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Production within touching distance for Touchstone

Shares in the Trinidad and Tobago-focused gas company took a hit in March after a disappointing well test. But that means an opportunity to buy in to rising production on the cheap
April 29, 2021
  • Buying opportunity from Touchstone's recent drilling disappointment
  • Strong infrastructure supports projects
Tip style
Speculative
Risk rating
High
Timescale
Medium Term
Bull points

Positive cash flow getting close

Shares down to under five times book value 

Quick ramp up in sales and profits expected

Another well could deliver where Chinook did not

Bear points

Still largely pre-revenue

Chinook knocked share price and confidence in the block

Our globalised world depends on the free and easy trade of commodities. Prices can vary between regions, like the difference between the West Texas Intermediate (WTI) and Brent crude oil prices, or gold in a street market in India and a London boutique. But for most commodities it is big global events that hold sway, whether a hurricane in the Gulf of Mexico or a labour strike in Chile upping the copper price. 

Gas is different. It is more local. While there is the Henry Hub pricing standard, named after the Arkansas pipeline that is the delivery point for futures contracts, gas prices vary hugely between places. Australia offers a strong example of what can happen when export markets are more attractive for producers – prices skyrocketed on the country’s east coast while gas was sent overseas under contract. 

The divergence of different parts of the market explains why the situation for an Americas-based gas project that is about to reach production is more stable than the regional outlook would suggest. 

US onshore gas production is set to hit a record high next year, according to consultancy Rystad Energy. But south of the boarder in Trinidad and Tobago supply is slowing. 

The twin island country is the largest gas exporter in Latin America, according to IHS Markit. 

Gas expert Fernanda Machado predicts production will be a quarter below 2015 levels by 2022, dropping from 4bn cubic feet per day (bcf/d) to 3bcf/d as large onshore fields approach the end of life and are not replaced. This is just a fraction of the forecast US output next year of 93bcf/d.  

 

 

But Touchstone Exploration (TXP), a Canada-domiciled, Aim-traded company, is not worried about prices crashing. It it is bringing on Trinidad onshore production at the Ortoire block where the sole buyer is the country’s National Gas Company (NGC). The gas it sells onto the NGC has also already been promised to buyers further down the line, giving more certainty. 

This year marks a shift for Touchstone, as it pushes for positive cash flow thanks to the its Coho and Cascadura wells moving into production. There is also hope for another big discovery, although investors will be wary of that as a positive catalyst after getting burned on a Touchstone disappointment last month. 

 

 

The Chinook gas deposit, onshore Trinidad, was the third major discovery in a year when announced in 2020, and added to the excitement around the company. But further testing did not come up with the fantastic, easy-to-extract gas investors were hoping for, with oil and not much else coming out. 

An extended production test is now being conducted, with results expected towards the end of June. 

Touchstone’s share price fell from around 130p to just under 100p in two days on the Chinook news, after already falling back from an all-time high of almost 180p in early February. 

Chief executive Paul Baay told Investors’ Chronicle shareholders had been right to be disappointed but said exploration was always a “rollercoaster ride”. 

“It's tough when you've been testing for a 40mcf/d gas well, if you don't get a 40mcf/d gas well it's disappointment,” he said.

Since the Chinook announcement, the company has announced a successful test of the Cascadura deep well, although this had far less impact on the share price. 

 

What now?

Touchstone’s share price made a nine-fold climb from 20p at the start of 2020 to touch the February high. This leap was because of the discoveries in Trinidad, across the Cascadura, Coho and the ill-feted Chinook deposits. Coho will be going into production in the coming weeks, and Cascadura by the end of the year. 

Once these two are producing gas, the company will swiftly move to positive cash flow territory. It currently sells a small amount of oil, but these two wells will see Touchstone shift from being just an explorer, with Coho producing around 1,500 barrels of oil equivalent per day (boepd), or 10-12mcf/d. Cascadura will be much bigger, at over 5,000boepd, although will take another six months or so to get into production. 

Canaccord Genuity forecasts operating cash flow after tax of $54m next year and $87m in 2023. That compares with just $8m this year. 

Touchstone is a very different prospect from other listed gas players, such as Energean (ENOG), for example, which has a massive amount of infrastructure to build or lease. The Trinidad company just has to build the well, with the NGC paying for the short pipeline to the nearby plants, cutting costs. 

In 2020, the company also became more certain of its reserves. Proven and probable reserves (2P) climbed by 194 per cent to 65m barrels of oil equivalent (mboe). On a net present value basis, with a 10 per cent discount as per industry custom, this almost doubled the value of reserves to $289m. These estimates did not include Chinook, which could still offer recoverable oil and gas. 

According to FactSet figures, the company’s price-to-book value (p/b) hit 14 times in February, and it has now dropped back to under five times. This illustrates both how book value has leaped as a result of last year's discoveries (up from 71p to 124p in March), but also how expectations of further success has been dented as a result of Chinook. Previously, the ratio had raced up from 1 times at the start of 2020, meaning Touchstone’s share price surged ahead of how much gas it was certain it had in the ground. This is fairly common for explorers. 

Importantly, there is plenty more exploration to come which could improve sentiment. Baay said Touchstone's Royston prospect could “make what we’ve done so far look small”. The well is expected to spud next month.

 

Fertile ground

A gas explorer does not fit into many neat investment categories. As a start, an all-white board that is dominated by men is a bad sign for a company that is focused on Trinidad and Tobago from a governance perspective. As a junior fossil fuel company it won’t get on any ESG lists, but expanding the board to reflect where it operates would be a good start, as well shifting the director gender divide from seven-to-one in favour of men. 

Looking at its future operations, gas occupies a middle ground when used for electricity, with lower emissions than coal but also far more than renewables. 

The European Union is still working out whether to include gas-fired power plants in its green financing definitions, and will announce this later in the summer. The industry has long argued gas is needed to replace coal given the intermittent nature of wind and solar power generation, providing a quick drop in emissions. 

Touchstone largely gets to skip this argument because the Trinidad and Tobago National Gas Company largely supplies petrochemical plants where gas rather than power plants is used as a feedstock, to make ammonia and methanol, among other things, although the largest single industry is liquid natural gas (LNG). LNG is exported via ships and might still be burned elsewhere for power generation. 

Touchstone has changed much in the past year, shifting from a junior closer to a mid-cap. It has a strong foothold in a small but important country for the gas market and it has potential to become more important. We think it is worth investors looking past the recent disappointment.

Touchstone Exploration Inc (TXP)   
ORD PRICE:106pMARKET VALUE:£221m  
TOUCH:105-106p12-MONTH HIGH:178pLOW:24.0p
FORWARD DIVIDEND YIELD:nilFORWARD PE RATIO:15  
NET ASSET VALUE:28.8ȼNET CASH:$16.7m  
Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ) 
2019391.9-4.0nil 
202020-3.7-6.0nil 
2021*318.00.0nil 
2022*10840.810.0nil 
% change+245+410-- 
NMS: 
Beta:1.3    
*finncap forecasts, adjusted EPS figures
£1=$1.38