Oilex - Bottomed Out (Again)?

I last covered dual-listed oil and gas producer Oilex (LSE:OEX) just over a year ago, when the site successfully locked in almost 70% worth of gains in around 4 months.  The company, which operates in India, has made some meaningful progress, but not in terms of its share price, which currently stands at just 3p/share. That is just above the recently and long-term lows of 2.88p. The price now seems to have stabilised, and volumes have been growing. Following a replacement of management in late 2012, Interim Managing Director Ron Miller now heads the company. The company has recently completed both a placement, and an sale of part of its share at the Cambay PSC which means the company is in better financial stead and looks a good proposition at the current market cap of £11.78m.Having completed the placement, Oilex has almost 393m shares in issue.

This article is a follow-on from the below post. For full context and information, read this article first:

Above is the current position for the Australian Oilex stock. As the ASX-listed stock is fairly well traded, it is worth keeping an eye on the price movement there as it could drive the UK-listed share price. Overall, the outlook is very bullish if the double bottom is confirmed. Given the rise in volumes, that is the probable scenario.

The technical outlook for the AIM Oilex stock is less clear - I would put that down to the relative illiquidity. That is also shown by a less material increase in volume thus I would look for that as a precursor to upside. The spread is not too wide, and is smaller than the published spreads on many websites. It currently is 6% from Bid-Ask so 3% either side of the mid price. The trend channel that Oilex is currently in, is likely to be broken out of sooner rather than later in my opinion. That is because it continues to extend fairly rapidly downwards meaning that should it be constrained to the channel, a sub £10m market cap would ensue. With the cash balance as it is, plus a high chance of speculation based momentum, I don't see that as a realistic outcome. A break of the channel would require a move past 3.50p, and then 3.63p for a medium-term bullish outlook. That will only really happen with a pick up in volumes and consequently, a short-term improvement in liquidity.

Follows is a brief recap of the company's operations (as outlined in the first report). The company formerly had a 45% interest in the Cambay project in India's Gujarat region. However, Oilex recently announced an Equity Sale Agreement (ESA) in order to reduce their exposure there. The ESA was signed with UK Investment Vehicle, Magna Energy. The first portion of the deal will see Oilex sell a 10% stake in the Cambay project, to Magna for approximately £2.5m with the second portion being an optional extra acquisition of a further 5% for approximately £1.25m. That means that Oilex's new working interest will either be 35% or 30% dependent upon whether or not Magna execute their option. That deal has passed all the formal obstacles. Lastly, should the deal be terminated, the cash is converted to shares. The project itself has a healthy resource level at both the prospective and contingent levels:

Taking the 2C estimates, at the 30% interest level, Oilex has a share of 25 million barrels and 149 bcf of recoverable resources. Those levels are respectable and use low recovery factors, but that is primarily because Oilex's plan is to use fracking to unlock them - a method that is gaining acceptance in several developed economies (particularly the US). However, they are not the largest resources compared to other LSE listed oil and gas producers. The real value here lies in the gas price in India with the domestic price due to be hiked well above many other countries - that figure is set to be just short of $8.00/mcf. That will help Oilex significantly, especially since the discovery cost is estimated at just $0.60/boe. Encouragingly, Oilex has already drilled a multi-stage frac well at Cambay, and although the well was problematic. The well, known as Cambay-76H ran well overdate and overbudget. The problem arose when the fracturing stage opened up pathways from a deeper reservoir and an associated higher pressure that caused 'mechanical problems'. The company will seek to avoid a re-run of that disaster with the knowledge gained.

Positively (at Cambay-73), in April Oilex successfully signed a gas sales agreement (GSA) with an undisclosed Indian company for the sale of off-spec gas production for 2 years. The price is also undisclosed pending the governmental approvals. Acting Managing Director, Ron Miller, said, "The signing of the GSA is an important milestone for the Company as Oilex delivers production from our India assets. It also demonstrates the strong demand and excellent commercialisation opportunities for gas producers in the Cambay Basin which is ideally located in the industrialised state of Gujarat."

Courtesy of Oilex's Archives
Oilex also has an interest in the Bhandut contract area in India. The PSC has minor production and has produced almost 20,000 barrels of oil since it was acquired in 2007 - for reference, in the last financial year, the total production only brought in $196k AUD in revenue, so it is fairly immaterial. However, a test of a 3.5m sand earlier this year retrieved a very decent maximum flow of 6.5mmscfd. The offtake flow rate is suggested to be between 0.5mmscfd - 1mmscfd. Therefore, at the upper estimate, the contingent 250MMscfd resource would last 250 days of production which should help with working capital flows. Production at both Cambay-73 and Bhandut is pencilled in for late 2013 but there is a possibility that could run over into Q1 2014.

Oilex's other main project is in Australia through the SPA-0055 licence in the Canning Basin. The company owns a 100% working interest, but is looking to farm down that to a smaller percentage in order to reduce the risk. The basin covers an area in the North-West of Australia and is 11,400km2. The acreage is touted by the company to be analogous to that of Cairn Energy's Rajasthan project in India, that produces 175,000 bopd. Of course, you can't even start talking about even fractions of those figures as it is very much an unexplored area thus it is high risk. The high working interest does therefore not suit Oilex's portfolio, and in my opinion, a level between 30% and 50% would be a better starting zone. Given the stage of development, the farmout result is unlikely to yield much more on top of a stake reduction. Oilex has also applied for two other blocks in Australia through the government.

Other minor interests include Sabarmati (India) and Indonesia where the company continues to seek a $4.6m payment from SPE following an arbitration award. The company is unlikely to get that full amount, but discussions over at least a partial payment remain and that would be a welcome addition to the balance sheet.

The next focus point for the company is to drill a follow-up well at Cambay, named Cambay-77H. The firm horizontal well at Location D1 (Cambay-77H) will address the remaining Proof of Concept issues subsequent to the suspension of Cambay-76H; specifically the drill out, flow-back and production test from a modern horizontal well with multi-stage fracture stimulations. The well is designed for a simple 350 metre horizontal completion in order to minimise risks and incorporate lessons learned from the previous campaign.

The contingent drilling programme is predicated upon the successful flow-back and production test results of Cambay-77H, the firm horizontal offset well. The vertical pilot contingent well and horizontal well at Location G is designed to test the fluid type distribution across the Contract Area, and will be targeting an area that has tested oil from the X and Y zones in the past. If successful, the well will be side-tracked to a 1200 metre horizontal and stimulated by hydro-fracturing. An independent reserves report will then be commissioned.

Courtesy of Oilex's Archives

Considering the total cost of C-77H is expected to be $13m, you may be wondering about the cash position of Oilex. Oilex noted that post-placement, the cash balance would stand at around £5.3m - if the extra 5% stake is exercised, that will rise. In the case that Magma Energy take up the full 15%, the cash from the equity sale will exceed the cost of drilling the well, whereas if the 10% is taken up, there will be a slight shortfall. Nonetheless, the cash level is fairly strong following the fundraisings. An upside catalyst in the form of a payment from SPE remains possible and could return up to £2.87m to Oilex. However, considering that this cash is well overdue, it is impossible to be certain hence it is possible surprise upside at best.

In the first review I noted that: "At this point in time Oilex is more a recovery play than a long term hold. The follow-up Cambay well will definitely lift the share price if a positive outcome is reached and this is the next key event to look out for. It is unlikely the company will try to raise cash until this is complete. Currently the longer term reason to invest in Oilex is unclear simply because of their cash position. If this is resolved in a relatively dilution-free way, this would pave the way to a strong future for Oilex." I retain the view that this is only a medium-term investment until the company achieves confirmed success at Cambay. The financial position has been improved and should see the company through the first couple of quarters of 2014 at a minimum, especially if the wells are brought online as scheduled. That has been done through the placing and the equity sale.

India's energy sector remains buoyant with a shortfall of supply compared to demand, and that is unlikely to be alleviated in the foreseeable future. Oilex is currently progressing towards the end of a period of non-exploratory work, during which they have strengthened their cash position, and undertaken technical work at Cambay. The Canning Basin asset remains in its early stages and there is unlikely to be material progress there over the next few months - it is therefore imperative that Oilex succeeds at Cambay. They have ample data to base it on and have had ample time to ensure their mistakes at Cambay-76H are not repeated. As the company leaves this non-exploratory phase, I would expect momentum to build ahead of further drill news. The technical position of the Australian stock (which currently leads the UK) is potentially strong (should the double bottom be completed), and the risk-reward at this level is favourable. I have a Buy tag on Oilex at 3.0p.

UPDATE (27/01/14) - I have moved Oilex from Buy to No Rating at 5.88p, locking in a 96% gain. This comes after a sharp move upwards, which is perhaps a little premature given that the drill is still a month away


  1. An interesting little oilie. I like to have some exposure to them and I like that high gas price!


  2. Indian bureaucracy is stifling but the authorities have resolved to do something about it . We'll have a better idea of the potential upside after more drilling .

    There is not much unlicensed known prospective acreage left in Western Australia .

    If and when Oil Basins get native title approval for the Derby block there will be even less left .

    Unlike a lot of acreage in the Canning neither Oilex nor Oil Basin's is in the middle of nowhere .

    Oilex's tests turned up a 600,000 acre half-graben on what was previously overlooked land .

    If they get their expedited native title and are granted the remainder of the Walal Graben bigger players should be knocking their door down to get a slice including their Indian partner ; Gujurat State Petroleum Company .