Frontier Resources - Draft Notes

- Frontier Resources (LSE:FRI)
- Market Cap = £2.53m
- 2.30p mid price. Roughly 2.25p - 2.39p spread. 110m shares in issue
- Oil & Gas Explorer
- Listed on AIM in July 2013 having been on the ISDX beforehand

- O&G market seems to have woken up in recent days following successful US producers such as LGO, CAZA and EME
- FRI has a very low market cap and investor sentiment towards these companies tends to be highly bullish if the assets are decent
- FRI has 3 onshore assets spanning Middle East and Southern Africa
     1. Oman
     2. Zambia
     3. Namibia
Obvious corporate governance and delay risks in these three countries. Oman is the most secure for oil in gas development as their economy is dependent on it
- FRI raised £1.56m when it listed last year, which was the full amount intended. Raised through a placing at 6p. Initially rose to as high as 7p, but has since slumped, likely as a result of background sellers (potential similarities with Sula?)
- Volume spiked towards the close of play bodes well for forthcoming days as investors take note of FRI's listing amid a flurry of O&G buying
- FRI formerly had US onshore O&G assets but ended up selling these at a loss. FRI formed in 2008, disposed of those US assets and acquired this new portfolio of assets. Omani asset required a signature bonus of circa $750k

- Oman (100% working interest)
- Has a PSA in Block 38 in Southwest Oman, right on the border with Yemen. Block spans 17,425 km2. There is a producing basin quite far East known as the South Oman Salt Basin. 3 wells have been drilled in Frontier's block. The first two were pre-1965 with the latter one later that century. Perhaps that shows a lack of interest in the block, and supports the relative ease at which Frontier acquired the asset. All three wells came up dry with no signs of hydrocarbons
- The Block is still considered prospective for O&G despite this, as a relatively close block has producing assets. However, the lack of interest in Frontier's block over decades, despite Oman being very oil and gas centric, is a concern
- Data available consists of old well data, historic 2d seismic and other geological studies. Generally low quality
- Primary targets are deep at depths of 3km to 5km, but onshore, so costs are not too high. Secondary targets are both shallower and deeper than the Primary.
- Plan is for early stage surveys to delineate 3D seismic areas as 3D seismic can be expensive
- Very early stage CPR suggests the size of the block means that there could be as much as 10.8 billion barrels of oil equivalent in place. Using an 18% recovery factor, that figure comes down to 1.9 billion barrels equivalent. Previous operator Phillips put 140mmbbls as the risked gross best estimate
- The first period of the Omani licence will expire in November 2015. The Omani field is supposedly an analogue to the Harweel Cluster, but analogues tend to be of little use for investors. At least the analogue in this case is domestic and not half way across the world
- A well was drilled in this analogue called Sakhiya. This flowed a sustained initial product rate of 1800 bpd. The oil was found in the Ara stringer carbonate zone. Recoverable volumes estimated at circa 35 million barrels
- In terms of overall Oman, O&G accounts for over half of Omani GDP and the bulk of government revenues, so there is good industry backing. Estimations are that Oman has over 60 billion barrels of oil in place
- Previous operator Phillips

- Zambia (90% interest)
- Block 34 with local partner Metprosol. Block is 5.9km2 in size. FRI has old seismic line data and core analyses, which show source rock is possibly in place, but no hard evidence of hydrocarbons
- Essentially very unexplored so very little value attributable here

- Namibia (90% interest, 100% working interest)
- 2 blocks: 1717 and 1817, covering 19,000km2 in the Owambo Basin in North Namibia
- Once again, very unexplored so very little value attributable here.

The Requirements
- Oman PSA suggests an indicative total cost of $20m over the course of the first three years (i.e. by late 2015). Most of that cost has to come from a 3D seismic survey totalling 500km2, which will cost ~$9m. If a drillable prospect is found, it also must be drilled. That cost would be around $10m. There is no way Frontier could fund those requirements on its own - it is highly likely that if there is a farmout, the vast majority of the equity will be given away (over 70%). There is no chance of backcosts given how little Frontier has progressed the asset. Timescales also look a little tight, especially since 3D seismic can take several months to complete - who will farm in on 2D legacy seismic? Will there even be a farm-out?
- Namibia blocks expired in January 2014, but renewed for two years through to January 2016. Some relatively encouraging signs in soil sampling, but hardly enough to base a farm-out on. I would be sceptical over whether a farmout could be achieved here. However, work requirements are low so more likely than Oman. 2 leads have been identified, but on very limited seismic coverage so the confidence in these estimates is probably extremely low.
- Zambia blocks expire at the end of March 2015. Very lightly explored to very light work requirements - will this be successfully farmed out? Not to any company of significance - barely any progress has been made since acquisition, so no idea what the company expects to achieve aside from giving away equity for very little in firm commitment

- Omani development costs are particularly high, which will reduce attractiveness of the asset and decrease the likelihood of a farm-out. Many development wells are required to extract the sour oil (if it exists) plus oil processing facilities would be required given the nature of the oil, and the location

- Directors look to have some credibility though as the Chairman is the former FD of WS Atkins (LSE:ATK) between 1993 and 2002. Michael Keyes (CEO) also co-founded Egypt-focused Circle Oil (LSE:COP). Keyes has also provided over $200k in loans to the company which is good backing. However, one extremely disappointing point is that Keyes keeps giving himself pay rises despite the shockingly poor financial position of the company. His pay has ballooned from ~$70k to what is set to be $200k this year. This looks completely unjustified and shows a misalignment of interests in my view. Even though he has provided the loans, he should appreciate how early stage FRI is, and how little it has achieved, and peg his salary at a much lower level - this of course will not happen.
- 11m outstanding options at exercise prices ranging from 5.5p to 7.5p gives incentive to help the price rise, plus Keyes has 21.5% of the shares in issue

- Gardner Energy Corp = 9.46%
- BBHISL Nominees = 5.25%
- YA Global = 7.57%
- Salim Macki = Over 4% (He has held several important positions within the Omani O&G administration)
- Beaufort interest = 9.24%. This is clear conflict of interest - Beaufort should not be allowed to produce investor reports and hold shares in the company, but that is the case. I therefore give zero credibility to Beaufort's broker reports in this instance

- If cash becomes constrained, Namibia exploration expenditure will be deferred, or a farmout will be attempted, or the licence area will be reduced, or the licence will be allowed to lapse
- The directors have openly admitted the need to raise further funds in "mid-2014", which is now. Given the level of commitments and the reality that they won't get much (if any) money from farm-outs, the company will need enough cash to meet the seismic in Oman. Say they give away 80% of the licence and need to fund 20%. That would cost £1.07m. Add on another £750k for G&A and say that net fees are 90% of the total gross funds raised. Therefore £2m in funds would need to be raised which represents significant dilution. If there is no farm-out, then the Omani licence will lapse as commitments won't be met. The problem is that even post-seismic, Frontier wouldn't be able to fund its drilling commitment, so it looks relatively doomed on that front (for now)
- On the other hand, if they complete a small £0.5m to £1m placing, that could help prop up the share price as it de-risks the investment for some investors. However, the long term funding constraints are obvious and potentially crippling (as a result of the Omani obligations). Therefore, giving away a huge percentage in Oman actually makes sense if only to reduce seismic costs. Alternatively, if they can get carried through the seismic, the share price will probably rise, which may allow for an equity raise at a higher price
- In any circumstances, a cash raise is probably imminent, if only to pay for G&A
- The sharp fall in the company's share price will severely limit their ability to raise cash from the market

- FRI will try to farm-out all three licences to try to reduce ongoing commitments. Frontier haven't added much value in reality so expecting anything material from the farmouts is probably misplaced - after all, the companies could have picked up the assets before if they were particularly lucrative. The company has spent, in total, less than $3m on all three of its assets since inception - this perhaps underscores that the licences are extremely speculative, and that there is no real asset backing. Combined with the funding strains, it's exceptionally high risk at the current point in time, even though the market could well price it at a higher level for the next couple of months.