Description

Jadestone Energy (JSE.V)

Jadestone Energy (“Jadestone” or “JSE") is way, way off the beaten track. One note before we get started, this is either (i) a PA investment or (ii) a small fund investment. For small funds there are large blocks out there but it takes some work by your broker to track them down. We do know it’s possible however to find multi-million share blocks.

Capitalization

*Assumes convertible debt is converted into stock and is therefore only the cash balance.

Everything discussed in this write-up will be $USD.

Summary of the Thesis

·       Due to the business transformation none of the numbers we are about to share show up in the historicals. This is good in that it’s very difficult to see and therefore some value to those that find it. Bad in that it’s more of a trust me.

·       The historical strategy of this company was O&G exploration for big opportunities. That didn’t work. The new (and one we really like) strategy is to buy assets that are immaterial to the large O&G players for really cheap, operate them better and cash flow them. Then rinse and repeat. It’s almost like a spin-off in that new management is going to care a lot more about the assets than old management.

·       In the last year, Jadestone has acquired two producing assets (offshore Australia which is oil and Indonesia which is 2/3 oil and 1/3 gas) that are worth at least 50% more than the market is giving them credit for

·       Jadestone is highly likely to relist on a major exchange, probably the LSE. Its listing on the TSX.V is a legacy of its speculative history. The current business is no longer speculative

·       Jadestone is led by a management team that you would not expect to see trading on the TSX.V. It’s management team is the former Talisman Asia group with significant experience with legacy assets including the North Sea, Asia, etc

·       There are a lot of unloved assets out there for very cheap/reasonable multiples they can acquire

·       The company will be free cash flow positive and has net cash of $15M excluding the debt ($8M) which we assume will be converted to equity.

History

Jadestone was previously known and listed as Mitra Energy until changing its name with a recap in late 2016. Mitra was started in 2005 and went public via a reverse merger with Petra Petroleum in 2015. As the oil markets fell apart Mitra recapped itself with equity and convertible bonds from existing and new shareholders. The shareholder base is now very concentrated:

·       Tyrus Capital – 49.6%

·       West Face Capital – 17%

·       Livermore – 9.7%

·       Ontario Teacher Pension Plan – 8.7%

The convertible bond facility was done by Tyrus. Tyrus can choose to convert all outstanding principal into shares at CAD$0.5 at the end of the three year facility.

Since the recap the company has acquired two producing assets, one off the coast of Western Australia (100% WI) called Stag ($10M) and one in Indonesia (50% WI, $1.5M) called Ogan Komering.

The history is pretty standard, failed oil and gas exploration. The future is interesting and uncommon. Buy unloved and immaterial assets to larger companies, operate them better, cash flow them and keep going. Very few PUBLIC companies operate under this model. But, having some experience in this world in West Texas, this is a very common private operator approach that made a lot of people very rich.

The Current Business

As discussed above, Jadestone has two operating assets:

Stag (100% OI) Offshore Western Australia

Stag was purchased for $10M in November 2016. 1P reserves for this asset are 11.5mmboe. 2P reserves are 17.8mmboe. Whether or not those reserves are perfect is somewhat beside the point. They effectively bought them for $1/boe. Additionally they took over in Jul17 the operatorship so they can now operate as they see fit. Management claims this will have a material impact. We will see in the next few quarters.  

This is a high quality asset that should produce 3-3.5K barrels of oil a day. That’s roughly 100K barrels a month at ~$60/barrel (Brent + $2 generally) or $6M a month in revenue. All in costs including workovers (generally these wells have to be worked over every two years as they are old) are high $30s. Management hopes to get that down to the low/mid-$30s but for now $40 is reasonable. Therefore total costs / month are roughly $4M and profit from the wells going forward should be $2M/month.

Ogan Komering (50% WI) Indonesia

Jadestone bought this asset from Talisman for $1.6M in Mar17. Five months later it paid for itself. Of course there is a catch, the current deal with the Indonesian government expires in Feb18. At this point the current production sharing deal (other 50% owned by Indonesian State O&G Company Pertamina) will be replaced by a new gross split contract.

So it’s likely the economics will get worse but there is no reason to imagine the contract will just be taken away from them. Currently, Ogan does net 1.5kboe a day (2/3 oil, 1/3 gas) and cash flows about $400-$500K a month. Jadestone gets roughly $7.75/mmbtu so it’s not North America type natural gas prices.

The company will commission new reserves study with the new gross split sharing deal with Indonesia. They think it’s worth about $15M-$20M. As always take with a grain of salt but it certainly was worth a lot more than they paid for it.  

Other assets

The Company has a few assets in Vietnam, the Phillipines, etc. that they are very excited about. Until we get into production however I think it’s a bit of a waste to spend time digging into their details as it’s all a forecast…and sometimes a vert rosy forecast.

G&A Costs 

The company is running at about $12M-$15M of G&A annually. This is primarily the management team, public company costs, etc. Our best guess is that the G&A here isn’t going to be a material driver of the stock as the stock price is more likely to be driven by good/bad deals.

Paths to Unlock Value

This one is pretty simple:

·       Buy cheap unloved assets over and over again without diluting the minority shareholders

·       Operate current assets better than the previous operators like a spin-off with mgmt. caring more

·       Pull off a “mega- acquisition” that grabs everyone’s attention and leads to a re-listing say on the LSE.

·       Keep G&A costs fixed as you scale thereby leveraging your current G&A profile

Management

Jadestone is basically run by the old Talisman Asia/Middle East team.

The “key-man” in the story is Paul Blakeley, the CEO. Mr,. Blakeley previously ran Talisman’s Asian unit.

We don’t personally know the management team, but we know a few people associated with the company extremely well and they are highly complimentary of this management team. Of course, given that they put a lot of management in place it has to be taken with a grain of salt.

However, if we look at Stag and Ogan, these were very good deals done quickly by a management team that is highly incentivized to pull this off (millions of options outstanding and we would expect millions more to come).

It’s also worth pointing out that Mr. Blakeley, and Neil Prendergast (general counsel), along with Mr. Neuhauser of Livermore Partners (9.7% holder) have been buying shares in the open market around these prices. While these aren’t large dollar figures they do demonstrate management’s desire to own more stock:

In Summary

With Stag and Ogan spitting out low $20M in FCF and $10-$15M of G&A, we should have FREE cash flow of around $5-10M / year. This isn’t operating cash flow, it’s free cash flow.

I think it’s unlikely the stock moves on the cash flow however, the most likely scenario is either a big deal (hundreds of millions) or a bunch of smaller deals. Either way they are going to buy free cash flowing assets and just focus on operating them better/cash flowing them.

If they do this correctly, this business and the stock should do extremely well. In fact, if they do the deals they want to, the Stag and Ogan will be footnotes on the overall business which makes the time spent on them a bit of a waste but important for the downside.

Risks

·       Oil price, obviously

·       Dilution of minority shareholders – This is a big concern because it is basically a closely held business by four players who combined own 85% of the stock. If they choose to do something that is not in the best interest of the minority shareholders there isn’t a lot we can do. We know a few of these holders however and have no reason to think they would do this given that they will already make a ton of money if this works. Sometimes greed is weird though so we will have to be cautious here.

A bad deal where the cash flows fall apart with the commodity and the deal leverage hammers us. 

Catalyst

Additional accretive deals

Positive FCF shows vs. historical losses.