Freed from financial constraints following a debt restructuring last year, Trinity Exploration & Production (TRIN:14p), an independent oil and gas exploration and production company focused solely on Trinidad and Tobago increased average net production by 14 per cent to 2,871 barrels of oil per day (bopd) to account for 5 per cent of the country’s oil output.
Capital expenditure (capex) rose four-fold to $12.5m in the 12-month trading period, reflecting investment in eight new onshore development wells, of which six were drilled in the fourth quarter, and a low-cost ongoing programme of 143 workovers, 17 recompletions, reactivisations and swabbing across a portfolio of 1,094 wells, a fifth of which are currently active. Onshore production increased by 16 per cent to 1,563 bopd and is highly profitable with an operating breakeven of $16.10 a barrel. Trinity also undertook its first offshore recompletion since assuming operatorship in 2013, and successfully so. Trinity’s East Coast offshore production increased by 15 per cent to 1,110 bopd.
Group operating break even of $29 per barrel was half the realised oil price of $59.8 a barrel. So, with output rising, this meant that after accounting for supplemental petroleum tax (SPT) which is paid when the oil price rises above $50 a barrel, adjusted cash profit increased by more than a fifth to $12.8m on revenues of $62.5m. This is stated before deducting non-cash depreciation, depletion and amortisation charges ($10.7m), hedging costs of $1.1m (which have now been exited), and a $700,000 charge for share based payments. After all these charges, Trinity reported a small operating profit of $277,000.
But the operational leverage of the business should really kick in this year if Trinity’s management team, who own 23 per cent of the equity so are well incentivised to ratchet up output further, lift average output to 3,000 to 3,300 bopd as they are guiding investors to expect. Finance director Jeremy Brisglalsingh is forecasting capex of $8m to $10m this year, a sum covered by house broker Cenkos Securities’ operating cash flow estimate of $15.4m.
Moreover, based on an average oil price of $65 a barrel, and a 14 per cent surge in 2019 production, analyst James Mccormack at Cenkos is pencilling in a 14 per cent rise in revenues to $71.1m to drive operating profit up by 80 per cent to $12m. That’s before accounting for a slightly higher SPT charge of $7.4m.
It’s worth noting that chief executive Bruce Dingwall told me during our results call that Trinity is targeting higher angle or directional wells which could double initial production rates and improve Trinity’s return on capital. The company is also making solid progress with its TGAL field development plans to exploit the reserve potential of the offshore Galeota Block which has 700m barrels of oil in place.
Trinity’s share price is unchanged from when I last suggested buying (‘A game changer’, 7 January 2019) even though it’s successfully ramping up production, has plans to place to exploit the TGAL prospect, and could benefit from reform of SPT that has been earmarked by the Government of Trinidad and Tobago. Positive news flow from any one is a likely catalyst to narrow the 65 per cent share price discount to Cenkos’ risked net asset value of 40p a share which is based on 2P proven reserves of 24.49m barrels (valued at $147m), cash in the bank ($10.2m) and utilised tax losses ($47m). Buy.
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