By Anthony Wintle
Financial Review Of Block Energy
Rather than look at the assets like most reports seem to, I intend to focus this analysis on the Profit and Loss and the cash flow that could arise as a result of production.
I’m basing my calculations on standard management accounting formats but I will attempt to translate it as best I can into layman’s terms.
The company has stated that at $75 per barrel they can sell each barrel for $65 per barrel (spot minus $10) They have also mentioned that at this price they have a break-even of 84bopd (250/3) It is, therefore, $65 per barrel and 84bopd that I have based my workings on in regards to finding the break-even and standard Cost of sale per unit. (see workings below)
I have also used $ as the currency throughout to avoid fluctuation in FX variances. However, you will see a small fx difference on the admin costs as a result of not having the available fx rate used by the company. This won’t have a material impact on the result of this exercise so has been mostly ignored.
- Variable costs for Block energy are very low per BOPD at only $17,
- The fixed cost of sale expense is $1.99million per year which is average – below average for an aim listed company.
- Other fixed costs including admin are $1.26million
- Forecast figures for 2000bopd
- The company has stated they are aiming for 2000bopd
I have no reason to think this won’t be achieved as the WR play is based on a naturally fractured play for which past experience shows that 2000bopd can be achieved from a single sidetrack. (assumed from past experience in similar geology and assuming the fractures as active in the length being drilled).
We have also seen Norio produce very good initial flow rates using the “new to Georgia” perforation tool. If oil price is $75bopd spot rate at the time the 2000bopd level is reached we can assume that the profit before tax and other charges would be $33.6 million
Taking into consideration that the Mcap is actually £10million currently (19/2/2019) and based on a PE of 10 we should see the Mcap reach roughly $336million or the £ equivalent based on 2000bopd production.
Before anyone says drilling costs will come out of that, I would think that only the depreciation costs would increase as drilling costs should be posted to the relevant asset account and depreciation is taken out at the applicable rate. Granted, we will see increased costs as a result but nothing substantial.
I would expect cash inflow to be increasing as each well comes online, however, as drilling is a cost-intensive we would also expect costs to increase during times of drilling activity and non-stop drilling seems to be a relative certainty over the coming months. That being said, we know that they already have a fixed price contract for drilling and that its well within current cash reserve levels.
The big question then is, will there be a placing in the future? In regards to keeping the lights on and operating expenses, I would suggest that they will have sufficient funds and sufficient inflow of cash from oil sales to continue without a placing. They have stated numerous times that they are funded to complete phase one of the project which will bring them to 900bopd and into a profit-making position.
In regards to cash flow at 900bopd, they should have ample cash to continue future operations without the need to raise funds. They also have a deal on the horizon for an offtake of their future gas production and the other party will pay for the gas sale infrastructure. This will help them grow without the need to raise large amounts of funds to get the infrastructure to do so. The only reason for Block Energy to raise funds would be to buy more assets and they will be reluctant to raise funds at the levels we are at currently.
I hope you have enjoyed this article and I hope it helps to shine some light on the possible future of Block Energy.
Paul Haywood CEO spoke with Bonnie Hughes in February 2019