Time, at last, for President Energy?
“…with the ongoing energy supply crisis, promising overtures by the Argentinian government to the country’s hydrocarbons sector, a clutch of new wells coming on stream, and an intriguing green energy spin-out, is it time to look at President Energy…”
South America and US-focused oil and gas exploration and development company President Energy (AIM:PPC) has been overlooked by the markets for quite some time now, having had a difficult few years since an ambitious 2019 drilling programme stalled. But with the ongoing energy supply crisis, promising overtures by the Argentinian government to the country’s hydrocarbons sector, a clutch of new wells coming on stream, and an intriguing green energy spin-out, is it time to take another look at this somewhat neglected share?
PPC has a cluster of producing fields in the Neuquén Basin, situated in Argentina’s Río Negro Province, encompassing 90pc interests in the Puesto Flores, Estancia Vieja, Puesto Prado and Las Bases Concessions, and a wholly-owned exploration contract for Angostura. It also owns the Puesto Guardian Concession in the country’s Noroeste Basin, exploration opportunities in Paraguay, and cash generative production assets in Louisiana. The company recorded group net average production 2,473 boepd through 2021, and net 2P (proven and probable) reserves in Argentina of 24.4 MMboe.
PPC seeds ATOME
Last year’s most significant development was the spin-out of PPC’s clean energy interests into newly-listed ATOME Energy (AIM:ATOM), a first mover in the production of fertiliser products through green hydrogen. The new company has benefitted from the world’s pressing demand for agricultural feed, another commodity entangled in the current supply crisis, which has helped push its stock up nearly 15pc over the past year. PPC retains a 28pc interest, reaping $13m through the dividend in specie of ATOM shares.
ATOM is developing projects in Paraguay and Iceland with the potential to generate 400MW. A trading update last month reported a 60MW power purchase agreement with Paraguay’s state energy company for the production of green hydrogen and ammonia, targeting commencement of operations at or around the end of 2024. An electrolyser is scheduled for delivery to Iceland by the end of the year, with first revenues projected for H1 2023. Encouraged by investor interest in ATOM, PPC Chairman Peter Levine has established Green House Capital as an incubator for alternative energy related businesses.
Renewal in Argentina
Though ATOM has attracted much of the market’s interest, PPC has continued to develop its Argentinian assets over the past year, most notably through a three well drilling programme at Salta in the Puesto Guardian Concession. All three have records of past production. Production at DP2001 and 2003, in Dos Puntitas Field, is being ramped up to 190 bopd per well, and a third, PG13, is achieving more than 200 bopd. A May update reported that, after extensive testing to optimise well-flow, DP2001 was producing 200 bopd, and that similar results were expected at DP2003.
PPC finally seems to be benefitting from more favourable conditions in Argentina for the sale of oil and gas. The country has long maintained a rigid exchange control regime preventing producers from repatriating profits, and a system of fuel subsidies allowing oil to be sold in the domestic market at a controlled price only about half that of the world level. In 2019 Argentina’s previous president Mauricio Macri issued a controversial decree freezing fuel prices, reducing the price producers could charge by almost 25pc for a full three months between September and December, somewhat undermining the ambitious $50m work programme PPC had scheduled for that year.
But the tide has begun to turn since the election of Alberto Fernández, who has ended the decree and offered new support for the energy sector. During the pandemic refiners were obliged to source their crude domestically, and a minimum oil reference price was set. And this year, after years of lobbying, the government has begun to relax exchange controls, allowing producers to convert revenues from part of their additional production into dollars. Keen to step up production to contribute to the present supply crisis, Argentina is now talking up the potential of Vaca Muerta, the world’s second-largest shale gas deposit and its fourth-largest shale oil reserve, noting that if 50pc of the development’s resources were brought to market Argentina would generate more than $30bn a year of additional export earnings. PPC is beginning to benefit. The company’s Q1 results for Argentinian production reported an average price for Rio Negro oil over the past five months of $63 per barrel, and another update last month said prices for its Salta crude had risen 12pc since the start of the year to $66 per barrel.
Encouraged by higher prices PPC is renewing steps to farm-out a gas exploration project at Martinez del Tineo within its Puesto Guardian licence. A 2012 report estimated the prospect as having Unrisked Recoverable Resources at 570 Bcf of gas and 14.5 MMbls of condensate, upgraded in 2016 through an internal estimate of approximately 2.8 Tcf of gas and 69 MMbbls of condensate from two independent formations. PPC’s original plans to farm-out the prospect five years ago were put on hold as market conditions worsened, but it is now being re-evaluated in the light of a 50pc increase in domestic realisable gas prices to nearly $4 per million thermal units. The company says the ‘process is now being re-activated with steps to be taken to update the offering and data room and promote the same to the market with such marketing both domestically and internationally likely to commence before the end of Q3 2022’. The project would take advantage of the infrastructure PPC has already developed for existing production.
Elsewhere in South America PPC has farmed out part of its interest in the Pirity Concession, an exploration asset in Paraguay, to the CPC Corporation, Taiwan’s state energy company. The joint venture, in which PPC retains a 50pc stake, raised $4m for a pilot well to test the field’s potential. An April update confirmed the drilling location at Tapir 1, within the Concession’s Delray Complex of prospects, which internal estimates indicate have a total of 306 MMbbls PMean unrisked recoverable oil in place. An independent sub-surface study commissioned in March estimates Tapir has a 17pc chance of success. Spudding is scheduled for Q4 this year.
PPC’s producing resource in the US was hit hard last year, falling by 64pc to 94 boepd (2020: 258 boepd) after a four-month outage at its Triche well in Louisiana, and dislocation in production either side of the outage. The company has a 70pc working interest in Louisiana, with 1P current proven producing reserves estimated at 724 Mboe. But the asset is producing closer to its potential following workovers earlier this year, and benefitting from higher oil prices. An April update stated that the Triche well is producing in-line with expectations in the range of 180 barrels of oil per day plus gas, and a second well, Simmons, is also producing in line with an expected 50 barrels of oil a day. Triche has since ramped up to 300 boepd. An internal estimate of proven recoverable oil from the well indicates some 300,000 barrels of oil yet to be produced, giving a total realisable gross undiscounted sales value from the well at $100 per barrel oil of $30m.
PPC’s results for the year ended 31 December 2021, published last month, show the company moving back into the black: profit before tax for the year was $5.7m against a loss of $10.3m for 2020, and profit after tax $4.6m against a loss of $11.3m. Average realised sales prices in Argentina rose by 35pc to $40.6 per boe (2020: $30.0 per boe), and in the US to $43.1 (2020: $29.9 per boe). Group revenue increased by 23pc to $34.1m (2020: $27.8m), and free cash generation from core operations excluding changes in working capital, administrative expense, and non-recurring workovers more than doubled to $12.8m (2020: $6.2m). Adjusted EBITDA increased by 257pc to $7.5m (2020: $2.1m) with the adjusted EBITDA contribution from Argentina $10.5m (2020: $2.9m). Cash balances at year end amounted to $2m (2020: $1.1m).
Last year’s heavy capex programme pushed borrowings at year end to $29.3m (2020: $17.7m). Of this, $18m is third party financial debt with the balance owed to one of Mr Levine’s affiliate companies. Development drilling and working capital in Argentina was funded primarily through finance raised on the local market via the issue of a bond and a number of promissory notes, the first time PPC had issued a corporate bond. Last year the company issued an Argentina bond of $8.95m with a credit rating of A- investment grade. A further tranche of $3.585m was issued earlier this year.
A May financial update reported further progress. The average oil price received in Rio Negro of $54 per barrel is up by 8pc and is projected to increase further this year. EBITDA and free cash generation for the quarter was $4.5m, and profit before tax for the first three months of the year $5.3m, and after tax, $4.5m. PPC is currently projecting turnover in Argentina for the full year in excess of $40m once revenues generated by the new wells at Salta are accounted for.
So, is it finally time for PPC to catch the market’s eye? The company’s share price has drifted for a long time now. After touching 10p in 2018 it fell during PPC’s disappointing 2019 all the way to 1p, before stabilising at around 1.4p, where it remains today. Perhaps the company now has the classic qualities of a value share? – a somewhat overlooked stock beginning to benefit from more favourable market conditions. With new drilling in Argentina and the Paraguay farm-out PPC is stepping up production, and it is realising good returns from its stake in its (rather more glamorous) spin-out ATOME Energy. PPC continues to benefit from a strong institutional investor base, comprising Trafigura (also the company’s principal offtaker), Schroders, and the International Finance Corporation, part of the World Bank Group. Chairman Peter Levine owns nearly a third of the company. Perhaps now might be the time for retail investors to take a renewed interest in one of AIM’s overlooked stocks.