Coro Energy – Time To Buy?

COROsouth-east-asia-skyline
Coro Energy continues to drive into South East Asia – time to buy?

This week saw Coro take another step into the South East Asian gas and oil market with an agreement to survey a prospective block offshore of Malaysia. Coro’s shares fell 5.4pc to 2.27p on the news, continuing a broader downturn that has seen the company drop from 4.2p since September. Is it worth taking a punt on the firm now in the early stages of its new pan-Euro Asian strategy before it potentially starts to gain more traction?

In an update earlier this week, Coro revealed that it has agreed to conduct a joint technical study over a Malaysian block called 2A with a firm called Petroleum Nasional Berhad, or Petronas. Block 2A is located in a deepwater area near the prolific Sarawak basin. Although it is yet to be drilled, work to date has identified numerous large structural closures at prospective levels consistent with nearby plays. Initially, the deal will allow Coro to conduct an extensive technical analysis of the block before giving it the option to apply for a production sharing contract, subject to approval from Petronas. On the news, Coro’s chief executive James Menzies said: 

‘We would like to thank Petronas for giving Coro the opportunity to work on this exciting acreage. This is a fantastic opportunity for Coro to use its technical skills in firming up these very large structural leads to drillable prospects using the very high-quality data now at our disposal.’

Wider efforts

The agreement represents the latest step in Coro’s efforts to become an established mid-cap Asian oil & gas player. This work began earlier this year when the company launched a new pan-Euro Asian strategy, changed its name from Saffron Energy, and secured £14m to pursue new Asian opportunities.

As we have previously written about at length, Coro made its first move into Asia in September, when it bought a 42.5pc stake in the Bulu production sharing contract offshore east Java for $12m in cash and shares. The fully-funded acquisition, which pushed Coro’s shares up by 12pc, includes the Lengo gas field, which contains gross 2C resources of 359Bcf recoverable dry gas and total 3C resources of 420Bcf. It is expected to produce at a plateau rate of c.70MMscfd – 30MMscfd net to Coro – when it comes on stream.

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In its interim results, Coro said it acquired the assets at a price of $0.1/MMbtu. Given that the East Java gas market typically prices between $5.50-$8MMbtu, the company believes this price could be ‘physically transformational’ for its operations. The remainder of the site will be owned by Kris Energy, which also has a 42.5pc stake, and local partners Satria Energindo and Satria Wijaya Kusuma, which own 10c and 5pc of the field respectively.

A field development plan for the contract, on which developers have historically spent c.$100m, has been approved by Indonesian authorities and an MOU has been signed with a gas buyer. Marketing efforts have also begun to target the East Java Industrial Complex.

With the assets lifting Coro’s capacity by almost 500pc through the addition of 152bcf in net resources, Menzies described the acquisition at the time as a ‘strong initial platform on which to progress our SE Asian growth strategy’. According to the firm, it also took its EBITDA potential from $5m per annum to $35-$45m per annum

Alongside its drive to enter Asia, is also worth noting Coro’s acquisition of Sound Energy Holdings Italy at the time of its strategic change. The purchase greatly expanded the business’s presence in Italy, giving it five production concessions, four exploration permits, and four exploration permit applications in the country. The portfolio includes the producing Sillaro, Bezzecca, and Rapagnano fields, which together produced 203MMscf of gas in the first six months of the year, an average of 1.3MMscf/day that generated total revenues of €1.1m. Strong Italian gas prices, which averaged €6/mcf,m supported this figure over the period.

At the end of May, Coro reiterated its belief that its Italian portfolio – which contains 23.31bcf of 2C gas resources and 2.4MMbbls of 2C oil resources – can support its Asian growth strategy significantly.

Market gap

This week’s acquisition provides further evidence of Coro’s commitment to establishing itself in South East Asia.

 

The business, which primarily focuses on gas but is also assessing opportunities in the oil space, believes it has identified an industrial need and gap in the market for regional small to mid-cap upstream players. It puts this down to the region’s rapid economic growth, with increasing GDP rates, corresponding growth in energy demand and a shortage of resources in significant markets leading demand to significantly outstrip supply. By focusing on commercialising oil and gas resources in the region, with a particular focus on high-graded countries like Indonesia, Malaysia, and Vietnam, it believes it can create ‘latent value’ from this dynamic.

Rather than focus on one particular area, it believes it can create shareholder value from almost any stage of the value curve. Indeed, it says exploration assets can contribute value through technical de-risking and the drill bit, appraisal assets can provide low-cost development options, and producing assets can provide financial synergies.

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To remedy the historical difficulties foreign firms have had in operating across South East Asia, Coro has also assembled a management team with the technical skills and commercial experience needed to turn a profit in the region. Chiefly, Menzies has extensive knowledge of building and monetising asset portfolios in Thailand, Indonesia, and Malaysia. Meanwhile, non-executive chairman James Parsons is CEO of Sound Energy and has more than 20 years of experience in strategy, management, finance, and corporate development. Likewise, non-executive director Fiona MacAulay was CEO of Echo Energy and has more than 30 years of experience in oil and gas.

The company also enjoys a notably substantial amount of backing from the institutional market, with CIP Merchant Capital owning 21pc of shares and Lombard Odier holding a 26pc stake (from Coro’s November presentation).

On the cash side of things, it is slightly more difficult to get a precise idea of Coro’s current position. As at the end of June 2018, it had cash and cash equivalents of £12.2m and 164.8m warrants in issue, exercisable at 6.6p each before 09/04/2019. It also burned through c.€2.5 of general and admin expenses in H1 (c.€416,000/month). As mentioned, since then the firm has announced its acquisition of the Lengo field. However, with the deal being structured so that Coro has to pay just part of the acquisition cost upon the deal’s completion, its cash position could remain strong. Further details on this point can be found here.

With its foot now in the door – both through this week’s deal and September’s Lengo acquisition – the company has claimed to be developing a ‘pipeline of accretive deals’ in Asia. If this week’s agreement is anything to go by, it will be interesting to see if it can win over the market and prompt a re-rate with its progress as news flow develops. If you think it can, then Coro’s recent weakness could present a buying opportunity.

In September the company presented at Oil Capital, updating us on the Bulu acquisition
The author was remunerated but does not hold shares in the company


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