Trinidadian oil exploration hots up

Aim junior Leni Gas & Oil (LGO) has seen its share price rise four-fold this year on the back of successful drilling at its mature Goudron field onshore Trinidad. Shares in rival onshore operator Range Resources (RRL), meanwhile, have doubled in value since May, as have shares in Toronto Stock Exchange-listed Touchstone Exploration (TSX: TXP). This is despite the wider Aim oil and gas sector retreating a miserable 20 per cent over the past six months.

The excitement in Trinidad mainly stems from long-awaited changes to the country's onerous tax regime that were finally passed into law in June. These include cost recovery measures as well as exploration and development tax breaks designed to reward companies seeking to increase onshore oil production. Reductions in royalty rates have also been successfully negotiated on a case-by-case basis. At the same time, there has been early progress toward redeveloping major onshore oil fields previously operated by the likes of Texaco and state-owned Petrotrin. Onshore fields have largely been left alone for the past 40 years but rising oil prices, technological advances and the proposed changes to Trinidad's tax regime have caused oil executives to look at them with fresh eyes.

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Sunshine and pumpjacks

We looked at the backdrop to oil and gas production in Trinidad & Tobago in detail last time around, but for newcomers the broker's view section at the end of this article provides some useful background information. The key issue facing Trinidad is that, just like in the UK North Sea, oil and gas production has dramatically declined over the past decade as new discoveries have failed to keep pace with depleting reserves. While it will undoubtedly take time for the new stimulus measures to take full effect, they have already spurred several Aim-traded oil juniors to ramp up drilling. As a result, hydrocarbon production on the islands should quickly increase. Below, we examine the operations of each of the four current operators in turn.

Leni Gas & Oil

Despite having the lowest average oil production rate, Leni Gas & Oil is the largest Trinidad-focused oil junior by market capitalisation following a four-fold rise in its share price this year. Investorsare excited by the company's flagship Goudron field.

It was originally exploited by Texaco between 1956 and 1986 and still has about 100 old, inactive or poorly producing wells on site, along with decent enough infrastructure and direct access to an export pipeline. By reactivating previously shut-in wells, completing well work-overs and using new equipment, Leni has grown production from around 40 barrels of oil per day (bopd) in 2012 to a high of 388 bopd in October 2013. Eventually, it hopes to unlock further reserves using more expensive enhanced recovery techniques such as waterflooding.

In the past few months, however, Leni has focused on drilling new wells on the property under a 30-well infill development programme. The first well, GY-664, was completed on 30 May and intersected a whopping 300 feet of viable deposits in the Gros Morne sandstone reservoir, as well as a 79-foot deposit in the Lower Cruse reservoir. Initial production tests outperformed historical flow rates by up to four times, yielding an impressive 240 bopd. However, it will be interesting to see what the flow rate falls to after 30 days, as these types of reservoirs on the island have been known to deplete quite quickly. Notably, it has been nearly two months since the initial flow test was conducted, but Leni has not yet updated the market as to the well's current performance.

Leni has drilled three more wells since then, all of which intersected significant deposits (but flow test data has not been released yet). The company has also agreed to acquire another small producing field on the island, for which it recently raised £7m in a placing at 3.5p a share.

Range Resources

Range Resources has undergone a major makeover in 2014. The company's chairman brought in a new chief executive officer, along with some new non-executive directors in January. Range quickly initiated a farm-out or sale process to rid itself of non-core licences in Texas, Guatemala, Georgia and Colombia. Then came a partial refinancing of the company by bringing in a strategic partner and getting rid of several nasty equity swap arrangements.

Now, Range is focusing its efforts on Trinidad where the company is the largest private onshore acreage holder. Like Leni, its flagship Morne Diablo, South Quarry, and Beach Marcelle properties are old onshore fields that have been producing on and off since the early 1900s; their current output is a meagre 630 bopd from around 165 producing wells, mainly in the Lower, Middle or Upper Cruse formations. Field improvements on existing assets should continue to boost production incrementally, but a step-change in production will likely come from two planned activities: drilling new wells or implementing a wide-reaching waterflooding programme.

Last month Range completed the first new well at South Quarry since 2007; it came online at a stabilised rate of 70 bopd - a solid result. The company has four fully operational drill rigs and plans to drill additional targets across its portfolio over the coming year, possibly subject to a capital issue. It is also tripling the size of its waterflooding pilot programme at Morne Diablo, but a much larger scheme at Beach will take longer since it requires more extensive infrastructure.

Touchstone Exploration

Toronto Stock Exchange-listed Touchstone Exploration is producing three times more oil than Range or Leni from its onshore licences in Trinidad - yet its market capitalisation is roughly half that of its rivals. The chief reason behind the discount is that Touchstone also owns substantially loss-making Canadian heavy oil operations, which it inherited in a merger with Petrobank Energy earlier this year. That merger gave it access to Petrobank's large cash pile, though, and as a result Touchstone now has roughly C$44m in net cash (£25m). In 2014, the company plans to spend C$28m drilling 21 wells across its Trinidad licences to achieve a production rate of between 2,300 and 2,400 bopd by the year-end. It has drilled four wells so far, intersecting substantial commercial intervals in the Lower, Middle and Upper Cruse formations.

Trinity Exploration & Production (TRIN)

Local exploration and production group Trinity merged with Aim's Bayfield Energy last year, raising $90m (£53m) to pay for the exploration and development of some exciting offshore oil and gas prospects. Despite also generating cash profits of $35m from its producing properties (both onshore and offshore) in 2013, the group had just $9m in its treasury by 31 December 2013 after drilling an expensive exploration well offshore Trinidad, among other things. Thankfully, the TGAL-1 well was successful, encountering 547 feet of net oil pay; management believes the field contains between 50m and 115m barrels of oil in place. It will nevertheless take a few years to develop the new field. In the meantime, though, Trinity continues to spend furiously: it just drilled an infill well at its Trintes field, which experienced some unforeseen pressure difficulties, and the group has also agreed to buy four undeveloped offshore gas assets from Centrica for $23m.

FAVOURITE

Touchstone's shares offer investors the greatest value, although as they're listed in Canada, they're more difficult to trade. Three-fifths of the company's current market capitalisation is backed by cash and the its lower-risk, active drilling programme should provide plenty of share price catalysts. Importantly, Touchstone has committed to suspending its Canadian operations if it can't make them profitable this year, which could result in a positive re-rating.

OUTSIDER

Leni Gas & Oil's Goudron field undoubtedly has potential but we believe a lot of the upside is already priced in. Leni's market capitalisation is larger than any of its rivals, but the company is loss-making and its oil output is still minimal. True, successful flow tests from the Leni's current drill programme could quickly change this. But we believe a cautious approach is warranted for now until extended flow tests have de-risked the new wells at Goudron.

IC VIEW:

The new fiscal incentives in Trinidad should make it more profitable to develop small oil and gas fields on the island. We expect drilling activity to continue to ramp up and the recent positive share price momentum to continue.