- First-half operating profit before petroleum taxes increases 84 per cent to $5.4mn
- Net cash and working capital surplus equate to 36 per cent of market capitalisation
- Fully funded drilling programme on track to be on stream in first half of 2023
Trinity Exploration & Production (TRIN:112p), a £44mn market capitalisation oil and gas explorer and producer focused on Trinidad and Tobago, is on course to deliver a material increase in production next year and, with all hedges unwinding in the second half of 2022, deliver a step change in profits, too.
In the first half, Trinity commenced a fully funded onshore drilling campaign (four conventional infill wells, a horizontal well and a deeper appraisal well), targeting up to 1.1mn barrels of oil at a cost of $14mn to $17mn. It is expected that the four conventional low angle wells will be brought onto production by the year-end, targeting cumulative production rates of 200 to 250 barrels of oil per day (bopd).
By the end of the first half of 2023, all six wells should be onstream, underpinning house broker Cenkos Securities’ forecast that Trinity could increase average production by 20 per cent from 3,028 to 3,600 bopd in 2023. The broker has taken a prudent view of realised West Texas Intermediate oil prices, pencilling in an average of $84.2 (2022) and $70.5 (2023), both being below the current spot rate of $86.2.
However, hedging arrangements are unwinding from 58 per cent in the first half of 2022 to only 30 per cent in the second half. This means that the $6mn cash cost of the hedging arrangements in the first half of 2022 will halve to $3.2mn in the second half of this year based on current mark-to-market exposure. On this basis, Cenkos expects Trinity to deliver operating profits of $17.1mn (2022) and $26.9mn (2023) and adjusted earnings per share (EPS) of 14.8p (2022) and 42.3p (2023). This implies the shares are rated on forward price/earnings (PE) ratios of 7.8 (2022) and 2.7 (2023).
Moreover, based on 2P reserves alone, Trinity is effectively being valued at $1.80 per barrel, a massive discount to sector peers, and a bargain basement $0.50 per barrel once you include 2C reserves. The valuation is even more anomalous given that Trinity’s operating break-even of $32.40 per barrel is more than 60 per cent below the spot WTI oil price, and the company ended the first half with net cash plus working capital surplus of $18.6mn (41p a share). Furthermore, the Trinidad and Tobago Government has vowed to conduct a comprehensive review of the country’s oil tax regime, so this could lead to improved terms for royalty rates and petroleum taxes.
Trinity’s board acknowledge that the current market valuation fails to accurately reflect the company’s improving profit profile, not to mention a highly valuable asset base, having announced an initial $1mn share buyback programme ahead of the interim results, and a proposal to start paying regular dividends in 2023. They could be the catalysts to bring Trinity onto the radar of investors.
So, having last recommended buying the shares, at 94p (‘Slick operators’, 19 July 2022), I strongly feel that the catalysts are in place to deliver a major re-rating. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
■ 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 at £16.95 each plus postage and packaging. Details of the content can be viewed on www.ypdbooks.com.
Promotion: Subject to stock availability, the books can be purchased for £10 each plus £3.95 postage and packaging, or £20 for both books plus £5.75 postage and packaging.
