Sefton Resources - Downward Spiral

http://www.seftonresources.com/

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Sefton Resources (LSE:SER) has continued its downward crawl since the first review in December where I came to the conclusion that 'it is wise to avoid Sefton until their forward-financing becomes more transparent.' Ultimately, there has been no significant changes implemented and the current operational structure is simply not sustainable in any sense. With the company launching legal proceedings against two online writers (BrokerManDaniel & Tom Winnifrith) the drop has accelerated as the circa 1.05p/share resistance was broken through. The share price has reached the technical target I had set of 0.80-0.75p and currently lies at 0.78p/share equating to a 31% decline over the three month period. Sefton now has a market cap of £4.48m.

This article is a follow-on from the below posts. For full context and information, read these articles first:
http://www.theel1tetrader.com/2012/12/sefton-resources-whats-going-on.html


The current sentiment towards Sefton is strongly negative and this is reflected in the share price and is demonstrated by continuous downward movements with only relatively small bounce interspersed within them. Whilst there may be some short-term relief as some investors try to trade Sefton, the downtrend is not being tested for any sort of breakout and any news that has the capacity to create a breakout is only on the horizon (a horizon which seems to move as time passes). The technical outlook for Sefton is weak.

An extract from my last article outlines the operational structure of Sefton as below:
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.
courtesy of Kendrickhang on flickr

Personally I dislike companies that focus their operations on trying to access small amounts of gas/oil through either fracking or targeting depleted resources through new techniques. Although this method requires relatively low capital expenditure, production rates tend to stagnate and tail off as reservoir pressures are depleted. Furthermore, distractions such as salt-water disposal wells and other methods are often required to maintain what is a relatively low rate of production. Due to this, acquisitions of new acreage is often required in order to ensure that there are adequate resources which just leads to greater capital expenditure. Many of these firms tend to have small interests in the acreages which combined with the low rates of production often leads to money being whittled away whilst there is no material income. The specific problem with this for Sefton is that they don't have the cash to whittle away and the income they are receiving simply is not enough to solely fund the company's current level of expenditure as proved by the numerous equity placings that have needed to be undertaken. (Important to note though that this method can be successful).

Since the article in December the company has released the following news statements. The company started off the newflow in 2013 with an update regarding its Californian production. The data for November 2012 showed confirmed readings that indicated an average of circa 114bopd compared with 112bopd for the previous month. Considering the company only has a 90% net revenue interest here, this is completely immaterial to Sefton. With 30 days in November this translated to 3422 barrels. Considering that there are 31 days in October the increase is minimal as the October figure translates to around 3478 barrels - it would be difficult to attribute this production to increasing prospectivity as it such a small disparity (less than 2%) could be considered as a natural fluctuation. The company noted: "The Company is planning to resolve the most critical oil production limiting factor at Tapia by drilling a new water disposal well. A DOGGR permit is in hand for this new well and we are awaiting L.A. County to provide a permit. A rig is available once all permitting is completed." The issue with these solutions is that they very much are short-medium term. Oil production will likely receive a short-medium term boost but for many US wells the figures tail off again afterwards. An update to Dr Ali's steam flood report was also briefly mentioned in the RNS with no end for his project noted (even despite the report being unforgivably late compared to what the initial RNSs hinted at all those months back).

Towards the end of January a further production update was noted with final oil production figures for December at 133bopd which was more encouraging although this has since shrunk back to 111bopd in January (although restricted due to testing/repairs) and an estimated 118bopd in February. As pointed out earlier, these so called low-risk wells are not capable of driving shareholder value especially when there are only a few of them operating. In early February an operational update on their Kansas assets was released. It included 550 barrels of oil have been sold since operations began in the latter part of 2012, which includes 300 barrels of oil sold in January 2013 with production coming primarily from two leases. Chairman Jim Ellerton commented, "Kansas E&P operations are now generating revenue from oil sales with plans for a steady increase of such. The scope for growth in Kansas is considerable, especially as gas sales are added over the coming months. We look forward to being able to make regular production updates from Kansas and demonstrate the validity of our growth strategy for this business. "  The company would need to demonstrate the validity through being able to maintain 300bopm as a base level of production and build on this, each time increasing this base level. The problem with this is that dilution is almost inevitable again - the company does not have alternative sources of cash to attempt to solve expensive production issues.

courtesy of brewbooks on flickr

In February another brief Californian and Dr Ali report update was issued - the company seems to have caught on to the lack of newsflow regarding the latter and now seems intent on tracking the matter carefully and allowing shareholders to know what is progressing. The problem with this is that it's effectively rubbing salt into shareholders wounds who probably just want the report done and not be told that each stage is being completed with still no final end date.

Perhaps the most interesting news statement is that the company decided to take legal action against BMD and TW in relation to various articles they have posted on the internet over the last year. Ultimately the company will be the only ones who know whether or not their statements have been misleading and will have had professional advice over this. Whilst they could be interpreted as being misleading this does not necessarily mean they are and one would guess the company has enough information to back up their claims - why else would they commence legal proceedings? On the contrary, some of the news statements have proven to be very unreliable such as the timescale for Dr Ali's report, but once again unreliable ≠ inaccurate. The outcome of these proceedings are anyones guess, but the problem for shareholders is that this is bound to be an unwelcome distraction for the board and hence if anyone suffers, it will firstly be the shareholders. In addition, the legal fees will need to be stumped up which once again could require further equity placings in the short term which would drive down the share price. Even if the company do win the court case the potential placings would have already caused irreparable damage. A final trading update was issued today, but it was more of an operational update with the February data as mentioned earlier, another note that Dr Ali's work was progressing and noted that further re-completions would increase production from the average ~10bopd. Once again these would require investment using money that the company may need to raise and the cost may not exceed the benefit.

This next section will point out facts from Sefton's last Half Yearly report for the first six months of 2012:
- Oil revenue totalled $2.28m
- Capital Expenditure totalled $2.8m
- Cash and cash equivalents at $2.5m (which has since been depleted)
- Cost of sales grew to $945,000
- Administrative expenses totalled $955,000
- The company is evaluating using a mixture of equity (being used), debt and Joint Ventures for forward funding

Even though Sefton has high PV10 figures for its reserves, a significant proportion of these are unexploited hence attract a very substantial discount. With Sefton not having sorted its financial situation the outlook for the company remains bleak with a 0.50p technical target. In respect to this, if Sefton can give away (literally) a percentage stake in its Kansas assets, then progress may be expedited, but even still there is not a large enough source of money that the company can use to further its projects without dilution. Unfortunately the legal proceedings are likely to act as an unwelcome distraction for the board during a period of financial difficulty for the company that is unlikely to ease in the short-term. The initial 0.75-0.8p target range has now been successfully met. The potential for a turn-around of the company is diminishing and to that end I have no positive stance on the company - the current risk is excessive.

6 comments:

  1. sad but true

    Good write

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  2. I'm glad I stay away from this share.

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  3. spot on but will be funny to see tw squirm!

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  4. Would'nt touch this one with a bargepole or anything the Directors are involved with in the future. I keep a list of directors and their past interests.

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  5. LOL - the day after you write this there is a placing at 0.6p!!!!

    You're calls are impressive

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  6. It's one big fraud.

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