In our recent hosted webinar, Touchstone Exploration CEO Paul Baay gave investors an update on the firm’s latest progress in drilling operations at the Ortoire, Trinidad. Since coming to AIM in June 2017 at a price of 7.25p, the company’s share price has performed well, hitting a high of 22p in October 2018. However, recent weeks have seen something of a sell off, with the stock trading at 12.45p, last seen. This is especially surprising given what Touchstone could be on the cusp of achieving, so what is the market’s skittishness down to?
I put this question to Baay in our interview last week:
“I think it’s a combination of things. Right now every time you provide liquidity when someone wants to sell they sell into that liquidity. We saw volumes move up dramatically a few days after we made the announcement. I think number two is that in fairness the market is maybe being prudent and the market wants to see the test results, and quite frankly so do I. We’re in the ‘show me’ stage. This is a new geological concept in Trinidad, and our view is to be patient, and do this right, and go forward from there.”
In “doing things right”, Touchstone embarked on what has become a four-well drill campaign, in early August. The Coho-1 gas well was completed within budget and on schedule, with the business announcing “positive” initial well results in early September. Testing is now underway here and the company also moved the drill rig to commence operations at its first conventional oil target at Cascadura-1.
Interestingly, Touchstone did not announce the spudding of Cascadura-1, which is unusual for an oil & gas company in this market. I pressed Baay on this point:
“We decided early on and disclosed this in the releases before that we would put an RNS out when we started the programme, which was Coho-1, and we’d give updates when we had information along the way. We look at this as a programme and we don’t look at this as individual wells, and so when we have the logs down on Cascadura-1 we’ll put those results out, and when we have the test results out from Coho-1 we’ll put those results out too in a separate release. From our point of view, we’ll put out releases that have material information in them. We don’t want to be coming off as promotional where we release that we’ve spudded a well – to us that’s not material.”
What will be material is what happens next here. When Touchstone received its engineering report for Cascadura-1, it had contingent resources listed. Although the well is billed as an exploration well, it could arguably be viewed as a development well. It produced 27,000 barrels out of its top 40 feet when it was drilled in 1958, so there is known oil there and it is has already produced. However, the well was never fully explored and Touchstone intends to test a whole other sheet that was never evaluated.
Cascadura-1 has now had its surface casing put in and it should reach target depth by the end of the month. If successful, Touchstone’s long-term goal is to drill multiple development wells here. However, this will naturally be dependent on the initial result.
Balance sheet strength
In terms of Touchstone’s balance sheet, one item seems to have been overlooked by the market; namely a $5m VAT repayment that is due.
The government of Trinidad & Tobago published its budget last week and maintained its previous VAT policy. Although Touchstone cannot predict exactly when it will receive the amount owed to it, the additional funds do lend strength to the company’s funding position.
As a cash generating organisation and with a long-established credit facility, Touchstone is well positioned to execute its plans. The company’s goal is to fund its Ortoire exploration programme through cash flow. It can be flexible in how quickly it drills the wells here as conditions and cash permit.
At the end of last quarter Touchstone had around $7 million in cash and Coho-1 came $200,000 under budget at $2.8 million. In addition to this, the firm produced $3.6 million of free cash flow in H1, but it is clear that the $5m VAT repayment will provide a big boost to its coffers.
At 12.43p, Touchstone’s market cap is £20m. With results to come from testing at Coho-1 and drilling at Cascadura-1 over the coming weeks, there is plenty of scope for positive upside. This is despite the challenging market environment. Touchstone’s Ortoire exploration campaign has the potential to introduce significant blue sky potential and if the firm follows through on the initial positive results at Coho-1 then a long-awaited rerate in share price could be on the cards.