a significantly better financial position than we were in at the beginning of the year, we are working to make the end of 2018 even better than where we are now.’
Author: Daniel Flynn
Disclosure:
The author does not own shares in the company mentioned in this article
