|Shares Out. (in M):||394||P/E||0.0x||0.0x|
|Market Cap (in $M):||221||P/FCF||0.0x||2.8x|
|Net Debt (in $M):||-70||EBIT||0||170|
|TEV (in $M):||151||TEV/EBIT||0.0x||1.8x|
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Iona Energy (INA CN)
Iona Energy is a Canadian-traded developer and producer of oil and gas properties focused in the North Sea. The management team has a proven track record of development with the three founders being original founders of Ithaca Energy. Iona is off the radar, trades at a huge discount to its proved reserve value, will be cash flow positive early in 2013 and is opportunistically executing new deals to continue to grow its reserves and minimize its cash flow needs.
Iona’s business model is to acquire proven undeveloped oil properties. These properties are ideally located near existing infrastructure that needs product. Typical acquisition cost is $1 to $3/bbl. The upfront capital cost to drill and tie-in is normally around $20 to $30/bbl and the OpEx is in the range of $15 to $20/bbl.
Iona has approximately 394MM shares outstanding. At $.56 per share, its market cap is $221MM. Here is a breakdown of the total EV including pending financing deals (discussed later).
|Net funds from farm-in/out deals||(6.4)|
If you’re like me, you’ve probably been burned before investing in Canadian Juniors. However, companies such as Mart Resources and Coastal Energy which I initially wrote-up on VIC several years ago at $2.50 show that money can be made in this space. The key I believe is to find companies trading at a large discount to reserves with large netbacks that are at or near production with a clear path to being cash flow positive in the near future. Iona is targeting 7,000 boepd by the end of 2013 and should see that peaking at 18,000 boepd by 2016. All in Capex + Opex costs should be sub $50 boe.
Trading at a discount to its PV-10 value – Iona’s last reserve report indicated a proved reserve value of approximately $418MM. This reserve report does not include the pending acquisition of the Huntington working interest with expected net cash flows to Iona of $500MM over the next four years (see below). Looking at 2P current reserves, the company estimates 37.8 MMboe with a PV-10 value of $1,185MM, implying a potential stock value of $2.81, 400% higher than the current price!
|Proven Reserves (10%)||18.4||MMboe||$414.8||$1.05|
|Probable Reserves (10%)||37.8||MMboe||$1,185.0||$3.01|
|Proceeds from options||$9.9||$0.03|
|Net Debt (incl pending financings)||$(87.4)||$(0.22)|
The reserve report was prepared by Gaffney, Cline & Associates, a subsidiary of Baker Hughes.
Huntington Acquisition – On December 28, 2012, Iona announced the acquisition of Carrizo UK Huntington Limited ("Carrizo UK"), including its interest in License P1114 of UK North Sea Block 22/14b including the near-producing Huntington oil field development ("Huntington"). Under the terms of the deal, Iona will have a 15% non-operating working interest plus 2.55% royalty in the Huntington field. Iona conservatively estimates Huntington has net 2P reserves of 6.0 MMbbls and is expected to begin production by the end of Q113. Ryder Scott actually estimated for Carrizo 2P reserves 75% higher last year. We feel Iona is being overly conservative and that the actual reserves will fall somewhere in the middle. The field will be re-rated at the end of April by Gafney, Cline.
Once full production is achieved, Huntington should flow net to Iona 6,000 boepd in 2013/2014 and decline steadily through 2017. Upfront cost to Iona is $180MM with expected net cash flow of $500MM between 2013 and 2017. The acquisition includes a tax loss pool of $111MM. The deal is being financed with $120MM in debt. OpEx is low at $22/boe. Additional upside may be achieved through another discovery at Jurassic with net to Iona of 3 to 5 MMBO. Initial flow test rates there were 5,000 bopd.
Iona recently completed a “bought deal” equity financing for $23,000,230 with shares issued at $.55 with a four month holding period. Iona had no plans to raise additional equity but the bankers, in order to approve the financing, required the additional equity as their production completion test forecasted a potential cash shortfall of $20MM to achieve free cash flow breakeven.
Iona’s management team is currently in London finalizing the terms of the debt financing which will include a $120MM headline facility plus $60MM in bridge financing. The deal is expected to be finalized by mid-February.
The Huntington deal is a major de-risking event for Iona. The company will have imminent huge cash flow, instead of a year from now when other wells were expected to come online plus increased reserves. Iona anticipated having to raise $120MM in financing just to complete the Orlando well. Now they get debt for a big producing asset in Huntington (with additional appraisal upside) that will pay for all their immediate development needs and more.
Huntington could easily produce 30,000 bopd, but due to a bottleneck peak production will be 25,000 bopd. This should result in a longer lived asset.
Trent & Tyne – This is Iona’s loan producing field. It is nearly 100% gas. Iona has a 20% non-operating interest, but is planning on increasing that ownership to 37.5% later this quarter. The company expected net production of 8MMscfd in January 2013, but may increase that to 22MMscfd should they elect to drill another nearby well. Drilling another low-cost sidetrack in 2014 could provide an additional 20 Bcf (gross) upside.
|Net reserves (Bcf) @ 37.5 WI||8.3||23.0|
|Net Pre-tax PV-10||$11MM||$76MM|
Orlando and Kells – These two developments are in the northern North Sea and tie back to the much larger Ninian Oil Field. These fields have a combined $1.1B tax shelter through the Small Fields Allowance eligibility.
Iona acquired a 35% interest in the Orlando development from Wintershall in March 2011 and the remaining 65% in May 2012 from the other JV partner. Chevron originally discovered the field in 1989. That well tested 2,850 Bbl/d of 32° API oil over a three-day test, on a restricted choke from the Ness formation. Due to pricing at the time of the discovery, the well was deemed uneconomic and abandoned.
Kells is a redevelopment opportunity. Iona acquired 100% of the development in January 2012. It was originally discovered by BP in 1989 and developed in 1992 with initial flow-rate of 10,000 bopd. Kells produced over 4.2 MMbbls, 6.5 Bcf gas from 1992 to 1994. It was decommissioned in 1995 due to pipeline problems and a $14/bbl oil price. Kells is expected to come online is 2015.
Opex and tariff rates are projected at $16.75/bbl for the two developments and require initial net capex of $130MM. Orlando alone is expected to flow 10,000+ bopd. The Field Development Plan approval should come in Q1 2013 and they are currently negotiating rig slots for both projects. Orlando is expected to start production in 2014.
Recently, Iona divested 25% of both developments to Altantic Petroleum as a way of reducing upfront costs and raising cash. They realized a 42% accretion over the acquisition cost.
|Kells Gas (Bcf)||4.6||28.0|
|Net reserves (MMboe)||8.4||18.2|
|Net Pre-tax PV-10||$275MM||$726MM|
There are other areas nearby that could also tie in to Kells with 1C of 9.4 MMbbls.
West Wick – Iona owns 58.7% of West Wick and they are also the operator. The expected initial flow rates are 10,000 bopd gross. The reservoir was initially discovered by Amoco in 1990 when 4 appraisal wells were also drilled to delineate the structure. Iona anticipates production in 2016 with a tie back to a nearly Chevron platform.
|Net Pre-tax PV-10||$147MM||$383MM|
Cash Flows –Once the Huntington deal closes, Iona will achieve self-funded status, the holy grail for small Canadian Juniors. Assuming Huntington comes online as expected in Q113, Iona can expect cash flow of ~$80MM in 2013. Once Orlando starts producing in 2014, Iona should be producing roughly 11-13,000 boepd. With Brent at $110, we should see at least $60 netbacks resulting in ~$240MM in operating income for a multiple of 1.3X 2014 EBITDA. Accounting for the Capex for Orlando and Kells, I arrive at a free cash flow yield of 39%. Kells and West Wick in 2015 and 2016 should keep production moving higher through 2016.
Conclusion - Iona is a very attractively priced oil-weighted junior E&P that has a near term path to profitability, coupled with large netbacks and substantial exploration upside potential. Their assets are worth multiples more than the market’s current assigned value. In addition, Iona’s business plan takes advantage of capitalizing on assets that are considered too small for the larger players in the North Sea, but are ideal for a junior. The assets are ideal because they hold little exploration risk and are developmental in nature. Most of the assets hold legacy wells that have produced but were shut-in for a variety of reasons, but mostly due to technological limitations and very low oil prices – most of the wells were drilled in the early-to-mid 1990’s, when the price of Brent crude was below US$17/Bbl.
Risks – Huntington financing deal falls through.
Delays at Huntington.
Delays at Orlando and Kells.
Huntington financing deal closing
Orlando FDP approval
2013 – 2014 cash flow ramp
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