Petsec Energy: Cheap With Many Upside Catalysts

By Greg Tolpigin | More Articles by Greg Tolpigin

I wrote over a month ago in my column on MGM Wireless (MWR) the process that I look for when identifying opportunities that could return multiples of my original investment.

Being mispriced or severely undervalued is certainly one of those criteria but the key of not being tied down to such an investment for years waiting for the so-called “value” to be unlocked and the market to recognize the opportunity all comes down to identifying a trigger point. Several trigger points are even better.

One such stock that is extremely undervalued and has several potential trigger points to unlock value is Petsec Energy (PSA). PSA currently has a market cap of $55 million and trades at 17c per share. At this level just one of its assets is being reflected in its market cap and its largest is essentially not – meaning that investors are getting this asset for free and all its potential upside.

PSA has two main geographical assets, the USA and Yemen. Within the USA that have to assets – the Hummer Gas/Oil Field (testing in July/August of 6 oil reservoirs) and the Mystic Bayou where drilling is aimed for mid-2019. The Yemen oil assets are enormous and are contained in two blocks with the Nagyah oilfield the most significant. This oil field was producing 10,000 barrels per day before being just in February 2014.

The two major trigger points for unlocking value in PSA is the testing of 6 oil/gas reservoirs in the Hummer Field in July/August and the liberation of the port of Hodeidah in Yemen from the rebel Huothis. This will open the pipeline directly from the PSA’s Nagyah oil field right through to the Ras Isa Terminal in the Red Sea. This pipeline has a 80,000 barrels per day capacity. The PSA share price has enjoyed a rally in the past fortnight as the Saudi and UAE led coalition have made the biggest assault (since the war began 3 years ago) at driving the rebel Houthis out of the region. They recently took control of the airport and are due to make an assault on the port shortly.

The best way to explain the opportunity here in PSA from a broad level view is via this slide below from the Company’s recent presentation (who we met with in our offices for an in depth understanding of their operations). Looking at just existing reserves (2P) within the USA of 3.8 million barrels of oil equivalent is worth 14c per share. This is existing 2P reserves, not potential or possible if upcoming testing is successful, but current. This valuation was also completed with an assumption of an Australian dollar exchange rate of UDS$0.76. As my column last week discussed, the Australian dollar is due to continue its trend lower and currently sits around USD$0.735 adding more upside to these valuations.

With a share price of 17c, what do investors get for an additional 3c per share? For this mere 3c, investors get everything below that first entry in the Net Asset Value table below – success from the current testing of the 6 oil/gas reservoirs in the next two months PLUS all the two Yemen oil fields with production ready to go from the Nagyah oilfield. The valuation on the 2P reserves of 5.6 million barrels of oil equivalent is worth 63c per share. On existing 2P reserves PSA is worth >77c.

The value of the Yemen assets will be unlocked with the liberation of the port and Ras Isa oil terminal which is currently underway. How successful and the timing is unknown but the share price has finally begun to move in anticipation and with the biggest offensive led to date to reach that objective, hope is at its highest. But I personally don’t invest on “hope”. This leads to the contingency plan of trucking the oil from the Nagyah oil field to the oil terminals on the other side of Yemen which PSA is awaiting approval for. While there will be an additional cost for doing so cashflows drop by only US$7 million from $52 to $45 when compared to using the pipeline (equivalent of around $10.bbl). Photos below show the two trucking plans and it’s worth noting that OMV Group just obtained approval to truck their oil from their nearby oil field shown.

A brief discussion of the drilling at the Hummer Field (offshore Gulf of Mexico near the coast of Mississippi), highlights the high probability of success here, much more than the market is currently pricing. I am not an oil and gas analyst by any stretch of the imagination hence why I refer to company presentation slides and why I like to Company management explain to me the details of these in person. The slide below shows far better than I can explain the objectives of the B2 well (for appraisal and development). The B1 well is a producing well in the field having intersected several reservoirs. The lowest reservoir E is the main objective of this well and it is an already producing in nearby fields. The B2 well will also test deeper reservoirs as well as the successful ones from the B1 well/platform. Given the knowledge obtained of the field from the B1 well/platform I am confident good news will be seen here.

The PSA share price as I noted earlier has been on the move in keeping with the offensive in Yemen. This has pushed the share price to over 20c and in the process has begun to breakout from a decade long base. As the potential upside from drilling/testing continues to move closer to success and we see a trucking/pipeline resolution in Yemen the resulting rally could be very significant as the share price is re-rated back to its true underlying value. It very well could be a case of rallying as quickly as it fell in 2008. Initial targets would be into the 30/35c zone which are the series of highs from 2009/2010 but beyond that, very little resistance exists. Under this 25c level is where accumulating can be done at a very cheap valuation.

So when looking at opportunities of hidden value, coinciding with share price momentum and several trigger points, Petsec Energy certainly fits that category. I am always encouraged when I can purchase companies already producing a product and earning income to help mitigate risk in the event that “potential” fails to materialize. These situations are not in abundance but lately I have managed to find a few. I will keep looking and updating.

Greg Tolpigin

About Greg Tolpigin

Greg Tolpigin is the Head of Proprietary Trading at Gleneagle Securities and has over 20 years of experience as a proprietary trader and high-level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank.

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