CES Energy Solutions (CEU-TSX); BUY, C$3.75
Companies: Canadian Energy Services & Technlgy
CEU posted 2Q16 revenue of $98 mm, in line with our forecast of $102 mm. The Company generated EBITDAS of -$1 mm, in line with our expectation. CEU has increased its Drilling Fluids market share in the U.S. to 11% and the acquisition of Catalyst should improve the Company’s Production Chemicals U.S. market share. However, competitive pricing is likely to continue until there is a recovery in activity. We are increasing our 2017e EBITDAS estimate to $94 mm from $89 mm driven by an upward revision to our revenue assumption for the year from Canadian production chemicals and an increase in U.S. Drilling Fluids market share.
Impact: We expect the stock to trade lower due to revenue and EBITDAS coming in below expectations. However, we were impressed to see Canadian touch points for the Canadian Production Chemicals segment increase q/q.
CEU has announced it has acquired Catalyst Oilfield Services, a private West Texas based Production and Specialty Chemicals company, with exposure to the Permian, Barnett and Eagle Ford. We believe the transaction price was in the C$75 mm range, and that annual EBITDAS contribution will be $5 mm to $10 mm. The midpoint EV/EBITDAS transaction metric is 10.0x, whereas CEU was trading at 14.2x 2017e EV/EBITDAS prior to this announcement. We have increased our 2016e EBITDAS by 4.5% to $34 mm and 2017e EBITDAS by 9.0% to $89 mm.
Impact: Neutral, as no transaction price or financial metrics were provided. As such, it is challenging to assess the transaction impact, but it is strategically aligned with the Company's previously stated goal of expanding its production chemicals presence in the Permian.
CEU intends to issue ~30.7 mm shares for gross proceeds of $92 mm. The share issuance is equivalent to ~14% of the Company’s outstanding share count as at March 31, 2016. The offering is expected to close on or about June 8, 2016.
CEU expects to realize $20 mm of annualized cost savings through restructuring that occurred in 1Q16. CEU has shuttered eight of eleven mud facilities in the U.S. in an effort to reduce costs. The Company will now be focusing its drilling fluids business on the Permian, Eagle Ford, Utica and SCOOP/Stack in Oklahoma. The U.S. drilling fluids business generated negative margins in 1Q16. We have lowered 2016e EBITDAS to $35 mm (prior: $37 mm) and 2017e EBITDAS to $71 mm (prior: $74 mm).
Negative. EBITDAS of $8 mm was well below consensus of $11 mm and our estimate of $12 mm.
We are updating our oilfield industry forecasts post the release of FirstEnergy’s new commodity price forecast for crude oil and natural gas on March 24, 2016. We have updated our 2016e Canadian well count/drilling days forecast to 3,209/37,335 from 3,800/43,325. In 2017e, we have left our forecast unchanged at 6,200 wells/70,200 days. In the U.S., our 2016e rig count forecast is now 482 (prior: 610) and 2017e is 675 (prior: 775). Data for 1Q16e came in weaker than our prior forecast anticipated, and we have lowered our estimates across our coverage universe accordingly. We are currently below 1Q16 consensus for 15 of 18 companies in our coverage universe, but the percentages are misleading given the absolute size of EBITDAS being earned this quarter.
Companies: CWC ESI PD SVY TDG WRG CEU CET PSI PHX BDI HNL MTL SES TOT CFW FRC TCW
CEU reported 4Q15 EBITDAS of $14 mm, below our forecast of $22 mm as pricing pressure and reduced sales volumes impacted margins. The Company is alluding to razor thin margins across all business lines until a recovery in commodity prices or field activity occurs. As such, we have reduced our 2016e EBITDAS forecast to $41 mm in 2016e (prior: $71 mm). In 2017, we are now forecasting $77 mm (prior: $88 mm). CEU is in negotiations with its lenders to obtain covenant relief. We believe the Company will be successful in this endeavor.
Impact: Negative. EBITDAS was well below expectations in 4Q15 and we suspect 2016e and 2017e consensus estimates are going to have to be revised significantly lower.
We are moving our target 2017e EV/EBITDAS multiple to 8.6x from 11.1x. The reasoning behind the reduction in the target multiple is that CEU’s prior multiple was due to its ability to payout its cash flow to investors in a robust dividend. With the Company moving to a dividend policy more closely aligned with the rest of our coverage universe, we expect its premium trading multiples to revert back to its OFS peers. CEU’s average EV/EBITDAS over the last five years has been 13.0x, whereas the group has averaged 7.8x. The average EV/EBITDAS target multiple for our coverage universe in 2017e is 8.6x. We still appreciate the quality of CEU’s Production Chemicals business, but believe the Drilling Fluids business will be challenged in 2016e. Regrettably, the reduction in our target multiple leads to a decline in our 12-month target price to $2.00/share from $2.75/share. The implied return of negative 33% leads to us retaining our Underperform rating.
In conjunction with the new oil price forecast released by FirstEnergy on February 8, 2016, we have updated our 2016e Canadian well count/drilling days forecast to 3,800/43,325 from 4,950/54,853. In 2017e, we are now forecasting wells/drilling days of 6,200/70,200 from 7,900/86,600. In the U.S., our 2016e rig count forecast is now 610 (prior: 763) and 2017e is 775 (prior: 1,063).
We have updated our 2016e WCSB drilling days forecast to ~54,900 days, which is 18% below our prior forecast and a 16% decline y/y. We are also rolling out our 2017e drilling days forecast, which is 86,600 days, or a 58% improvement from 2016e. In the context of the last 25 years, our 2017e forecast ranks 19th for active drilling days. Our 2016e U.S. rig count forecast has been reduced to 763 rigs from 888 rigs. In 2017e, we are forecasting a U.S. rig count of 1,063 rigs.
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Robust, cash-generative production from mining waste
Jubilee operates several chrome-Platinum Group Metal (PGM) operations in South Africa and is constructing a zinc-lead (vanadium) plant at Kabwe in Zambia after already commissioning the copper and cobalt circuits (the ‘Sable' refinery). The company has a growth pipeline identified and significant opportunities to find new projects in Africa (or globally); more specifically, Jubilee announced that it is looking to increase its copper (cobalt) production in Zambia aggressively to make full use of the Sable Refinery. Jubilee also owns the Tjate PGM project in South Africa, which is currently on hold. The company model is to treat its own waste materials and to supplement these with third party ores and wastes where possible. This year has been nothing if not eventful for Jubilee, but further progress and material catalysts are expected over the course of 2020. Jubilee has a high-margin business with cash on hand, and we see plenty of opportunities for Jubilee to capitalise on its robust business model through the global Covid-19 crisis and beyond. We initiate with a fair value of 11.2p/sh
Companies: Jubilee Platinum
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGY ARBB ARIX BUR CMH CLIG DNL HAYD NSF PCA PIN PXC PHP RE/ RECI SCE SHED VTA
Companies: Hurricane Energy
U.S. futures and European stocks dropped on Friday as investors mulled a reported conflict among policy makers over a stimulus package for the single-currency region, as well as political upheaval in France.
The Stoxx 600 Index fell after Bloomberg News reported the European Central Bank is facing a potential rift over how much their emergency bond-purchase program should stay weighted toward weaker countries such as Italy. The euro fluctuated following French President Emmanuel Macron's decision to name a new prime minister after asking his government to resign. Rolls-Royce Holdings Plc slumped after the British jet-engine maker said its exploring options to raise funds to strengthen its balance sheet.
The dollar was slightly down, posting its first weekly drop in a month, while American cash equity and bond markets were shut for Independence Day. President Donald Trump will attend an early July 4 celebration at Mount Rushmore with thousands of guests who won't be required to wear masks, while his U.K. counterpart Boris Johnson urged Britons to act responsibly as pubs prepare to re-open and the government lifts quarantine rules on travel for 60 countries.
The friction at the ECB highlights the risk to markets should promised stimulus measures fall short. Investors continue to weigh policy support and upbeat economic data against relentless new outbreaks of the virus. U.S payrolls figures Thursday fuelled optimism of a V-shaped recovery in the world's biggest economy, even as Florida reported that infections and hospitalizations jumped the most yet, and Houston had a surge in intensive-care patients. Emerging-market stocks posted the biggest weekly gain in a month.
Elsewhere, crude oil dipped but remained on track for a weekly gain.
Companies: TGL JSE IAE ADME BP/ DGOC ENOG NTQ NTOG PMO RBD ROSE RDSA UKOG TRIN
Caledonia's Q2 2020 production from its 64% owned Blanket mine in Zimbabwe was 13.5koz gold. This was an increase over the same period last year of 6.2%, leaving Caledonia with a first half production of 27.7koz – well ahead of this time last year (24.7koz) and on track to meet its 2020 full year guidance of 53-56koz (WHI etc. 55.5koz).
Spectra Systems Corporation is a provider of machine-readable high-speed banknote authentication, brand protection technologies and gaming security software. The company has announced that it has executed a new contract with a major world central bank to ‘enhance existing authentication sensors to detect a unique type of counterfeit notes'.
Companies: Spectra Systems Caledonia Mining Corporation Plc Com Shs Npv
Stable platform agreement approved by creditors
Companies: Premier Oil
Over the last 18 months, Powerhouse has cemented its relationship with Peel Environmental, which is targeting the development of at least 30 distributed modular generation (DMG) plants across the UK. Each of these will potentially generate £0.5m in annual licence fees for Powerhouse. This roll-out is conditional on shareholders approving the proposed acquisition of former development partner Waste2Tricity (W2T) at the general meeting on 14 July
Companies: Powerhouse Energy Group
InfraStrata has raised £9m in gross proceeds via a share placing (subject to the approval of shareholders), which will be used to provide growth capital to execute on the company's pipeline. The proceeds will also be used to repay high-cost short-term debt (leaving the group with a c£4.5m net cash position). Given the significant earnings potential of H&W, along with that of the group's other infrastructure assets as they mature, we consider the company to be significantly undervalued and reaffirm our Buy recommendation.
PetroTal (PTAL LN/TAL CN)C; Target price £0.45: 1Q20 results/Bretaña expected to restart in July – 1Q20 financials are in line with expectations and 1Q20 production had been reported previously. At the end of 1Q20, current trade and other payables had been reduced to ~US$45 mm compared to ~US$55 mm at YE19. Most importantly. PetroTal continues to expect the Bretaña field to be re-opened this month. The contingent liability with Petroperu is estimated at US$25 mm at the current oil price and the company has entered into a financial swap for 0.46 mmbbl of oil with an ICE Brent reference price of US $40.58/bbl to cover the upcoming sale by Petroperu at the Bayovar port. This is a recovery story that we continue to like. It offers a combination of value, production and cash flow growth and reserves upside. We anticipate that the imminent reopening of the field with be an important catalyst to the share price.
i3 Energy (I3E LN): Reveals takeover target in Canada | Maha Energy (MAHA-A SS): Production update | Aker BB (AKERBP NO): 2Q20 update in Norway | Energy (RRE LN): Recommended offer by Viaro Energy | Spirit Energy: Dry hole in Norway | Enwell Energy (ENW LN): Ukraine update | JKX Oil & Gas (JKX LN): 2Q20 update in Ukraine and Russia | Pharos Energy (PHAR LN): Operating update in Egypt and Vietnam | Sound Energy (SOU LN)C: Terms of Moroccan licence renegotiated | Tethys Oil (TETY SS): June production in Oman | Victoria Oil & Gas (VOG LN): Gas sales contract with ENEO in Cameroon terminated
EVENTS TO WATCH NEXT WEEK
14/07/2020: Aker BP (AKERBP NO) – 2Q20 results
15/07/2020: Premier Oil (PMO LN) – 1H20 update
13-17/07/2020: GeoPark (GPRK US) – 2Q20 update
Companies: I3E MAHAA JKX PHAR EQNR AKERBP ENI HUR PTAL REP RRE SOU TPL VOG OMV
• 1Q20 financials are in line with expectations and 1Q20 production had been reported previously.
• At the end of 1Q20, current trade and other payables had been reduced to ~US$45 mm compared to ~US$55 mm at YE19.
• Most importantly, PetroTal continues to expect the Bretaña field to be re-opened this month.
• The contingent liability with Petroperu is estimated at US$25 mm at the current oil price and the company has entered into a financial swap for 0.46 mmbbl of oil with an ICE Brent reference price of US $40.58/bbl to cover the upcoming sale by Petroperu at the Bayovar port.
Recovery, value and cashflow
PetroTal is a recovery story that we continue to like. It offers a combination of value, production and cash flow growth and reserves upside. PetroTal’s shares continue to trade at around one quarter of our Core NAV of £0.47 per share and at less than half of the company’s value based on its 2P reserves only (2P NAV of £0.28 per share). This reflects Brent price assumptions in line with what BP, Shell and ENI are using. This is important because the commodity prices assumptions of the Majors have often been more conservative than those used by smaller companies that could see PetroTal as an acquisition target. On flat production, PetroTal’s share price implies EV/DACF multiples of 1.0x in 2021 turning negative in 2022. In 2021, we forecast PetroTal generates ~US$90 mm cash flow with ~US$35 mm cash capex (incl. servicing the payables). Our target price of £0.45 per share (~our Core NAV) represents 4.5x the current share price.
Looking beyond the restart of the field
We anticipate that the imminent reopening of the field will be an important catalyst to the share price with 4Q20 production expected to be over 12 mbbl/d. This is however just a first step and there are multiple areas of additional value creation. (1) The story would strongly benefit from a further increase in oil prices. At US$50/bbl for Brent, the Petroperu US$25 mm contingent liability would be reduced to
The market should be in no doubt that Pure Gold will deliver first gold before the end of the year before ramping up to 66koz in 2021 through to 125koz in 2025 (the company is already looking at ways it can accelerate the ramp up). All critical path items are on track with long lead equipment on order, all license applications expected to be approved by Q2, and mine sequencing being planned. Management are already planning on how they might ramp up quicker, improving flexibility in the system with a new decline and tweaking metallurgical recoveries. Perhaps most importantly they are growing their knowledge of the geology with the team putting together a drill programme to start next year once in production. This will target extensions to the 1Moz, 9g/t reserve (will be the 17th highest grade mine in the world when in production) down dip, at satellite deposits and, most excitingly, at Zone 8 where there is already a 0.5Mt resource grading 21g/t.
Companies: Pure Gold Mining
AFC Energy is a global leader in the fuel cell sector. It has a proven fuel cell technology which it is commercialising through its H-Power™ product, an off-grid electric vehicle charging system which is run on hydrogen and produces no emissions. The company's core fuel cell technology is a liquid alkaline fuel cell called HydroX-Cell(L)™. The company is also developing a solid alkaline fuel cell called HydroX-Cell(S)™ , the critical component of which is a is a solid electrolyte which upon validation will be marketed under the AlkaMem™ trademark. We expect the AlkaMem™ product to have multiple electro-chemical applications outside of fuel cells. The purpose of this note is to compare AFC Energy's products, markets and business strategy against its listed peers Ceres Power and ITM Power. The note also assesses the state and outlook of the hydrogen market in addition to the proton exchange membrane market, which is relevant for AFC Energy's AlkaMem™ product. As a reminder, we believe AFC Energy has a fair value of 27p/sh.
Companies: AFC AFC AFC
In this note, we analyze the indebtedness of 35 international E&Ps publicly listed in the UK, Canada, Norway, Sweden and the USA. For each company, we look at (1) cash position, (2) level and nature of debt (including covenants), (3) debt service and principal repayment framework and (4) Brent price required from April to YE20 to meet all the obligations and keep cash positions intact. We also estimate YE20 cash if Brent were to average US$20/bbl from April to YE20. While the oil demand and oil price collapse are of unprecedented historical proportions and the opportunities to cut costs much more limited than in 2014, most companies (with a few exceptions) entered the crisis in much better position than six years ago, with stronger balance sheets and often already extended debt maturities. In addition, this time around, many E&Ps have already been deleveraging for 1-2 years and are not caught in the middle of large developments that cannot be halted. The previous crisis also showed that debt providers could relax debt covenants for a certain period as long as interest and principal repayment obligations were met. This implies that as long as operations are not interrupted and counterparties keep paying their bills (Kurdistan), the storm can be weathered by most for a few quarters.
With (1) Brent price of about US$50/bbl in 1Q20, (2) reduced capex programmes, (3) material hedging programmes covering a large proportion of FY20 production at higher prices and (4) limited principal repayments in 2020, we find that most companies can meet all their costs and obligations in 2020 at Brent prices below US$40/bbl and often below US$35/bbl) from April until YE20 and keep their cash intact, allowing them to remain solvent at much lower prices for some time. In particular, Maha Energy and SDX Energy are cash neutral at about US$20/bbl. When factoring the divestment of Uganda, Tullow needs only US$9/bbl to maintain its YE20 cash equal to YE19. Canacol Energy, Diversified Gas and Oil, Independent Oil & Gas, Orca Exploration, Serica Energy and Wentworth Resources are gas stories not really exposed to oil prices and Africa Oil has hedged 95% of its FY20 production at over US$65/bbl.
Companies: AKERBP AOI CNE CNE DGOC EGY ENOG ENQ GENL GKP GPRK GTE HUR IOG JSE KOS LUPE MAHAA OKEA ORC.B PEN PHAR PMO PTAL PXT RRE SDX SEPL TETY TGL TLW TXP WRL
Jubilee Metals (JLP) – Corporate – Large copper tailings project in Zambia – staged expansion for Sable
Market Cap £82m Share Price 3.8p
Jubilee announced yesterday that it had secured a JV with a private company - Star Tanganika – for the rights over a copper project at Ndola in Zambia. The purchase price was $5m ($0.6m in cash the rest in shares in Jubilee) which will be used to advance a further potential copper tailings project held by the owners of Tanganika. Jubilee will provide all of the operating and capital funding for the first phase project and will receive 75% of the project earnings until all capital is recovered dropping to 60% after that – Jubilee will also have first right of refusal over the copper-bearing concentrates produced on 3rd party offtake terms.
Despite the ongoing economic headwinds, 2020 has already been a significant year for United, with the 2019-20 infill-drilling campaign at Abu Sennan exceeding expectations and delivering significant reserve and production additions. Since the Abu Sennan acquisition was announced in July 2019, net production has nearly tripled from 1,100boepd to 3,100boepd, following successful wells at ASH-2 and El Salmiya-5 and the onset of gas production from the Al Jahraa field. We value United's portfolio (minus Jamaica) at US$91.3m, c4.5x its current market cap. Unrisked, we value United's entire portfolio at US$321.7m (including Jamaica) or 34.9p per share, >16x United's current market cap. We set our target price in line with our risked valuation (minus Jamaica) at 9.5p, a 280% premium to the current share price and reiterate our BUY recommendation.
Companies: United Oil & Gas