For instance, shares in Global Energy Development (GED: 68.5p) have yet to come good and are well adrift of my advised buy in price ('Insiders major buy signal', 17 Dec 2012). The lacklustre share price performance has not been helped by a set of full-year results well shy of analysts' estimates. True, operating profits almost doubled to $6.1m (£3.7m), and pre-tax profits rose five-fold to $3.4m, but analyst Andrew McGeary at broking house Northland Capital had predicted that pre-tax profits would surge from $2.7m to $7.8m in 2013. This is disappointing to say the least and reflects a below par second half performance that was hit by production downtime in two key wells (Tilodiran 2 and 3) and natural field decline in the Llanos Basin of Colombia.
The majority of Global Energy's oil production comes from its contract areas located within the Llanos Basin where the focus is on maximising production volumes, reducing operating costs and utilising cash flow to develop projects within the Middle Magdalena Valley contract areas (Bocachico and Bolívar Association Contracts). So mainly reflecting the downtime in the final quarter last year, total gross oil production fell by more than 80,000 barrels to just over 400,000 barrels in 2013, and combined with a 8 per cent decline in the average oil price achieved on sales, this accounts for much of the profit shortfall.
On a positive note, Global Energy has made good progress on the cost front with annual admin costs slashed from $7.9m to $4.9m, while robust cashflow meant that net debt was cut from $11.6m at the end of 2012 to $10m, or the equivalent of around 12 per cent of shareholder funds of $80m. That net debt position does not reflect the $5m cash inflow from the recently announced farm-out deal with Everest Hill Energy Group which has entered into a joint venture with Global Energy for its Bolívar shale oil properties, located within the Middle Magdalena Valley in Colombia.
It made sense for Global Energy to agree a farm-out because in order to boost production and exploit Bolivar's large reserve base, the company needed to ramp up drilling activity, which requires technical expertise and manpower to manage this massive shale oil development project. The first of the two re-entry wells is expected to spud imminently, so we will not have long to wait for newsflow on this front. Everest has also agreed to drill and complete one new exploitation well in the Contract Area within two years of signing the farm-out agreement. Analysts Conor Fahy and Andrew Edmond at broking house Equity Development estimate Everest will incur total drilling costs of $24m on these three wells, on which Global Energy has a free carry and also recoups $5m of its previous development costs.
According to both analysts this is "arguably a much better deal than could have been struck with a major or super major oil company". That reflects the fact that Everest is an affiliated company of the Quasha family trusts which also have an interest in Lyford Investments and HKN, both of which are major shareholders in Global Energy. In other words, the farm-out is in effect being kept inhouse.
Exploiting an valuable asset base
Global Energy may be a minnow with a market capitalisation of just £25m, but it has some significant assets to exploit: its Bolivar reserves now consist of 32.2m barrels (1P-proved), 55m barrels (2P-proved and probable), and 184m barrels (3P- proved, probable and possible). Equity Development forecast $2bn (£1.25bn) of potential pre-tax profits from Global Energy's 1P Bolivar reserves alone in the financial years between 2014 and 2020, albeit by the end of 2016 the investment in capital expenditure is estimated at around $236m including $178m on the first 31 wells. Clearly, a positive announcement on the imminent spudding of the Catalina-1 well would do wonders for Global Energy’s share price as it would finally bring into sharp focus the blue sky potential of the Bolivar properties.
True, oil exploration is inherently a risky business and there is no guarantee that Global Energy and Everest will hit pay dirt. But in the case of Global Energy it still has the valuable Llanos oil producing fields which Equity Development believe are capable of producing $30m of revenue this year (based on an average oil price of $82.2 a barrel) and turn in pre-tax profits of $7.5m. Based on 3.4m barrels (1P-proved), 5.6m barrels (2P-proved and probable), and 6.3m barrels (3P- proved, probable and possible), and a ramp up in output and profits next year following investment in these fields, then Mr Fahy and Mr Edmond arrive at a unrisked valuation of $103.7m for the Lanos Basin 1P reserves alone. The risked valuation is $77.8m, or double Global Energy’s current market value.
In effect, that leaves the company's Bolivar properties in the price for nothing and on which Equity Development have a risked valuation of $350m, or 524p per Global Energy share. And I haven’t even factored in the value inherent in the Bocachico Contracts area.
True, it’s fine banding about some blue sky numbers but for investors’ perception to change, and to finally kick start the share price into action, what is needed now is some upbeat news on the drilling front. So although I was unimpressed by the profit shortfall last year, given the hidden value in the shares, I am happy to give the company the benefit of the doubt ahead of results from the first well.
Please note that around 86 per cent of the company's issued share capital is controlled by the top nine shareholders, so Global Energy's shares can be volatile due to the low free float. I have also taken into account the fact that the shares are trading at support around 68p and are heavily oversold with the 14-day RSI below 30. They are also priced around 25 per cent below their 200-day moving average. In other words, given the low free float and the technical set-up, any positive news on the first well is likely to have quite a dramatic impact on Global Energy’s share price. On a bid offer spread of 67.25p to 68.5p, I continue to rate Global Energy shares a buy.
Please note that I am working my way through a long list of companies on my watch list which have reported results or made announcements recently. These include:IQE (IQE), Pure Wafer (PUR), LMS Capital (LMS), Communisis (CMS), Eros (EROS), Inland (INL), Safestyle (SFE), Sutton Harbour (SUH), First Property (FPO), API (API), SeaEnergy (SEA) and Record (REC).
