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OPINION

Oversold and ripe for a bounce

Oversold and ripe for a bounce
September 10, 2014
Oversold and ripe for a bounce
IC TIP: Hold at 44p

The reason for the share price slide reflects mixed drilling updates following re-entry of its Catalina well in the Bolívar Association Contract area, located within the Middle Magdalena Valley in Colombia. The use of sand in the stimulation process collected at the oil-water interface and acted as the agent to create the emulsion. In turn, the presence of an emulsion substantially blocked most reservoir fluids pumped in from reaching the wellbore. The company's later attempts to remove this blockage by inducing pressure surges within the formation, in order to form a corridor to allow oil to pass through the emulsion, were ineffective.

So Global Energy has decided to shut in the well and put on hold ongoing capital costs having taken the view that the formation oil will eventually move back towards the wellbore and the emulsion will organically breakdown as formation and wellbore pressures equalise. That seems a sensible decision to me to allow nature to run its course on the emulsion within the well for the next few months.

However, the knee-jerk reaction of investors led to a sharp share price slide. It seems lost on investors that recoverable reserves remain intact: On various estimates Bolívar contains 32.2m barrels (1P-proved), 55m barrels (2P-proved and probable), and 184m barrels (3P- proved, probable and possible). Moreover, the funding costs of the drilling are being fully met by partner Everest Hill Energy following a farm-out agreement whereby the company retains a 50 per cent interest in its Bolivar license area and has a fully carried interest on three wells. These comprise re-entry and fracking of two existing wells (including Catalina) and completion of one new exploitation well.

Furthermore, investors are ignoring the important discovery that the Simiti formation has massive natural fracturing. This means that more conventional, and far less expensive, means of recovering oil can be used rather than relying on fracking. It also means that the company does not need to use high pressure and high volume fracturing in its next Bolivar project. It also seems lost on investors that it is Everest, and not Global Energy, that is fronting drilling costs of $24m (£14m) on the three wells. Moreover, there is no reason to suggest that more conventional forms of drilling will not deliver more positive results on Global Energy’s next well.

True, oil exploration is inherently a risky business and there is no guarantee that Global Energy and Everest will hit pay dirt on any of the wells. But it’s worth noting that Global Energy still has its valuable Llanos oil producing fields which analysts at Equity Development believe are capable of turning in pre-tax profits of $5.5m (£3.4m), albeit this is $2m shy of the firm’s previous estimate. If achieved then this should produce EPS of 5.4p and means that the shares are priced on just eight times earnings estimates. It also means that with Global Energy shares trading at such a depressed level the company’s equity is being valued at just £16m and it is being attributed an enterprise value of only £22m. In my view, the profitable Llanos fields justify that valuation alone meaning that the development activity on both the Bocachico and Bolívar Association Contract areas is in effect in the price for free.

I would point out too that the technical set-up favours a share price bounce: the 14-day relative strength indicator on Global Energy’s shares is massively oversold (below 20), and having retraced back to the March 2009 and July 2007 lows of 40p, then it is only reasonable to expect some sort of technical retracement from this key support level.

Admittedly, the investment has not worked out since I initiated coverage at 103p (‘Insiders major buy signal’, 17 December 2012), and the shares are also well down on my last buy advice at 56p (‘Global Energy sell-off’, 31 July 2014). However, given the drilling campaign is being ascribed no value at all in the current market valuation of Global Energy, I would hold onto the heavily oversold shares ahead of a further update at the time of the interim financial results later this month.

■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'