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Dead cow, rising Phoenix?

Following a big restructuring, Phoenix Global has emerged as a focused, all-in bet on Argentinian shale
June 22, 2018

For many, the exploration, production and commodity price risks attached to resource companies are enough to rule out an investment. Throw in Argentina, a country in apparent economic freefall, and even more will bow out. But those left over might look at Phoenix Global Resources (PGR) (shares in which have slumped since re-listing last August) and see a risk worth taking. That’s because the company has a massive position in the Vaca Muerta (or ‘dead cow’) shale basin, which has geological parallels with the major US shale plays. Those already convinced include several supermajors, who have collectively spent billions of dollars (routinely at over $7,000-an-acre) to gain a foothold. Apply that benchmark to Phoenix’s frontier geography, and its Vaca Muerta assets alone could be worth $3.9bn (£2.9bn). With financing, a strong board and a fully mapped exploration programme to its name, Phoenix is poised to test an exciting proposition.

IC TIP: Buy at 19.5p
Tip style
Speculative
Risk rating
High
Timescale
Medium Term
Bull points

Funded work programme

Shares at 12-month low

Board quality

Profitable production

Bear points

Economic turmoil

Exploration risk

Naturally, an awful lot needs to go right. That is the hope, and major strategic bet, by commodity trading group Mercuria, which created Phoenix through a complicated merger of Aim-traded Andes Energia and independent explorer PETSA. But while the core business is a speculative (if highly detailed) wager on Argentinian shale, the group is backed by conventional daily production of more than 10,000 barrels of oil-equivalent (boe).

This output is profitable. In the first quarter of 2018, netbacks (that is, sales less royalties, tax and operating costs), ran to $23 a barrel, which should prove more than enough to cover the $65m earmarked this year to develop conventional assets in the Neuquina basin, alongside wells at Cuyana and Austral. The other $125m of capital expenditure scheduled – more than double last year’s budget – will go towards unconventional acreage. Principally, this centres on concessions in the Puesto Rojas area, where 10 wells, including one horizontal well, will be drilled in 2018, and Mata Mora, where Phoenix expects to drill two wells in the third quarter to be completed in the fourth quarter.

Finance has been provided by a $160m convertible revolving credit facility from Mercuria, which can be converted to equity at 45p. A similar arrangement saw Mercuria convert $100m of debt into new Phoenix shares at 37p earlier this year, which somewhat skews the net debt position in the table below. Such funding offers both possible future dilution, and near-term equity growth.

In pursuing the latter, Phoenix has appointed former BT chairman Sir Michael Rake, and a drilling team with “decades of unconventional experience of shale development”. But while this knowhow is set to flow into Argentina, capital has moved in the opposite direction in recent months, leading the peso to sink, and forcing the pro-business government of Mauricio Macri to request up to $50bn from the International Monetary Fund (IMF).

PHOENIX GLOBAL RESOURCES (PGR) 
ORD PRICE:19.5pMARKET VALUE:£536m
TOUCH:18-22p12-MONTH HIGH:71pLOW: 19p
FORWARD DIVIDEND YIELD:NILFORWARD PE RATIO:11
NET ASSET VALUE:10.3¢*NET DEBT:60%
Year to 31 DecTurnover ($m)Pre-tax profit ($m)**Earnings per share (¢)**Dividend per share (¢)
201612917.91.0nil
2017142-287-19.0nil
2018*20144.91.1nil
2019*2941052.4nil
% change+47+133+118-
NMS:7,500   
BETA:0.43   

£1=$1.33.

*Includes intangible assets of $207m, or 75c a share

**Panmure Gordon forecasts, and adjusted pre-tax and EPS numbers.