The 44 per cent plunge in the oil price in the fourth quarter last year savaged the share prices of oil companies and Trinity Exploration & Production (TRIN:11p), an independent oil and gas exploration and production company focused solely on Trinidad and Tobago, was no exception. However, although the West Texas Intermediate (WTI) crude oil price has rebounded by more than 30 per cent from its Boxing Day lows, Trinity's share price is once again trading back at those December lows.
As a result, Trinity is one of the lowest rated players in the sector, a valuation that is completely at odds with the company’s operational performance. Indeed, ahead of the release of first-half results in early September, Trinity’s management team – who between them own 23 per cent of the issued share capital – have revealed that first-half average production increased by 8.6 per cent to 3,008 barrels of oil per day (bopd), and that an eight-well onshore drilling campaign has just commenced to boost output even further in the second half, and beyond.
Trinity will be drilling a number of high-angle wells, the industry standard in many basins around the world, in order to try to yield initial production rates and reserves more than double those achieved from conventional vertical wells. Analyst James McCormack at house broker Cenkos Securities is factoring in 2019 net average production of 3,224 bopd, at the top end of management guidance of 3,000 to 3,000 bopd, and well ahead of the 2,871 bopd produced in 2018.
In light of the sell down in the oil price last year, Trinity has sensibly taken the decision to hedge out more than a quarter of its annual output to protect cash flows between $50 and $55 a barrel. This also helps mitigate the impact of supplemental petroleum tax (SPT), which is paid when the oil price rises above $50 a barrel. The current WTI price is around $56 a barrel.
There is undoubtedly value on offer here. Trinity has a market capitalisation of £42.2m and an enterprise valuation of £28m after factoring in net cash of £14.2m at the end of June 2019. To put that into some perspective, Mr McCormack at Cenkos believes that Trinity will be able to produce operating profit of $12m from revenues of $71m in 2019. Deduct from that profit an estimated SPT charge of $7.4m, add back a tax credit of $4.5m, and a debt-free business that could make net profit of $9.2m (£7.4m) is effectively being rated on a miserly four times net earnings. The company is also trading on a hefty discount to Cenkos’ core NAV of 40p a share, and Whitman Howard’s risked NAV-based target price of 32p.
Moreover, Trinity’s 2P reserves of 24.5m barrels of oil equivalent (boe) are being priced at only £1.15 per boe, massively below its Latin American peer group. For instance, Amerisur Resources (AMER), the oil and gas exploration and development company operating in Paraguay and Colombia, has 25.6m boe of 2P reserves, but these are valued at £6.56 per boe. It received a bid approach this week, a point that further highlights Trinity’s chronic undervaluation. Also, even if you factor in the 2C resources of both companies, Amerisur’s total reserves are still valued 4.5 times higher than those of Trinity. It’s not an isolated comparable either as the 25m boe of 2P reserves of President Energy (PPC), a company with operations in Paraguay and Argentina, are effectively being priced at £100m, a valuation that is 3.5 times higher than Trinity’s almost identical level of 2P reserves.
From my lens at least, Trinity’s undervaluation is clearly anomalous especially as the management team led by chairman Bruce Dingwall has a plan in place to ramp up low-cost onshore drilling activity at a high operating margin in order to accelerate profit growth in the coming years. It’s worth noting too that three directors have between them purchased more than 700,000 shares at prices between 11.25p and 11.7p since my last article (‘Trinity’s low-cost production boost to 2019 profits’, 2 April 2019). Also, the board participated in last year's equity raise to de-gear the balance sheet and provide the company with the funding required for the drilling programme, one reason why I suggested buying the shares last autumn, albeit I hadn't envisaged the subsequent decline in the oil price which has dented sentiment ('Alpha Company Research: Simon Thompson’s oil recovery play', 3 September 2018).
The bottom line is that the pullback in Trinity’s share price from the 14p level when I covered the annual results in early April is a buying opportunity well worth exploiting. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
