Review following FY22 results (13/3/23)
Thesis Review: See the history notes for some context, but the companies strategy and future value opportunity remains what it always has. Namely that it finds an partner to exploit lease holdings in the TMS (Tuscaloosa Marine Shale) which has net oil reserves of 153 MMbbls. It retains skeleton operations to fund the company while it seeks a partner. The TMS region is virtually untapped and existing shale oil regions have passed peak production with reduced investment and productive leaving the TMS as the next best option for producers to exploit, it’s just a matter of time.
Value: Current operations are generating solid cash flows to pay down debt, but only allow limited capex. The value of current operations are not very meaningful, the value is in the potential value in exploiting the 300 potential well location available. This could be as much at US$12m NPV10 for each (company estimate based on US$80/bbl oil price) which is US$3.6b… how much of this “potential value” could be captured by the company is the real question. I don’t have an answer other than it is likely to be well above the current A$50m market cap of the company.
There is also the question of how it will be realised, a take over or buyout of lease entitlements would be the cleanest and quickest but probably at the greatest discount. I suspect from following the company for a while that any such deal would likely need to be at A$500m+, but that is a guess. More likely is that a strategic partnership is formed and royalties or a share of profits which would see value released over many years, beyond an announcement bump (which could be large if the likely PV of any deal is high).
FY22 Results: Oil sales of 347k bbl, down from 410k bbl last year with well declines & weather, however higher oil prices increased revenue from US$22.9m to US$28.4m. Costs increases just 3% so NPAT has moved from -US$2.4m to +US$2.0m. More relevant was cash, very good operating cash flows of +US$6.7m Vs +US$3.1m LY, they continue to pay down debt (US$1m/qtr required) with ease to reduce net debt from US$6.7m LY to US$4.2m on the way to being net cash positive in a year with solid oil prices.
Oil price hedging has crimped revenue & profit by -US$5.2m this year and -$US$5.4m last year, so as oil prices move down, there should be some favorable hedge impacts to protect the downside but only about 35% of the sales are hedged. With this downside protection, the business looks like it will continue to tick over just fine while they seek a partner to tap the true value opportunity.
Remuneration: The remuneration report is a monster at 30 pages, generally a bad sign… but there are some mitigating circumstances. Firstly as part of the banking renegotiation when Covid hit and spot oil prices went negative, significant amounts of board and KMP remuneration was shifted from cash to shares to save cash - a prudent move that may have saved the company. The second is the fact that all board members have stayed despite 33m unexercised options expiring and continue to receive significant portions of their remuneration in shares, indicates they view the future opportunity as promising!
History & Strategy Notes: The TMS region was assessed around 2010 when shale oil boomed in the US but extraction technology at the time and the availability of easier and already productive areas left it unexploited. As oil prices crashed post 2014, lease holder either went broke or sold leases at low prices. ATS was formed in 2014 and listed in 2016 with a view to acquiring TMS lease holds at heavily discounted values for potential future exploitation once oil prices recovered.
Survey work has continued to assess the reserves and production wells have tested the productivity and found them to be comparable to the main shale oil regions. New technology has enhanced production 2.5-3x compared to when initial testing was done around 2010 to 2014. Oil prices began to recover to suitable levels in 2018, but in 2019 Opec and Russia drove oil prices down in an attempt to crush the US shale industry, this dove tailed into Covid at which point the company had to renegotiate with it’s bankers (Macquarie – who also had equity options) to restructure it’s debt.
Saved by the debt restructure, cost cutting and it’s hedging program the company has mostly been in caretaker mode, waiting for oil prices to recover and continuing to seeking a partner. Exploitation of the leases on it’s own is not viable and some leases which have expired were not renewed, forcing a prioritisation, but core land positions remain at 80k acres (down from 115k in 2019) and Net oil resources at 153 MMbbls down from 206 MMbbls.