President Energy: extremely exciting oil strike, but be careful – funding is needed

Comments

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   Steve

   20 October 2014, 14:39

   Ben,

   Good article. I’m a holder of PPC and am hugely excited after this announcement on top of what was excellent news from Jaracanda but needed the sparkle of a discovery that this has provided. It seems a prolific petroleum system has been proved in this part of Paraguay, where PPC own huge acreage and have identified almost 30 distinct prospects. You’re absolutely correct about Management and I’m confident when PPC announce it is expected to be commercial it will be commercial.

   Just a couple of comments.

   Oil prices are no longer plunging – they have stabilised around $85 for Brent – whether this is the end is debatable but I believe if Brent threatened $80 OPEC will step in. Regardless of which the fiscal terms and the fact that this is onshore mean that this will be relatively low down the cost curve. Amerisur resources probably provide a useful comparison where at $80, pre-tax netbacks are around $40 per barrel.

   On the funding side, I agree its almost certain that at some point PPC will need funding and it will likely be equity. The question is when – Jaracanda re-entry would seem to be direct replacement for Tapir so I don’t see it changes what was a fully funded drilling campaign, so I don’t believe funds are needed imminently. Similarly will 31p last if Lapacho strikes on the primary target or after successful flow tests would be announced. Similarly is Jaracanda proves more oil what does the SP look like? The results so far and today make all of these scenarios more likely.

   In terms of how much equity is needed – again referring to Amerisur after the initial well, development is more or less self-funding. My assumption would be that $40million would be more than adequate. This would be around 100million additional shares at an issue price of 25p.

   So I would agree that with the current market state and the fact that fund raising is likely required there may be opportunities to get in at a better price. However, even assuming a 100million issuance at 25p, todays share price capitalises this at just £160million which seems awfully cheap given todays announcement and the acreage PPC have and given upcoming activities it may not be possible to get a position at a much cheaper price than today.

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   Ben Turney

   20 October 2014, 15:15

   @Steve – thank you for this reply.

   I need to write a piece about oil prices. My view is that they are being driven largely by the prospect of imminent QE withdrawal. OPEC no longer has the same influence it used to. Did you see recent Saudi comments about $80 oil?

   As for PPC, I’ve given this some more thought, since publishing and I think the chances of an imminent placement are very high. Look at this way – if PPC places in the next week or so, it can offer placement participants the potential of a rise in anticipation of Lapacho’s flow testing and the re-entry of Jacaranda. As a sales hook this looks like quite a compelling one to me.

   What price the market will pay for the placement is another matter and I think PPC’s board would do well to get it out of the way, as more nastiness could be around the corner for the oil price.

   (as an aside, there’s little point mentioning Brent in reference to PPC. WTI is the relevant benchmark)

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   Jonathan

   20 October 2014, 17:49

   Given general sp depression.before this news, I think the board would be stupid to not place now! Put it in at 20p, and it goes back to where it was yesterday.

   If I were invested yhere, and 2 days ago someone told me that there would be 100or 50mil placed at current share price I would have said YES PLEASE!

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   Steve

   20 October 2014, 18:38

   Ben,

   Thanks for the response.

   My initial reference to Brent is because that is what I believe OPEC will start to defend at $80 – I know the Saudi stance so far but I believe OPEC as a whole will want to act at $80 and I don’t see Saudi risking a breakup. I also think that once $80 is breached traders will step in as below this price some production becomes unviable.

   Also having checked PPC investor presentations they state they have a sale at Wellhead agreed at the Brent Index.

   Giving the fragility of the markets I certainly wouldn’t be critical of the board if tomorrow they announced the issue of 100million shares to secure necessary funding. However I believe they will wait for a flow test and then the risk of non commerciality is removed but the upside of Jaracanda and near term production remains.

   All speculation from both of us though! :o)

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   Ben Turney

   20 October 2014, 19:30

   @Jonathan – I agree. The FOMC meets next week and if it confirms the end of American QE, the price of oil could tank. I think sorting the funding out sooner rather than later would be the right move, but as @Steve says, this is all speculation

   @Steve – whatever the outcome, I do believe this is a very well run company and given its license coverage in the region, there is massive potential. The Jacaranda re-entry is a very exciting prospect

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   Steve

   20 October 2014, 20:17

   Hi Ben,

   Thanks for the response – the initial reason I referred to Brent is because that is the Benchmark most relevant to OPEC and I believe at $80 they will take action. There seem to be contradictory noise coming out of Saudi but other OPEC members will be more desperate and so I think Saudi will support OPEC at $80 rather than risk a rift. I also think below $80 traders will start to take positions as an increased amount of current production and future production becomes non-profitable. Brent is not trading at much of a premium to WTI now anyway.

   However I also checked the President investor presentations and they state that they have an agreement to sell at the wellhead against the Brent benchmark so it is valid for President.

   As to fundraising – I certainly would not be unhappy if the board tomorrow issue 100million shares to ensure funding is in place – it would be prudent in these choppy markets. However my personal belief is they will wait until the flow test then they can offer investors lower risk as commerciality is proven but there is still the bonus of Jaracanda and production would be only 12 months away.

   We’ll see – regardless I think a buy now will be good for the long term. Nothing wrong with waiting for a better price but they don’t ring a bell at the bottom!

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   John ☠ The Tax Collector ☠ Zacchaeus

   24 October 2014, 13:00

   250m of net oil play is unbelievable!

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   John ☠ The Tax Collector ☠ Zacchaeus

   24 October 2014, 20:37

   If they hit the equivalent of 2bn boe in the lapacho , the SP should hit around 150p giving more than enough for a 100m gbp fundraising.