Sefton Resources - What's going on?

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Sefton Resources (LSE:SER), a US-based oil and gas producer, has been at the heart of speculation over financial difficulties, untrue production figures and a rapidly declining share price in recent months with a fall amounting to 50% since the start of the year. But is the fall justified? This article outlines Sefton's current position, their past events and what could be in store for holders. Sefton currently has a share price of 1.13p giving it a market capitalisation around £5.75m and 512m shares in issue.

As represented above, it has been a torrid time for Sefton holders who have seen their share holdings decline in value. The share is currently in a bearish trend which could see it test the bottom of the channel with a potential target of 0.80/0.75p. On the contrary, a breakout past 1.50p could signal a long-term uptrend with a break of 1.80p confirming this. However, as the current trend shows, this is highly unlikely without some exceptional news. Directors hold modest stakes in the company totalling just short of £400,000 and there are not many significant shareholders. It's also worth noting at this point that there is only one recent broker view on Sefton - Northland Capital has a sell tag on the company with a target price of 0.80p.

Sefton's core areas of operation are within the states of California (where they have a 100% working interest in the Ventura Basin) and Kansas (where they have a 100% working interest in the Forest City Basin). These prospects are heavy crude oil and, both oil and natural gas, respectively. The main focus of Sefton has been to develop previously uncommercial deposits of gas - a similar strategy to firms such as Nostra Terra (LSE:NTOG). A disadvantage to this strategy is that these reserves are often overlooked for a reason. In most cases this is due to them : i) taking a long time to re-pay the costs of drilling, ii) require a high level of attention to relatively low output compared to untapped acreage, iii) are unlikely to stimulate sustainable flow rates without pumps and other mechanisms. Conversely though, these types of prospect are inherently low risk and are cheaper to drill. Sefton have noted that a key component to their strategy is to realise value when hydrocarbon prices are high. Unfortunately though, as will become apparent, it is very difficult to gain farm-in partners through developing depleted and small resources.

Within the Ventura basin are two main projects; the Tapia and Eureka Canyon fields. At Tapia (where Sefton has a 90% net revenue interest), the resource estimate for oil in place is 11 million barrels and there are currently almost 20 wells in production creating ~110 bopd. At Tapia the 'net back' per barrel of oil stands at $34.50 per barrel. On a positive note, oil prices have been increasing rapidly at Tapia so should the trend continue, the company should benefit. Clearly though, on a per well basis, this is very low at just 6 bopd/well hence why this sort of business strategy is not particularly lucrative once you withdraw development costs. The Tapia development also requires cyclic steam flood programs and other methods to boost potential production (such as water disposal units). Steam flooding works by dedicated injection wells pumping steam into the reservoir which both increases the temperature of the oil and increases the pressure of the reservoir. Consequently, flow rates are improved.
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Unfortunately though, for a range of reasons flow rates have disappointed and missed expectations from earlier in the year. For example, Hardman & Co commented on the following in May:
With benefit of steam flood, we are currently forecasting that production will average 195
bopd in 2012 – although steam flooding, remedial work and drilling activity could see it go higher – and 315 bopd in 2013. 

This target has easily been missed and represents a good example of why confidence has been lost in the stock.

This trend follows across to Eureka Canyon (where Sefton has an 87.5% net revenue interest) where
between 6 and 10 wells are currently creating just ~6 bopd each. Eureka Canyon revolves around exploting gas reserves at uncommercial coal bed deposits which, whilst may be of interest to some companies, is not Sefton's expertise. Thus for this type of hydrocarbon development, the emphasis is on quantity of wells drilled and gaining a better understanding of the geology. Positively, the company has two gas pipelines here that are ready to be connected to interstate pipelines. The pipelines have the capacity to deliver 10mmscfd. It is imperative that Sefton pursues production in Kansas as this remains a source of upside that is currently difficult to factor into calculations.

The next few paragraphs will run through key news statements from Sefton in 2012. Following a trading update early in the year, the first news of significance was a reserves report from the Tapia assets in California. The key points from the report are as follows:
  • California oil assets valued at US$137.8 million (£87.7 million) as at 31 December 2011 on a constant costs/price, PV10 basis were slightly higher than the mid-year valuation, despite a reduced oil price.
  • Proved reserves total 3.7 million barrels of oil in California as at 31 December 2011 and remain largely unchanged from the mid-year stage.
  • The quality of reserves is improving as the recent work at Tapia has allowed Proved Undeveloped (PUND) reserves to move up into the Proved Developed Non-Producing (PDNP) and Proved Developed Producing (PDP) category of reserves.

  • The first production report of the year highlighted that production levels were lower than expected at Tapia and two of the newly drilled wells at Tapia required treatment. At Tapia oil production was at 124bopd. In March a CPR was released for the Kansas assets with a PV10 estimate of $140m. Clearly once again, this is far above the current market cap which is due to cash constraints and the resources being undeveloped. The company's full year results were next released with the key points as follows:
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    - Oil and gas revenue up to $4.14m (from $3.58m)
    - Gross profit marginally up to $2.9m
    - Liabilities at $10m
    - Salaries and fees increased to $1.7m (this needs to be reduced, far too high for a small company)

    Following this, the CFO of the company resigned having a 'mutually beneficial contract' not being reached. This is particularly worrying considering the financial state of the company. In May the company signed a £10m equity financing facility whereby the company can raise funds by issuing shares. Whilst this will give it some flexibility in forward work programs, it is a dilutive way to fund operations. This was then upgraded upon completion to a £15m facility. The company noted the following within the press release:

    Alongside the EFF, we are looking to put in place enlarged and more flexible debt facilities as well as industry-related financings such as joint venture financing or farm-out deals to add further to the future financing alternatives available to the Company. 

    The completion of these ideas to help support the company's activities would help to calm some short-term nerves and would aid a rising share price on a relatively short timescale. The issue is effectively pushed down the line, which gives Sefton a bit of time to sort the issues in question. Thus one of these strategies is likely to create a pivot point within the share price.

    The half-year report showed increased oil revenues and oil production levels, but these were largely offset by increases in capital expenditure. Sefton also slipped to a small H1 loss following a profit in 2011 after having to factor in additional cyclic steaming. Liabilities stood at ~$8m and the company re-emphasised the focus to bring in a third-party contributor 'whilst retaining operating control'. Following this the company announced it had purchased a 100% WI in a 14 well lease.

    CEO Jim Ellerton commented:
    “The acquisition of this lease in Leavenworth County is expected to kick start the Company’s oil production in Kansas. In our area of interest in Northeast Kansas, the oil produced comes with associated gas and water. Our pipeline infrastructure system is in the process of being connected to the Southern Star interstate system which will allow such associated gas to get to market. The water disposal facilities that come with this acquisition are extremely beneficial for Sefton and will expand our options for maximizing future oil and gas production."
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    After this an RNS was released correctly the incorrect production figures. August had 96 bopd
    , September 103 bopd and October 112 bopd. Preliminary November figures showed 119 bopd but after this reduction of 4% attributable to the preliminary figures, this only equates to 114bopd (i.e. the increase in November was small). A new water disposal well will also be drilled at Tapia to increase production. Finally following this was a withdrawal of funds from the EFF and a purchase of shares by CEO Ellerton.

    The latest reserves and resources report for Sefton does indicate potential upside in terms of their asset, but these are mostly in the form of reserves that are unexploited. Contingent resources stand at 38bcf worth $27.5m at a PV10 (present value of reserves). However, this will take a long-time and a lot of financial resources to uncover thus perhaps justifies the low current market cap. Alternatively though, total undiscovered (PV10) resources plus reserves are said to total $226m by the company. The problem Sefton currently has is obvious - it simply does not have the necessary cash to even begin to exploit the area and may find it difficult to find a farm-out partner due to the long time requirement to gain sufficient returns. For example, since May 2010, the issued share capital has soared by over 230% which has definitely hit investor confidence. Thus a secure path of financing should be looked for before entering Sefton. Whilst the company currently has an equity financing facility, this is the least secure method of raising funds. Issuing more shares will depress the price which will mean more will need to be issued in the future to raise an equivalent amount.

    In answer to the comments and speculation surround Sefton, these are the key issues that have been highlighted by individuals:
    1. Misreported well production figures
    2. Dilutions will keep on coming
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    In regards to 1, this is true as the firm did come out and clarify their mis-reported previous figures. However, this is hardly worth deliberating over for any longer now the issue has been cleared. After all state production figures are always available for comparison. The scenario has simply hit investor confidence further. Referring to question 2, it is almost inevitable that more dilution is needed in the short-term. There has been no solution to the financial position of the company and they recently enlarged their equity financing facility signalling their intentions. Consequently in the absence of a comprehensive solution, I would expect the share price to drift.

    Sefton finds itself currently in a very awkward financial position. It needs to increase revenues to be able to pay off debts, but it can only increase revenue through increasing production which requires a cash injection. (Kansas production would help alleviate this problem somewhat.) If the company can secure a 40% partner (although its likely to be a small company) at both its fields, it may benefit in helping to fund work programs going forward, but also in terms of past costs. Sefton may also opt for a loan note in combination with the above although this may require high interest payments. In the last four years where Sefton has been cash-flow positive, this cash flow has only been able to fund ~40% of requirements. I would certainly not expect the company to be merging/acquiring other assets considering their current position despite their signalled intention in their October presentation. Perhaps if the above portfolio rationalisation can be achieved (similar to how Sound have) then Sefton could turn be turned around considering the low share price in relation to net asset value. In any case, an investment here before certainty would be very risky and patience would definitely be required on fundamentals. Despite this (contrary to some) it's worth stressing that its far from over at Sefton. A change in tack by the company is probably required, either in strategy of financing. However, it is wise to avoid Sefton until their forward-financing becomes more transparent.


    1. Finally a factual review on sefton


    2. Agree, wouldnt touch ser


    3. sefton nocash

      keep it up

    4. Thanks. Ali report could change sentiment here as and when it comes.

    5. 12 years of wasted capex over $30 million dollars. The $12.2 million dollar debt with The Bank of the West. The 2006 consolidation from 1.7 billion shares to 117 million and the dilution post consolidation which is 500% which in real terms equals 5000% plus on the 1.7 billion that was consolidated. Not forgetting the J Ellerton " Consultancy" Fees the K Arleth "Consultancy" Fees Ellertons pension figures alone are over $2 million dollars.

      Not forgetting the 3 years of Dr Ali Steamflood lies. I wouldn't touch this company with a barge pole it is riddled with greed & corruption. The Hardman & Co notes are a total Joke. Paid for by Sefton as a ramp to sucker in new investors. This company are only going one way and that's boots up, tits up and bankrupt!

      Then there's the 12 years of lies on the cylic steaming in 2000 Ellerton was saying that they could get 800 bopd he's been saying this 3/4 times every year since the IPO

    6. Great entry price now, jigsaw coming together piece by piece.

    7. Wouldn't touch SER with a bargepole, dilutions, dilutions, dilutions!

      No money, no increase in production, just a steady pay packet for the BOD, laughable, buy at your own peril.

    8. I feel genuinely sorry for people sometimes. I have no interests here and never have but 'jigsaw coming together'... have you even read the excellent analysis above? A veritable case study in investor bias.

    9. The trouble with this stock is that while every few years a great " Hardman' type report comes out confirming that there are 100m$ in reserves etc , it costs Sefton
      11 $ to extract and sell 9$ worth of oil . !