President Energy, are a small-cap oil and gas company listed on the AIM market, and fast becoming one of the market’s enigmas. Over the past 10 years, President has carefully constructed a promising portfolio of operated onshore producing and exploration assets in Argentina, the United States and Paraguay. The company is profitable, known for its laser focus on costs, and has a respected management team with significant holdings.
And yet its share price has tended to drift at levels considerably lower than what these fundamentals might suggest. Currently, less than 1.4p, President’s price has tumbled more than 80pc over the past 12 months.
The company’s Argentinian assets include 90pc working interests in the Puesto Flores, Estancia Vieja, Puesto Prado, and Las Bases fields, and a 100% interest in the recently acquired Angostura exploration area. It has revenue-generating operated interests in Louisiana, and two prospective fields in Paraguay.
President’s institutional investor base is strong, including Trafigura (also the company’s principal offtaker), Schroders, and the International Finance Corporation (IFC), part of the World Bank Group. Chairman Peter Levine has a nearly 30pc stake in the company. President’s debt is falling, now standing at $3.7m, down from a peak of $10.7m just 18 months ago.
According to its full-year trading update, published in February, President had a decent year in 2019. A pipeline between its Puesto Prado and Las Bases facilities in Rio Negro was completed, allowing greater volumes of gas to flow to market, including first gas from the Estancia Vieja, which also produced first oil. Puesto Flores and Estancia Vieja were unified in one enlarged concession, and the producing Angostura field was purchased. The company recorded an average production of 2,414 boepd, 6% up on the previous year.
These operations generated a turnover of approximately $41m, just down on 2018 ($47m), and a cash operating profit of approximately $10m after all administrative expenses and workovers, but before depreciation.
But the market has remained sceptical about the company prospects in what is perceived to be a volatile working environment.
President’s 2019 performance was respectable but fell short of expectations set last March, when the company announced an ambitious fully funded $50m work programme comprising 15 new wells and 20 workovers, together with pipeline construction and infrastructure works.
Circumstances soon intervened. Oil prices below $50 a barrel cut into revenues. Flooding caused a three-month shutdown at a Louisiana well. More seriously for President’s reputation, there were a series of issues specific to Argentina. Electricity supply outages contributed to unplanned downtime at key producing wells. And a debt crisis – involving the biggest ever International Monetary Fund (IMF) programme – hit the country’s hydrocarbons sector hard.
In response to a plunge in the value of the Peso, Mauricio Macri’s outgoing administration issued the controversial ‘Decree 566’ to freeze fuel prices, reducing the price producers could charge by almost 25pc for a full three months between September and December. President’s revenues were hit both by lower oil prices and the falling exchange rate, forcing the company to suspend its programme.
Last year Argentina elected a new Peronist president Alberto Fernández who, though vague so far about how to address the debt crisis, has ended Decree 566, and indicated significant new support for the energy sector. Fernández has ruled that refiners will have to source all of their crude domestically, and has prepared a proposal to set a minimum oil reference price at $45 per barrel for indigenous production. The price would apply retroactively from 1 April and remain in effect for the rest of the year. A similar measure was implemented under the Presidency of Christina Kirchner, now Fernández’s Vice-President.
The measures lend weight to Peter Levine’s frequent defence of Argentina’s suitability as a working environment. In a June 2019 interview with Malcolm Graham-Wood Levine argued that doubt among some investors about the country was often based on unjustified ‘blindness’ and ‘prejudice’. President had never had a problem with Argentian regulators at federal or provincial level. The company had never encountered corruption and never had an issue receiving payment: President deals with a few major buyers, notably Trafigura and Shell.
Peering through the clouds
Nonetheless, given Argentina’s chronic tendency to economic turbulence, investors can be forgiven for their caution. And as with the global oil and gas market, the long-term impact Covid-19 will have on Argentina and President Energy is unclear.
But the new administration seems to recognise the critical importance a strong energy sector will have for helping the country out of its latest debt crisis. And President Energy is well placed to benefit from any recovery.
Through the swirling clouds, a company can be discerned with strong fundamentals capable of long-term revenue generation. In its March operations update, President said the new Rio Negro gas pipeline has enabled gas production of 1,000 boepd, which is expected to increase to 2,000 boepd by the end of H1 2020. The company is preparing to drill three new wells in Rio Negro, with the first expected to be spudded by the end of H1, and a further six wells are targeted across its assets later in the year. The recently acquired Angostura exploration block is expected to contribute some 600 boepd. President is standing by its guidance for average production in 2020 of more than 4,000 boepd.
The same update was hedged with a cautionary note that has become standard throughout the industry: in light of recent market developments the company’s 2020 capex budget is under review. But, for all the uncertainty, right now President looks substantially unvalued. It has solid assets, a robust programme, and continues to generate revenue. President is definitely worth looking at for a long term investment.
Friend of TMS Malcolm talks to Peter Levine, Chairman of President Energy Here
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The author was remunerated but does not hold shares in the company