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Drilling for bumper profits

An independent oil and gas explorer and producer focused on Trinidad and Tobago plans to scale up its onshore drilling campaign and is well set to resume a farm-out of its offshore projects
Drilling for bumper profits
  • 2021 underlying operating profit rises 150 per cent to $6.5mn (£5.2mn)
  • Drilling programme could ramp up production by 20 per cent by 2023
  • Oil price hedges start to unwind in second half, so strong oil price set to have material impact on profits

Trinity Exploration & Production (TRIN:125p), an independent oil and gas explorer and producer focused on Trinidad and Tobago, plans to scale up its onshore drilling campaign this year, having taken a prudent approach to pause these activities in 2021.

The surging oil price certainly supports plans to spend $14mn-$17mn to target 0.45-1.1mn barrels of reserves by drilling four conventional low angle wells (including two wells in the PS-4 Block, acquired in 2021), one horizontal well and one deep appraisal well. Analyst James McCormack of house broker Cenkos Securities estimates that each low angle well will have an initial production rate of 55 barrels of oil per day (bopd), an expected recovery of up to 70,000 barrels, and generate a 31 per cent internal rate of return (IRR) based on a $1.8mn investment. The low angle wells will target some of the 35 opportunities identified by Trinity following interpretation of the 3D seismic data acquired in 2020, thus de-risking the planned investment.

The economics for a high angle well are even more compelling as Trinity could make a two times cash return on its $3.5mn planned investment and an IRR four times higher than for a low angle well. Moreover, the 3D seismic data has identified nine undrilled deep water turbidite leads in the Palo Seco Area, which are located beneath Trinity’s existing producing horizons. A typical target has a 55 per cent plus chance of finding 1mn-6mn barrels of oil in place. Trinity plans to drill a single deeper appraisal well in the first quarter of 2023 at an estimated cost of $4.5m, an investment underpinned by an estimated ultimate recovery of 150,000 to 500,000 barrels of oil and scope to make a 2.4 times cash return.

Importantly, Trinity is a low-cost producer – operating break-even of $29.20 per barrel on average production of 3,069 bopd in 2021 – and will see hedges unwind from the second half onwards, so is set to reap the full benefits from the 77 per cent rise in the West Texas Intermediate benchmark to $110 a barrel since last summer. The combination of a strong oil price – Cenkos expects Trinity to realise a 48 per cent higher oil price of $89.50 a barrel in 2022 – and higher production of 3,229 bopd support forecasts of current year operating profit (post Supplementary Petrol Tax and Property Tax) rising 80 per cent to $11.7mn on 58 per cent higher revenue of $104.8mn. Furthermore, the full benefits of the drilling campaign will be reaped in 2023 when Cenkos believes that operating profit could double to $23.8mn and produce a net profit of $22mn on average production of 3,707 bopd. The implication is that earnings per share will almost treble to 43.3p over the two-year forecast period.

It's worth noting that Trinity is in a strong financial position. Net cash of $15.6mn is expected to only dip to $12.3mn as estimated net cash inflow of $16mn from operating activities this year should fund the majority of the capital expenditure programme. Effectively, Trinity’s 2P proven resources of 19.7mn barrels are in the price for $3 a barrel, and you get a free ride on a further 2C contingent reserves of 47.2mn barrels even though there is development upside.

That’s because Trinity plans to resume the farm-down process to find a partner for its Echo fields on the offshore Galeota Block once reforms of SPT are announced by the Trinidad and Tobago Government. Potential farm-out partners are interested, but they need clarity on the future tax regime. That could be forthcoming sooner than investors realise. Bearing this in mind, Cenkos estimates peak production of 7,000 bopd and capital expenditure (capex) of $150mn (US$8 per barrel) for the Echo project, so any farm-out transaction would be a major valuation catalyst to reverse the unwarranted 10 per cent share price reversal since my last coverage (‘Two slick oil and gas plays’, 3 March 2022).

Trading on a 65 per cent discount to analysts’ risked net asset value estimates, and on a bargain basement 2023 forward price/earnings (PE) ratio of three, Trinity is not only undervalued, but offers potential short-term share price catalysts to narrow the valuation gap with peers. Buy.


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