PETROTAL CORP TAL.
March 03, 2019 - 5:05pm EST by
Frugal
2019 2020
Price: 0.25 EPS 0 0
Shares Out. (in M): 538 P/E 0 0
Market Cap (in $M): 100 P/FCF 0 0
Net Debt (in $M): -22 EBIT 0 0
TEV ($): 78 TEV/EBIT 0 0

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Description

All values are given in US Dollars
 
PetroTal is a compelling risk-reward in the oil space. The reason is probably because it is a small cap
spin-off into a reverse merger of a failed oil and gas company. The rationale behind the spin-off was that the
asset was non-core (other country of operations) and wouldn't move the needle for the parent, Gran Tierra Energy, 
to develop it by itself.
Petrotal has just one quarter of reporting revenues, which again doesn’t help it getting out of obscurity.
 
Normally I don’t like development assets since all sort of things can go wrong and it is hard having a
definitive image of the underlying profitability of the field/company. With PetroTal, there are some
mitigating factors. A conventional field with many comparable fields with long operating histories, a
decent balance sheet and a big discount to what I think is a fair value makes me more comfortable.
 
This write-up won’t be very long since all risks are pretty obvious but hard to quantify. The company
only has a single real asset, the Bretana field in Peru, which is still in development.
 
Valuation
 
PetroTal is valued in the market at around 100 Million (fully diluted around 107 Million). The latest
quarterly report mentions net cash of nearly 28 Million, but this amount has come down to 22
million due to ongoing capex to expand output at the field according to a recent press release. This
equates to an EV of 78 Million.
For this EV you get understated 2P reserves just shy of 40 Million barrels or less than 2 dollars a
barrel. If they can get the reserves closer to 3P over time, which I think is likely, you are paying
around 1 dollar a barrel.
 
The Bretana field

The field was discovered in 1974 by Amoco. There were some delineation wells drilled afterwards to
determine the size of the field, but these came up dry. The license was abandoned until it was taken
up by Gran Tierra Energy from which the company was spun out.
 
Bretana is a large OOIP, sandstone, unfaulted field but with a heavy crude (18-20 API). The OOIP is at
least 330 Million, with upside possible. As of now, the recovery factor mentioned by Netherland
Sewell & Associates inc (NSAI) is 12% percent to get to the 2P reserves of 40 million barrels. This
recovery factor is very conservative, and I think the real recovery factor should probably be a
multiple (2-3 times) of the current recovery factor.
 
Not only management mentions this and makes a pretty compelling case in their August 18
presentation, but the reserve auditor makes a similar claim in their reserve report. NSAI states:
“Bretana field is analogous to 16 oil fields that were discovered and developed by Occidental
Petroleum and PetroPeru in Blocks 8 and 192 in the 1970’s. These fields are on the same geological
trend to the northwest of Block 95. Vivian formation sandstones from the primary reservoir in these
fields with similar oil characteristics, reservoir characteristics, and structural trapping styles as
Bretana Field. These analogous fields provide a guide for production profile modeling, and recovery
factors (RF) are predicted to be over 20 percent.”
 
The fields mentioned above are now operated by Fronterra Energy and Puspetrol and are at the end
of their reserves in their current development. Notwithstanding, these were low cost conventional
oil fields for most of their lives.
 
So, what is Bretana worth?
 
While I don’t like NPV’s (especially now when the assumptions for oil prices in a few years are quite
aggressive many calculations I see use mid 70 to low 80 prices a barrel in 2-3 years, which
dramatically increase the valuation), Petrotal has made a few NPV calculations using different price
assumptions. Even in the most pessimistic case, the NPV-10 on a 2P basis that is derived by the
reserve engineer is 282 Million, and that was before 21.5 million of capex.
 
Below you can find a few different NPV’s and price scenario’s:
                       2P NPV-10 of $282 Million                       2P NPV-10 of $ 405 Million
Period Ending        Oil Price (US$/BBL)                                    Oil Price (US$)
12-31-2018                   67.76                                                   78.84
12-31-2019                   63.98                                                   75.08
12-31-2020                   61.07                                                   70.19
12-31-2021                   59.53                                                   66.53
12-31-2022                   58.97                                                   64.15
12-31-2023                   58.89                                                   62.58
12-31-2024                   59.09                                                   61.86
12-31-2025                   59.28                                                   61.83
Thereafter, escalated 2 percent on January 1 of each year.
 
These NPV-10’s only take the understated 2P reserves into account. If you would be more
“aggressive” and use a 3P valuation you end up in a range between 670 and 1,300 million. Off
course, that seems a bit too generous, but not impossible.
 
Another nice number mentioned by management in 2018 was that there has already been 300
million invested with exploration, seismic, production tests and production facilities to
date in a low cost and commercial field. In a way, we are buying all these efforts for just 100 Million,
or 35 or so cents on the dollar.
 
The economics
 
The field is currently producing about 1000 barrels a day from a 45 meter lateral sidetrack of a 2012
drilled exploration well. This is not an ideal production well, and despite this the company had a 12%
net profit margin last quarter selling 750 barrels of oil a day at 61.68 dollars a barrel and Brent at
74.65. That is quite impressive given the high fixed cost in oil fields. Management guides at 35+
dollar netbacks with 65$ oil in 2019 when the field should average 4,000-5,000 barrels a day and 40+
dollar netbacks in 2020 when the field would be producing +10,000 barrels a day.
 
This guidance seems realistic given comparable fields.
 
The discount to Brent is large and should get smaller when Bretana becomes a more consistent
producer.
 
The most important part, Risks..
 
The number one risk is balance sheet risk in a development company. While the company is debt
free with 22 million net cash as of February, I would have preferred more cash. This is somewhat
compensated given that the company is producing, is profitable and cash-flow positive at current oil
prices.
One should not forget however that the company anticipated to spend close to 67 million in capex in
2019 to expand production.
 
There is a mitigating factor given that execution has been better than anticipated. The company was
producing oil a quarter earlier than anticipated and under budget. Another point to like is a
reasonable SG&A.
 
Since this is Peru, there is always some country risk because Peru has not always been friendly to foreign oil companies
operating there. The same can be said about local tribes and some guerilla organizations.
 
Another major risk is that the company is highly dependent on just 1 asset and any difficulty with it
can have big complications for PetroTal.
 
The company is very lightly traded, which can also be considered a risk.
 
Petrotal has one more block in Peru with a few exploration leads. I would probably give the block a
pretty large negative value. The company is trying to farm out this block to lower the risks though.
These blocks do have a small chance of a very large discovery, which can give some nice option
value.
 
Since the company has no other field or discovery, there is a risk that cash-flows from Bretana can
be malinvested.
 
Management is not highly incentivized with insider ownership at just 1.1 percent. Again, something which I would
prefer to be different. Gary Guidry, who has a good track record and is currently CEO of Gran Tierra
Energy is member of the board. Douglas Urch is Chairman and had a very good track record
managing heavy oil field companies. Both Bankers Petroleum and Rally Energy, of which he was CFO, were taken over after
proving growing and profitable production in challenging oil fields.
Given these points, I would not consider management either a positive (given the low insider
ownership) nor a negative.
 
 
 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Growing production at Bretana
2P and 3P at Bretana growing larger trough drilling and production
A discovery at Block 133 or 107, but I don’t count on it
Rising oil prices
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    Description

    All values are given in US Dollars
     
    PetroTal is a compelling risk-reward in the oil space. The reason is probably because it is a small cap
    spin-off into a reverse merger of a failed oil and gas company. The rationale behind the spin-off was that the
    asset was non-core (other country of operations) and wouldn't move the needle for the parent, Gran Tierra Energy, 
    to develop it by itself.
    Petrotal has just one quarter of reporting revenues, which again doesn’t help it getting out of obscurity.
     
    Normally I don’t like development assets since all sort of things can go wrong and it is hard having a
    definitive image of the underlying profitability of the field/company. With PetroTal, there are some
    mitigating factors. A conventional field with many comparable fields with long operating histories, a
    decent balance sheet and a big discount to what I think is a fair value makes me more comfortable.
     
    This write-up won’t be very long since all risks are pretty obvious but hard to quantify. The company
    only has a single real asset, the Bretana field in Peru, which is still in development.
     
    Valuation
     
    PetroTal is valued in the market at around 100 Million (fully diluted around 107 Million). The latest
    quarterly report mentions net cash of nearly 28 Million, but this amount has come down to 22
    million due to ongoing capex to expand output at the field according to a recent press release. This
    equates to an EV of 78 Million.
    For this EV you get understated 2P reserves just shy of 40 Million barrels or less than 2 dollars a
    barrel. If they can get the reserves closer to 3P over time, which I think is likely, you are paying
    around 1 dollar a barrel.
     
    The Bretana field

    The field was discovered in 1974 by Amoco. There were some delineation wells drilled afterwards to
    determine the size of the field, but these came up dry. The license was abandoned until it was taken
    up by Gran Tierra Energy from which the company was spun out.
     
    Bretana is a large OOIP, sandstone, unfaulted field but with a heavy crude (18-20 API). The OOIP is at
    least 330 Million, with upside possible. As of now, the recovery factor mentioned by Netherland
    Sewell & Associates inc (NSAI) is 12% percent to get to the 2P reserves of 40 million barrels. This
    recovery factor is very conservative, and I think the real recovery factor should probably be a
    multiple (2-3 times) of the current recovery factor.
     
    Not only management mentions this and makes a pretty compelling case in their August 18
    presentation, but the reserve auditor makes a similar claim in their reserve report. NSAI states:
    “Bretana field is analogous to 16 oil fields that were discovered and developed by Occidental
    Petroleum and PetroPeru in Blocks 8 and 192 in the 1970’s. These fields are on the same geological
    trend to the northwest of Block 95. Vivian formation sandstones from the primary reservoir in these
    fields with similar oil characteristics, reservoir characteristics, and structural trapping styles as
    Bretana Field. These analogous fields provide a guide for production profile modeling, and recovery
    factors (RF) are predicted to be over 20 percent.”
     
    The fields mentioned above are now operated by Fronterra Energy and Puspetrol and are at the end
    of their reserves in their current development. Notwithstanding, these were low cost conventional
    oil fields for most of their lives.
     
    So, what is Bretana worth?
     
    While I don’t like NPV’s (especially now when the assumptions for oil prices in a few years are quite
    aggressive many calculations I see use mid 70 to low 80 prices a barrel in 2-3 years, which
    dramatically increase the valuation), Petrotal has made a few NPV calculations using different price
    assumptions. Even in the most pessimistic case, the NPV-10 on a 2P basis that is derived by the
    reserve engineer is 282 Million, and that was before 21.5 million of capex.
     
    Below you can find a few different NPV’s and price scenario’s:
                           2P NPV-10 of $282 Million                       2P NPV-10 of $ 405 Million
    Period Ending        Oil Price (US$/BBL)                                    Oil Price (US$)
    12-31-2018                   67.76                                                   78.84
    12-31-2019                   63.98                                                   75.08
    12-31-2020                   61.07                                                   70.19
    12-31-2021                   59.53                                                   66.53
    12-31-2022                   58.97                                                   64.15
    12-31-2023                   58.89                                                   62.58
    12-31-2024                   59.09                                                   61.86
    12-31-2025                   59.28                                                   61.83
    Thereafter, escalated 2 percent on January 1 of each year.
     
    These NPV-10’s only take the understated 2P reserves into account. If you would be more
    “aggressive” and use a 3P valuation you end up in a range between 670 and 1,300 million. Off
    course, that seems a bit too generous, but not impossible.
     
    Another nice number mentioned by management in 2018 was that there has already been 300
    million invested with exploration, seismic, production tests and production facilities to
    date in a low cost and commercial field. In a way, we are buying all these efforts for just 100 Million,
    or 35 or so cents on the dollar.
     
    The economics
     
    The field is currently producing about 1000 barrels a day from a 45 meter lateral sidetrack of a 2012
    drilled exploration well. This is not an ideal production well, and despite this the company had a 12%
    net profit margin last quarter selling 750 barrels of oil a day at 61.68 dollars a barrel and Brent at
    74.65. That is quite impressive given the high fixed cost in oil fields. Management guides at 35+
    dollar netbacks with 65$ oil in 2019 when the field should average 4,000-5,000 barrels a day and 40+
    dollar netbacks in 2020 when the field would be producing +10,000 barrels a day.
     
    This guidance seems realistic given comparable fields.
     
    The discount to Brent is large and should get smaller when Bretana becomes a more consistent
    producer.
     
    The most important part, Risks..
     
    The number one risk is balance sheet risk in a development company. While the company is debt
    free with 22 million net cash as of February, I would have preferred more cash. This is somewhat
    compensated given that the company is producing, is profitable and cash-flow positive at current oil
    prices.
    One should not forget however that the company anticipated to spend close to 67 million in capex in
    2019 to expand production.
     
    There is a mitigating factor given that execution has been better than anticipated. The company was
    producing oil a quarter earlier than anticipated and under budget. Another point to like is a
    reasonable SG&A.
     
    Since this is Peru, there is always some country risk because Peru has not always been friendly to foreign oil companies
    operating there. The same can be said about local tribes and some guerilla organizations.
     
    Another major risk is that the company is highly dependent on just 1 asset and any difficulty with it
    can have big complications for PetroTal.
     
    The company is very lightly traded, which can also be considered a risk.
     
    Petrotal has one more block in Peru with a few exploration leads. I would probably give the block a
    pretty large negative value. The company is trying to farm out this block to lower the risks though.
    These blocks do have a small chance of a very large discovery, which can give some nice option
    value.
     
    Since the company has no other field or discovery, there is a risk that cash-flows from Bretana can
    be malinvested.
     
    Management is not highly incentivized with insider ownership at just 1.1 percent. Again, something which I would
    prefer to be different. Gary Guidry, who has a good track record and is currently CEO of Gran Tierra
    Energy is member of the board. Douglas Urch is Chairman and had a very good track record
    managing heavy oil field companies. Both Bankers Petroleum and Rally Energy, of which he was CFO, were taken over after
    proving growing and profitable production in challenging oil fields.
    Given these points, I would not consider management either a positive (given the low insider
    ownership) nor a negative.
     
     
     
    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Growing production at Bretana
    2P and 3P at Bretana growing larger trough drilling and production
    A discovery at Block 133 or 107, but I don’t count on it
    Rising oil prices
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