|Shares Out. (in M):||14||P/E||0||0|
|Market Cap (in $M):||39||P/FCF||0||0|
|Net Debt (in $M):||-23||EBIT||0||0|
This is a small, illiquid international exploration upstream E&P company. It is also a deep value investment with asymmetric upside potential and a company with proportionately lots of cash to deploy into a depressed market in a counter cyclical strategy.
Its worth touching on some of my past failed ideas shared on VIC, as I have focused on this niche for a number of years, and have shared more than my share of poor performing ideas. Part of that could be attributed to a collapsevest in oil prices, but most of it was driven by 3 factors unrelated to oil prices:
1) bad management - bad managers can ruin otherwise good assets and situations
2) bad balance sheets - insufficient available capital can overwhelm good management teams and good assets
3) bad assets - poor asset level performance is hard overcome in an asset driven business
Generally, 1 or more of these factors drove poor performance. The good and bad part is that they may be identifiable in advance, meaning that some of these were "unforced" errors. The good thing is, having identified these drivers, performance going forward should improve.
This is relevant in the case of Petro River because it is well run by experienced management and with a technical team with long track records of success. It has a strong balance sheet with substantial net cash. And it has a unique asset portfolio that was built with a counter cyclical bent, is seeing joint ventures at impressive numbers compared to the market cap of the whole company, and has considerable upside going forward.
1) Who they are:
Petro River is invested in and alongside Horizon Energy Partners, a private company led by the former heads of exploration of Shell, Texaco (Chevron) and Burlington Resources (Conoco Phillips) and started by the co-founder of RAAM. Petro River is run by Scot Cohen, who co-founded Iroquois Capital, a multi hundred million dollar hedge fund, and Steven Brunner, former CEO of Constellation Energy Partners and former SVP of Pogo. They've each had significant success in their past roles, and each bring a valued skill set to Petro River that should contribute to success going forward. In a down market they have identified, raised funds and acquired a number of pennies on the dollar type international oil exploration opportunities. And they are ramping up to leverage 3rd party capital to shoot seismic and drill wells across their portfolio.
2) Their balance sheet / currently available capital:
Petro River recently raised $6 million and has $17 million net available in a subsidiary level joint venture. This is sufficient to fund their interest in their first international oil well (in Northern Ireland), to drill a number of wells later this year in Oklahoma for the subsidiary JV, and to negotiate good economics from "farm in" partners looking to shoot seismic and drill on the prospects that Petro River and Horizon have acquired. Petro River likely will raise additional capital going forward to fund development, subject to exploration success, but only after taking a number of "shots on goal" and probably at a considerably higher valuation.
3) Their assets:
Petro River has a dispersed, "random" set of upstream oil exploration assets. The portfolio was assembled with a goal of acquiring high expected value exploration projects with low geopolitical risk. Its heavy on North Sea/England/Ireland, Oklahoma and California, with no exposure in South America, Africa or Southeast Asia.
It is worth discussing the Larne prospect in Ireland in particular, and then briefly addressing other assets and their status, likely current value, and potential value going forward. Beyond management and a strong balance sheet, Larne is what got me invested in the stock. The set up is compelling, as it is delineation at the cost of exploration.
In June 2015, a UK gas storage company drilled into what looked like a good gas storage target, with good reservoir characteristics but believed to be devoid of hydrocarbons, as there had only been one hydrocarbon show from one well in the Larne basin previously. They were hoping to profit from the local swings in natural gas prices, from $7/mcf in the summers to $15+/mcf in the winters, and perhaps smooth out pricing and availability for the robust local market. They drilled the storage well, and it turned out that the reservoir already had gas in it, and they had hit the flank of the reservoir.
Horizon and Petro Stepped in to "farm in" - to fund and drill a well for the storage company, located on the likely center of the reservoir, to earn a portion of the ownership of the entire 130,000 acre mineral license. Geologists estimate the unrisked potential for 600 million barrels of oil equivalent across the license, and they estimate a 50% chance or greater of ultimately recovering 25 million barrels of oil and 25 bcf of natural gas. (http://www.ogj.com/articles/print/volume-114/issue-4/exploration-development/larne-basin-exploration-weighs-carboniferous-potential.html)
With a 12% net effective interest in the prospect and the field, this works out to likely 2.5 million barrels of oil and 2.5 bcf of gas recoverable to Petro River (50% chance its more, 50% chance its less). And geologists estimated a 90% chance of recovering half of that quantity or more. 2.5 million barrels of oil and 2.5 bcf of gas in the local $7+ mcf price environment could easily be worth $10 per barrel and $3 per mcf, or over $30 million just from this one prospect, with the rest of the field worth substantially more. Petro-River's management verbally estimated that in the P50 success case, their interest would be worth $100 million or more. Not bad for a $16 million enterprise value. Particularly considering that gas has already been discovered in the basin, and that this is essentially a delination well with exploration well type economics.
Other assets include delineation wells drilled in Oklahoma through the drilling joint venture mentioned above, and multiple exploration leases and licenses across the UK, Denmark, and elsewhere. Just the Oklahoma project could be worth a multiple of the current market cap. Similar to Oklahoma, across the portfolio Petro River and Horizon are bringing in joint venture partners to fund shooting of seismic and drilling of exploration wells, to reduce their risk and enable them to get very cheap shots at booking substantial reserves and bringing on meaningful production for a small company. On an unrisked basis, Horizon has exposure to over 2 billion barrels of possible oil and gas reserves, with net exposure to Petro River in the ~100 million barrel range, and new projects and joint venture partners continuing to be added.
I considered doing a deep dive into a few more of these assets, but ultimately this investment to some extent is about a high expected value bet on Larne - if it works, it is worth a multiple of the current stock price, and if it doesn't work, the other assets are there to support a residual value that may exceed the current stock price if any are successful. And there is a management team in place with a long track record of success and recent success in acquiring attractive assets at low prices, and bringing in joint venture partners to fund exploration and delination.
Ireland well begins to be drilled
Ireland well successful
Drilling results in Oklahoma, California, and elsewhere
Seismic results in California and offshore Denmark
Additions to the asset portfolio and new joint ventures and farm outs announced