TrapOil - North Sea Play

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TrapOil (LSE:TRAP) is an AIM listed North Sea oil and gas exploration company . TrapOil listed on the London Stock Exchange in March 2011 with an initial closing price of around 44p/share having listed at 43p. Since its listing it has seen its share price more than halve to 17.88p/share currently, whilst making a low at around 16p/share earlier in the year. At 17.88p/share, TrapOil has a market capitalisation of £40.66m with ~226m shares in issue.

As shown in the graph, the share price action for TrapOil has been weak with the movement firmly to the downside. Without news the share looks as though it could drop further towards 15p breaking recent lows. Conversely, with positive news it could create a medium term uptrend towards 25p. However, at the moment it is poised slightly more to the downside chart-wise, hence I am neutral for now even though the downside may be limited.

Its worth noting that in July 2011, TrapOil acquired Reach Oil and Gas for £20m in cash and £10m in ordinary shares. At the time Reach's portfolio consisted of fourteen exploration licenses across twenty-four blocks along the UKCS (United Kingdom Continental Shelf). Consequently Miles Newman (Exploration Director) was appointed as a Non-Executive Director of TrapOil. TrapOil went on to sell the relatively expensive HTHP wells that were acquired during the takeover of Reach.

In terms of the share structure there is a strong directors holdings background with eight directors aggregately holding over 39 million shares. Top holder Miles Newman (former exploration directors of Reach Oil and Gas) owns ~£4.15m worth of shares alone. Ultimately, this strong holding within the company effectively incentivises the progress of the company and gives a strong vote of confidence in the assets, going forward. Many of these directors also hold share options at 43p. In addition, the institutions account for circa 50% of the shares in TrapOil with the largest holders being JP Morgan Asset Management and Henderson Global Investors both with an over 20 million share stake. Once again, this conveys that they are confident in the company's assets.

Prior to today, TrapOil had 21 licenses across 29 blocks all located offshore Scotland in the North Sea. Along with this TrapOil agreed to potentially farm-into the 'Perenco' gas discovery at a 30% level which would grant them access to other blocks that form the 'Trent East Terrace'. The TET is not a particularly large prospective area though as the hydrocarbons are gas and in relatively small sizes. The mean value of all reserves stands at 92bcf and at the Trent East discovery - a mean value of 42bcf. Approximately 14bcf would be net to TrapOil. Flow rates here are decent/low with 9.5mmscfd. Despite the company saying that this will create cashflow, I do not believe the the TET offers anything in the way of a more balanced or attractive portfolio and it will certainly not create enough cash as to be able to make a significant difference to funding other exploration work. With TrapOil already having a busy exploration portfolio the added need to cover over another asset may not be beneficial. Of course, this can never be known until/if the acquisition takes place. What should be clear is that the farm-in will create little shareholder value in the short and long-run. It would be the other exploration work that would do this.

Courtesy of eutrophication&hypoxia

However, today through the 27th licensing round they were awarded several more blocks. In each of these the operating structure would form a 50:50 split between TrapOil and Norwegian company Noreco with TrapOil having 5% of their stake as free carry. For a full breakdown of the block structure and locations read today's RNS. It was agreed that Noreco would operate each of these blocks except  for a block named 16/18b which TrapOil would operate. In the announcement CEO Mark Groves-Gidney commented:

"We are delighted to have received these provisional awards under DECC's 27th Licensing Round, a testament to our knowledge and expertise in the UKCS. The attainment of operatorship is a key milestone in the Company's development and positions us strongly to create shareholder value."

Within the company's assets there have been multiple discoveries: Bordeaux, Brule, Orchid, Lytham, Surprise and in the Trent East Terrace. Elsewhere in the license, TrapOil has a 15% equity in the prolific Athena discovery that produces circa 11,000 bopd (of which Trap gets ~1650bopd), and a 20% stake in the Lybster 500bopd well. The Athena interest (that was purchased for £34.5m) provides the company with ~£1.2m/month, gives a tax benefit and as in the same core location as other finds thus is easily manageable. However, this is expected to rise towards 18,000 bopd (of which Trap would get ~2700bopd) in which case the company would receive ~£1.96m/month. However, it has suffered from some problems thus may incur further costs.

Within the Athena core area are the Boredeaux, Brule and Athena discoveries. The Bordeaux discovery proved the presence of oil at the specific location close to Athena. It was drilled in 1978 and proved oil the 'Claymore sandstone' geological region. 62 feet (circa 20 metres) of oil pay was found which flowed at 1400bopd. The oil was fairly heavy with an API of 28. Conversely, the Brule discovery found a 52 feet oil column (circa 17 metres) containing oil with an API of 32 degrees, away from the Athena discovery.. The plan with these two discoveries would be to drill step-out wells to try to unlock the already identified resources. In a block adjacent within the core area is the potentially large 'Crazy Horse' prospect which is a 100mmbl play with potential for a further 250mmbl.

One well currently being drilled is entitled 'Romeo' after TrapOil acquired a 12.5% interest in it via the 25th licensing round in 2009. Operator here is Suncor. Total depth is expected to be at circa 4330m. The prospect itself is a four-way dip closure and has a mean net resource of 3.31mmboe to TrapOil. The chance of success of this well is calculated at 24%. A further well named Scotney, will also be drilled in 2012 in order to meet PSA obligations. This well will be shallower at 2800m, has a mean net resource  of 7.53mmboe to TrapOil and has a 32% chance of success.
courtesy of freedigitalphotos.net

To further future developments and to have helped in the past, TrapOil has signed an agreement with CGG Veritas, a renowned geophysical company (5 years on this contract remain). Through creating a long-term relationship with the firm, TrapOil has been granted access to multiple privileges.
- They have access to a £300million database for 'derisking'
- They can license 5000km2 for £45million (5km2 would cover a large section of their licenses)
- They can access £1million worth of 'specialist processing data'
In exchange TrapOil currently owes CGGV £300,000 in debt remuneration.

The first operational news during 2012 came in March with the 'Orchid' well being spudded where TrapOil has a 5% free carried and 10% working interest. The well had a total depth of 9415ft and a net mean resource of 5.7mmboe to TrapOil. Following this was the announcement concerning the purchase of interest in the Athena discovery. CEO Mark Groves-Gidney commented:

"Athena represents the game changing, cash generative production deal that we have been pursuing since our IPO. The Company is now well positioned to achieve its mission of becoming a significant, well rounded, independent, UKCS focused oil and gas business."

A few days after the company released its final results. The net loss was significantly greater at £4.5m from £297k. However, in the coming year the Athena production should go some way to reducing this loss especially because the paying interests in the wells being drilled is comparatively small. Positively this was highlighted as follows:

As at 31 December 2011, the Group held cash resources of approximately £32.4m. The Group has an active exploration drilling programme for 2012. The Group will incur no capital costs for the majority of these wells, with such expenditure being met by its partners under carried interest agreements. At present, the Group is budgeting capital expenditure for 2012 before acquisitions of approximately £8m.
Thus accordingly, the cash resources at year-end can be estimated as £24m minus the purchase of the Athena interest (effectively £26.9m) plus £4.3m (from a share placement) plus Athena income. This would leave a small cash balance for TrapOil to work with that would slowly increase over time. However, in case of any funding shortfall this would improve the company's finances and as noted: The acquisition of this interest in Athena will, in time, enable the Group, should it wish, to secure debt funding thereby bringing greater financial flexibility to the Group. The only potential worry in the statement is the upping of the administrative costs from £1.3m to £4.5m. Granted that some of these costs will be have been used in the IPO, but £1.4m directors pay seems a large increase from the £387.5k in 2010. Bonuses totalled £230k.

courtesy of Micora

In April a section of the Orchid well was announced to have been re-drilled as a 'mechnical sidetrack'. A further update on the well results was then released in May:  As previously announced, the 12¼" hole section of the Orchid well bore was re-drilled as a mechanical side-track. The well has reached its target depth of 9,333ft Measured Depth Below Rotary Table ("MDBRT") or 8,609ft True Vertical Depth Sub Sea ("TVDSS"). The shallow secondary objective Andrew sandstones were not well developed over the top of the structure, but the deeper primary target Chalk zone had over 280ft of good oil shows. 100ft into the reservoir an influx into the wellbore of a small amount of fluid was encountered, which was safely controlled, and reported on the rig site to be oil. MWD logs completed over the Chalk interval confirm at least 50ft of net oil pay with average porosities of 30 per cent. and an average oil saturation of 47 per cent. Further log runs were obtained over this zone but these proved inconclusive as to the quality of the pay zone. Accordingly, the well will now be plugged and abandoned. Despite this disappointing result, the management attributed a potential 64ft of gross oil pay above the 280ft section, but this would need to be confirmed via a second drill.

In May the first production from the Lybster well occurred. The oil would be trucked to ConocoPhillips' Immingham refinery. TrapOil holds a 35% stake in the production, but from first production Caithness is entitled to recover all development and operating costs attributable to Trapoil's carried interest out of net revenue achieved from the sale of Trapoil's percentage interest share of the crude oil produced. Until such costs have been fully recovered, Trapoil will receive approximately 20 per cent. of net petroleum revenues attributable to its carried interest in Lybster. First oil from the Athena field arrived in late May also. The commencement of production from the two wells is a significant milestone for TrapOil and it should help bolster an investment case with steady incomes achieved. Investors would hope that this will eradicate the need for dilution in the long-run. In June 20.5m shares were placed at 21p/share to raise £24.3m in order to potentially pursue the TET, other drilling commitments and fund corporate working capital.

An RNS in July outlined the 2012 drilling program and stated that 5 wells are to be drilled in 2013. Aside from the already drilling Romeo well and imminently following Scotney well, TrapOil will take part in the following drills: 'Magnolia' (20mmbo), 'Crazy Horse', 'Knockinnon' among others. Clearly TrapOil will soon be in the midst of a low/medium-interest multi-well programme. An update regarding the Interewe prospect was then released with a subsidiary of Centrica (LSE:CNA) opting out of drilling an appraisal well. TrapOil will receive a walk-away fee of £1.5m. Consequently, TrapOil and partners will seek a new farm-in partner prior to 09 January 2013 and pursue the drilling of the well. In addition, the Romeo well spudded on 21 September. The interim report soon after showed a narrowing of the first half loss from £1.8m to £1.55m.

TrapOil clearly has the potential to grow its market cap by at least 50% in the medium-term with success at Romeo or Scotney which have been described as 'potentially transformational'. Broker targets are currently set at 30p and 57p respectively, but of course these are always inaccurate (brokers' curse). 25p seems much more feasible that 57p at the current point in time and with the already exploited assets. The combination of strong production rates and low-interest/quite high-risk exploration plays limits further downside for the company, but technically it could re-test 15p with any upward movement currently met by selling pressure. However, with a balanced portfolio and a strong exploration plan, TrapOil should draw interest from investors and could be a decent medium-term play.

Update (April 2013) - I have started updating the conditional share reviews. TrapOil has exceeded my 15p target, but I remain cautious until an upward trend is put in place. No Rating

8 comments:

  1. agree with your points. Can see 30p being reached in 2013 in my opinion.

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  2. Im 'TRAP'ped in here at 20.25p ;)

    Forgive the pun

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  3. Maybe another encore oil but thats so be seen

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    Replies
    1. not for a lnog time!

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  4. Thanks for the analysis ,
    With regard to the athena field , which had a recoverable forecast in the range of 9.6 - 15.7 mmbbl based on current wells and 22000 bopd initial production .
    By drawing a decline chart and allowing for first year production to cover capex , It would seem that about 10.7 mmbbl production is needed over the life of project to cover capex and ongoing opex costs , which would leave the project in profit at the mid case of recoverable and having done well if it acheives the upper case.
    The lower initial production alters the potential field profitability .
    As the field life would now be nearer 7 years and with high fixed operating costs , it would now appear that about 14.1mmbbl production would be needed to cover capex and opex , this would leave the project in a loss situation at mid case and only in a small profit at the high end of recoverable forecasts.
    It would seem that the field production being on plateau for longer than expected and additional wells to produce from the northern section are the key to realising any gains on this project.

    phil

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