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Slick operator offering multiple share price catalysts

A cash-rich independent oil and gas producer is on course to more than double operating profit this year and offers material upside from multiple exploration projects.
Slick operator offering multiple share price catalysts
  • New Galeota licence terms a gamechanger and farm-down process to commence shortly.
  • US$3.5m acquisition of 100 per cent owned PS-4 Block to complete early in fourth quarter.
  • Full-year production guidance 2,900 to 3,100 bopd.
  • 2021 operating cash break-even target below US$30 per barrel.
  • 2021 operating forecast post Supplementary Petroleum tax forecast to rise from US$2.6m to US$5.8m.

Trinity Exploration & Production (TRIN:151p), an independent oil and gas explorer and producer focused on Trinidad and Tobago, looks well placed to deliver material growth for shareholders on multiple fronts. Importantly, Trinity has a well experienced team to deliver this.

The group is being led by chief executive Jeremy Bridglalsingh (previously managing director) following last month’s sad death of founder and chairman Brice Dingwall. The board is being overseen by Nick Clayton, an industry stalwart with 37 years of experience within the global oil and gas sector who commenced his career at BP, and subsequently held senior oil and gas corporate finance roles at both Canaccord Adams and Dresdner Kleinwort Wasserstein. The executive management team has been expanded, too, and the appointment of Derek Hudson as non-executive director looks a smart addition.

Hudson is a geologist by profession, having over 30 years’ senior level experience in the oil and gas industry with multi-national organisations and state enterprises. He worked for BG Group for over 20 years in senior managerial positions in the UK North Sea and Trinidad, was responsible for Shell's upstream and LNG business activities in the country and latterly served as adviser to Shell's Trinidad and Tobago business until June 2021.

The strong rebound in the oil price since last autumn – Trinity’s average realised price of US$55.9 per barrel in the first half of 2021 was 54 per cent higher year-on-year – is not only improving the economics of the group’s existing production (averaged 3,023 barrels of oil per day (bopd) and $27.8 a barrel operating break-even in the first half), but makes new projects more attractive, too.

In mid-July, Trinity entered a new 25-year exploration licence and production licence on the offshore Galeota Block, and on far more attractive terms. Previously, Trinity held a 100 per cent working interest only in the Trintes field (1,100 barrels bopd) and a 65 per cent interest in wider block with its commercial partner Heritage Petroleum holding the other 35 per cent. Heritage has converted its interest to an overriding royalty over the whole Galeota licence area which materially reduces the royalty rate.

Importantly, Trinity now has a 100 per cent working interest over the entire 7,802-hectare block which increases its 2C contingent resources from 23.25m to 31.06m barrels in addition to 19.55m barrels of 2P reserves. Taking 100 per control is a gamechanger for Trinity as it boosts the net asset value of the Galeota licence by 75 per cent (based on the current forward oil price curve), and the improved commercial terms make it more attractive for potential funders for the development. A farm-down process will commence in November (six to nine-month duration) to find a partner for the Echo fields on the license (potential peak production of 4,000 bopd and capex of around US$150mm (US$8 per barrel) with first oil pencilled in for late 2023 if all goes to plan. In addition, there are historic tax losses of US$164m pertaining to the Galeota licence which further underpin the economics of Echo and the nearby Foxtrot and Golf licenses.

Galeota is not the only catalyst for shareholder accretion on the horizon as in the near future Trinity expects to complete the US$3.5m acquisition of the 100 per cent owned PS-4 Block in the prolific producing Grande Ravine area. It is contiguous to Trinity's largest and most prolific onshore Block, WD-5/6, which produces over 1,000 bopd. Production from PS-4 Block started in the 1930s, but due to underinvestment it currently only produces 83 bopd. New workovers and recompletions could boost output to 150 bopd at a cost of around US$150,000 at which point the PS-4 Block should be producing annual cash profit of at least US$1.4m. It's a cracking deal for Trinity's shareholders.

Trinity continues to be cash genartive and well funded, retaining net cash of US$19m and producing operating cash flow (pre-working capital movements) of £7.7m in the latest six-month trading period. House broker Cenkos Securities predicts full-year net cash inflow from operating activities of US$13.8m and is maintaining operating profit forecasts of US$5.8m (post Supplementary Petroleum Tax of US$4.5m) after deducting non-cash depreciation and amortisation charges of US$10.3m. On this basis, it is priced on a modest 10 times operating profit to enterprise valuation, and on less than four times cash profit (post Supplementary Petroleum Tax) to enterprise valuation. Moreover, its 2P reserves are effectively in the price for US$3.1 per barrel (24 per cent lower than the average for Aim-traded peers), and its 2C reserves at US$1.2 per barrel (46 per cent discount to peers).

That’s not only an unwarranted low-ball valuation, but one that doesn’t attribute any value to Trinity’s other business initiatives (partnering with heavy weight and cash rich oil group Cairn Energy) on the west coast offshore Jubilee Prospect nor the high impact onshore North West District opportunity. Bids on both prospects could be submitted on both by mid-November. Strong buy.

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