Moves by banks, refineries and ship owners to self-sanction imports of Russian oil have sent the Brent crude oil price gushing to a multi-year high well above $120 (£90) a barrel. In fact, analysts estimate that more than two-thirds of Russian crude is struggling to find a home. The market could get even tighter still given that Russian exports of 5mn barrels per day of crude oil account for 5 per cent of global supply, half of which is sold to Europe.
There are calls for European countries to cut off their gas purchases from Russia even though the country supplies 40 per cent of the region’s gas. The uncertain geopolitical situation has put a rocket under the wholesale price which more than doubled last week to a record intraday high of 465p a therm (15.9p per kwh) in the UK and €200 per MWh (16.6p per kwh) in Europe.
The need for Europe to reduce reliance on Russian energy imports is great news for Chariot ( CHAR:10.1p), an African-focused energy group which is seeking a funding partner for its low-cost flagship Anchois Gas development, offshore of Morocco. Excess gas will be sold into Europe (‘Bargain shares: Hitting pay dirt’, 10 January 2022). It’s good news for another company on my watchlist, too.
Priced to hit pay dirt
- Fourth-quarter production up 3 per cent to 3,103 barrels of oil per day (bopd)
- $29.2 a barrel operating break-even in 2021
- 50 per cent of production hedged for 2022
- Farm-down process ongoing on Galeota licenses to find a partner for the Echo fields
The surging price of West Texas Intermediate (WTI) could not have come at more opportune time for Trinity Exploration & Production (TRIN:138p), an independent oil and gas explorer and producer focused on Trinidad and Tobago.
Last summer, Trinity entered a new 25-year exploration licence and production licence on the offshore Galeota Block, and on better terms. Previously, Trinity held a 100 per cent working interest in the Trintes field (1,100 barrels bopd) and a 65 per cent interest in wider block with its commercial partner Heritage Petroleum. In exchange for giving Heritage a lower royalty rate over the whole Galeota Block, Trinity now holds a 100 per cent working interest in the licenses and increased its 2C contingent resources by a third to 31.06m barrels. Trinity also holds 19.55m barrels of 2P reserves.
Trinity started a farm-down process in November to find a partner for its Echo fields, which house broker Cenkos estimates could have peak production of 7,000 bopd and require capital expenditure (capex) of $150mn (US$8 per barrel). Assuming a farm down is completed by the summer, then first oil is likely by the end of 2023. Historic tax losses of $164mn relating to the Galeota licence further underpin the economics of Echo and the nearby Foxtrot and Golf licenses. With several supermajors announcing 2022 capex increases of between 15 and 30 per cent, there is an increasingly amount of capital available to target low-cost, low-risk developments in safe geographic regions. Trinity’s Galeota Block is likely to be a highly attractive investment opportunity.
It’s worth noting, too, that although housebroker Cenkos Securities predicts Trinity’s reported operating profit will soar from $2.9mn to $7.4mn in 2022 based on 21 per cent higher revenue of $81.8mn, these estimates only factor in an average realised oil price of $74.3 a barrel. WTI hit a high of $113 a barrel last week, so even allowing for a 10 per cent discount on the spot rate, Trinity is still realising $102 a barrel. Furthermore, the company has only hedged 50 per cent of its 3,116 bopd budgeted production for 2022. If current prices hold for the rest of the year, then Trinity’s operating profit could be heading for double Cenkos’s current estimate even after factoring in higher Supplemental Petroleum Tax charges.
The point is that Trinity only has an enterprise valuation of $55mn after adjusting for net cash of $18.3mn. The potential for game-changing newsflow on a succesful farm-down of its Echo license, and earnings upgrades when the company reports first-quarter results in April, are being seriously undervalued with Trinity’s 2P reserves in the price for a bargain basement $1.72 per barrel. Buy.
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