Following a farm-out deal in March with Everest Hill Energy Group, which entered into a joint venture with Global Energy for its Bolívar shale oil properties, located within the Middle Magdalena Valley in Colombia, the company has just announced another farm-out agreement with Everest for a 50 per cent stake in its Bocachico licence. In return Global Energy will receive an initial cash payment of $1m (£600,000) upon signing and be fully carried on three wells; two will be re-entries and the other will be a new development well. Importantly, the agreement requires the first two wells to be re-entered within a year of signing and the new well to be completed within two years. The deal is a related party transaction with Everest deemed to be acting in concert with Global Energy’s major shareholder, HKN.
Analyst Andrew McGreary at broking house Northland Capital estimates that the two deals should see Global Energy free-carried on around $30m of combined expenditure, offsetting the dilution at the asset level. In effect, the terms of the Bocachico farm-out agreement are comparable to Bolívar given the three well carry. True, the upfront payment is lower ($1m versus $5m on Bolívar), but the company has prioritised well carries over up front receipts.
Mr McGreary believes this is a sensible move given that the “Bocachico geology has proven tricky to develop due to sand interruption to production and looks to be higher technical risk than Bolívar . However, it is encouraging to see the company progress another monetisation option at no initial financial risk to itself.” I would agree and note that Global Energy now has a free-carried interest of 50 per cent in the development of the Bolívar and Bocachico contract areas which have a combined gross 1P reserves of 33.2m barrels and 2P reserves of 90.4m barrels. In addition, Bolívar contains further 3P reserves of 129m barrels.
In my view, with Global Energy shares trading at 12-month lows, a successful result at either of the two contract areas should provide a significant catalyst for a re-rating. Rig mobilisation is expected to commence later this quarter on the upcoming re-entry of the Catalina well to test the Simiti formation in the Bolívar Association Contract, so we should not have long to wait for further news flow.
Sound asset base
But even without upside from these development wells, the shares are attractive on their own right. That’s because 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. Global Energy has made good progress on the cost front with annual admin costs slashed from $7.9m to $4.9m last year, while robust cashflow resulted in net borrowings being cut from $11.6m to $10m in the 12-month period, or the equivalent of 12 per cent of shareholder funds of $80m.
For the current financial year to end December 2014, analysts Conor Fahy and Andy Edmund at research firm Equity Development forecast Global Energy will report revenues of $30m (based on an average oil price of $82.2 a barrel), pre-tax profits of $7.5m and fully diluted EPS of 7.2p. A prospective PE ratio of 10 seems low in my book for a company that has a free carry on around $30m of combined expenditure!
Furthermore, 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 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 (£46m), or 64 per cent more than Global Energy’s current market value of £28m!
In effect, that leaves the company's Bolivar and the Bocachico area development properties in the price for nothing. Clearly, we need a material change investors’ perception of the company and its prospects to kick start the share price into action. Ultimately, that means upbeat news on the drilling front. But it’s well worth noting that Global Energy's volatile shares could absolutely fly if such news is forthcoming due to its low free float: 86 per cent of the share capital is controlled by the top nine shareholders, including HKN. I have taken this fact into account when making this recommendation.
I also note that Global Energy shares are trading close to support and remain oversold with the 14-day relative-strength indicator (RSI) around 40. So although they have yet to come good and are adrift of my advised buy in price ('Insiders major buy signal', 17 Dec 2012), ahead of the Catalina-1 well result, I continue to rate them a buy on a bid-offer spread of 68p to 70p.
Please note that I am still working my way through a list of companies on my watchlist. I will try and clear the back log this week. The companies include: Inland (INL), API (API), Oakley Capital (OCL), Taylor Wimpey (TW.), Barratt Developments (BDEV) and Bovis (BVS).
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