| 2007 | 2008 | ||||||
| Price: | 7.39 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 143 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
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Investment Thesis
Toreador Resources (TRGL) is an orphaned equity that presents an interesting investment opportunity for a patient long term investor. The stock has traded down from $28 at the start of 2007 to under $7.50 as of December 24th. The primary catalyst are increased cash flow generation as Turkish Phase I operations eventually come on line, farm-in joint ventures to explore in Hungary, France and Turkey and development of Phase II in Turkey.
TRGL Background
Turkish Assets
There are seven wells dedicated to the Phase I production:
The first seven wells in Phase I are shallow and low pressure. Three other wells, Ayazli-1, Bayhanli-1 and Alapli-1 have similar pressure and are in the vicinity of the producing platforms of Phase-1. The remaining three wells Akcakoca 3,4 and Guluc are in deeper water (maybe 60 more feet), are completed in deeper formations (~1000 feet) and have higher pressures (+100 to 200 Psi). They will be connected to the Phase II system.
Reserves Analysis:
All reserves have been fully evaluated by Laroche and Associates Ltd of
Exploration.
On purely exploration (non-development) wells, TRGL has gone 14 for 16. This success has been attributed to the successful implementation of AVO. AVO is a collection of several attributes and is a giant step beyond routine amplitude anomaly mapping. All of their drilling prospects including PUD's, probable, possible locations as well as the unrisked exploration potential possess AVO seismic anomalies.
Prior to 2001,
Historically, much of
TPAO’s modus operandi has been centered on working with international E&P firms in developing producing assets. TPAO’s priority for the last few years has been for exploration at offshore natural gas basins. In September 2004, TPAO found a viable gas deposit at the Ayazli-1 and Ayazli-2 wells off the western
Corporate Events Causing Distressed
|
Why does an E&P company trade from $28 to $7 as oil trades from $55 to $95 and natural gas in |
1. Incompetent Previous Management & Corporate Governance: In the past several years, TRGL management has been consistent in under-delivering and over-promising on their production estimates, capital expenditures and cash flow generation capability.
2. Lack of Operational Skills: TRGL historically never produced offshore assets. Unfortunately, neither does their two partners.
3. Over promise and never deliver: As mentioned above, TRGL’s management gave production guidance they have never met. From 2004 to 2007, TRGL investor communications was focused on selling a growth story with exploration upside in
4. Liquidity Risk and Fear of Equity Capital Raise: Given production hiccups and the private placement in March 2007, there is fear of another equity financing to capital raise.
5. Jefferies downgrade: As the largest investment bank covering the name, Jefferies analyst, Subhash Chandra initiated with a Buy rating at 32 (03/03/07). He quickly changed this rating to Hold at $18 (0/23/27) and subsequently $10 (9/20/07) and $8 (11/5/2007. Jefferies sell side research coverage has been negative on TRGL for the last six months.
6. Tired JV Partner Stratic Energy: Stratic the 12.25% interest holder in the Turkish JV is known to be an accumulator of production asset rather than either an explorer or producer of oil and gas. Most of their strategy hinges on investing in late stage E&P asset.
7. Recent Operational Issues: Last conference calls have been revolved around operational issues, especially in the production outlook for the different wells of Phase I, mainly the tripods in Ayazli-2 that has experienced shut-ins. A fishing trawler damaged sub sea pipelines in late November. The pipeline damage has shut in all production until sometime 1Q 2008.
With all the above-stated issues TRGL looks like a far better short candidate than a long value investment. The reason to buy TRGL is the operational issues and management blunders have driven the price to a point where the assets and implied optionality significantly mitigate any downside risk. The valuation section and the positive catalyst sections lay out the story to be long this orphaned value equity.
Positive Catalysts
1. Transition from Growth to Value: TRGL has shifted from being a roll-up of high potential exploratory asset and thus with valuation that fully reflects those potential. Thanks to all the internal issues above, TRGL is now as a value play trading at a significant discount to NAV.
2. Ugly Financials-In Hindsight: TRGL’s financial position reflects the mismanagement of assets. On a quarter to quarter basis, TRGL’s operating income has turned increasingly negative from -$3.9mm to last quarter’s -$10.9mm. On an EPS basis, EPS to shareholders is ($1.08) for Q3 vs. 0.33 for Q3 ’06. However, looking closer to 3Q numbers there is a positive surprise in currency gains. Simply put, TRGL recorded a $34mm non-cash currency gains added to shareholder equity and is reflected as a loss in the income statement due to accounting rules relating to functional currency standards.
3. Only one sell side analyst and he is continually negative on TRGL. Unless an investor is willing to do his or her own analysis on an asset by assets basis – TRGL is a tough story to understand on simple E&P financial analysis.
· Unless one digs into the underlying assets in
Asset Value
|
no of shares |
19,387 |
|
|
|
|
|
|
|
|
163,980 |
|
|
70,111 |
|
|
122,926 |
|
|
3,167 |
|
|
10,137 |
|
subtotal |
370,321 |
|
Net Debt |
(103,088) |
|
Equity Value |
267,233 |
|
Price/share |
$13.8 |
|
|
|
|
Price |
$ 7.39 |
|
% difference |
86.5% |
1. Only fund operations via cash flows: TRGL management has reiterated numerous time that they will only contribute future expenditure through cash flows generated from Phase I and
2. IFC Loan: The IFC loan is a revolver with a $50mm maximum line used for the production of
3. Phase II Capital Contributions:
The capital contribution for phase II is split evenly throughout the next two years.
TRGL CEO has stated that all phase II development will come out of current cash flow. Given its current equity price and market cap – it is unlikely that TRGL will do an equity financing. An alternative would be to sell part interest in the Turkish operations to another E&P company.
1. Dogu Ayazli: Dogu Ayazli has had mix production issues. The Dogu Ayazli-2 well has been underperforming. TPAO the operator in conjunction with TRGL is considering an intervention to increase well production. TRGL has indicated that pressure is building after initial production was shut in indicating that the issue might be mechanical. In December the decision will be made weather to perforate other zones in the well (there are 7 gas bearing zones) or to do a wire line intervention to increase production. TRGL management and technical staff have repeatedly conveyed that well still has potential to generate gas and the issue of underperforming in initial production does not imply that the well or the reserves are permanently impaired.
2. Ayzli subsea issues: The Ayazli tripod connection to the pipeline has been delayed. According to TRGL when the pipeline was laid some extraneous items were left at the end of the pipeline by the subcontractor. To connect the pipeline to the tripod these items have to be removed and a value needs to be fixed. Since the pipeline and the tripod are in 85 meters depth, divers can only work 15 minutes at a time. There have also been storms in the
· The operational issues are another strike against TRGL. But the market reaction has been that of a death blow. Basically the loss in the equity market value implies that the market values
1.
· From $7.50 price – what is downside in TRGL. Assume
2.
· Focus on the Commodity: The street has lost focus on the natural gas commodity in
· According to TRGL technically staff only 40% of the anomalies have been drilled in Phase I and Phase II. There is a lot of opportunity to drill for gas around Phase I and Phase II infrastructure. TRGL technical expertise on exploration is valued by TPAO especially AVO skills. TRGL also has additional acreage to drill offshore in the
· A question to ask is was TRGL so lucky that it was able to find the only natural gas along the whole Turkish Black Sea. From TRGL operational skill set we know they are not the world greatest oil and gas firm. But somehow they found gas in
Key Risks:
Liquidity
The primary risk with TRGL lies on its ability to execute on their target as a going concern. Given past performances, the market has severely discounted their ability.
Operational Issues
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