Solo Oil PLC, UK Oil & Gas Investments PLC et al Slide On Horse Hill Results

Onshore oil installationEarly feedback from David Lenigas devotees on Twitter suggested that this morning’s RNS announcements from the Horse Hill companies may have been positive.

Comments such as “we have a winner” may have suggested that the well had performed in-line with expectations.

I can only assume that the people concerned hadn’t read the RNS fully, and compared it with the pre-drilling presentation given by UK Oil & Gas Investments PLC (LON:UKOG) in January this year. Unsurprisingly, Mr Market did the maths, and the shares in all of the Horse Hill companies are down by between 15% and 30% as I write, at lunchtime (although some of these stocks are still up over a 5 day timeframe, they are all down one one month ago too, in some cases quite heavily).

The problem is that although Horse Hill-1 did find oil, there was much less than expected. In a new article for the Motley Fool this morning, I explained the numbers and compared them to pre-drill estimates, which seem to have been conveniently forgotten in all the hype.

I also give my view on whether Solo Oil PLC (LON:SOLO) remains a buy, or not.

Click here to read the full article.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any of the companies mentioned. Do your own research or seek qualified professional advice before making any trading decisions.

Results roundup: why I’ve sold Victoria Oil & Gas plc

Victoria Oil & Gas customer site

Victoria Oil & Gas is using its producing Cameroon gas field, Logbaba, to create a gas supply network for industry in the Doula region of Cameroon (image copyright Victoria Oil & Gas).

I’ve long been a bull of Victoria Oil & Gas plc (LON:VOG), but after reading the firm’s final results yesterday, I sold my shares. Here’s why.

Missing info: In my view, the worst thing about Victoria’s results was what they didn’t say. For example, the firm did not confirm the average price per unit sold of gas or condensate, although it previously has done.

This seems bizarre; I’ve never seen an energy or resource company publish annual results without specifying the average price per unit sold. Obviously the price of condensate will have fallen with the oil price, but has the price of gas fallen too, perhaps for new customers? We don’t know.

Accounting notes: Victoria’s accounts also raised some questions, due to the firm’s decision to publish them without any supplementary notes. As with gas prices, notes were included (as normal) in the interim results earlier this year, but were missing yesterday. Why?

I expect they will appear in the firm’s annual report, due in the next couple of weeks, but their absence from the final results RNS yesterday makes me uneasy, especially given the glacial pace at which Victoria publishes its accounts, nearly five full months after the firm’s 31 May year end.

In my view, there are only two explanations for this: Victoria is trying to hide some bad news for as long as possible, or its financial controls are so chaotic that its only just managed to scrape together some coherent figures, one month before the next half-year ends. Either way, I’m not impressed.

Accounting questions: I may not be a forensic accountant, but I reckon I ought to be able to spot the $20m cash inflow from RSM on Victoria’s cash flow statement, given that the firm only did $14m of revenue last year.

I can see an arbitration-related adjustment on the income statement, but why isn’t this cash influx clearly represented on the cash flow statement? Again, notes are needed to make sense of what’s happened to the $20m payment.

There are other questions, too: what, for example, was the $3,978,000 ‘other loss’ recognised in the income statement? The lack of financial detail in these results is shocking, in my view.

How long? I accept Chairman Kevin Foo’s comments that ground-breaking engineering projects always take longer than expected — having been an engineer myself, I understand this. However, the firm’s glacial reporting appears to be matched by the speed at which it pays suppliers and receives payment from customers.

Things don’t seem to be improving, either, as debtor days are rising and creditor days are falling. If this trend continues, a cash crunch could follow:

2013 2012
Debtor Days (average time VOG takes to get paid by customers) 348 days 305 days
Creditor Days* (average time VOG takes to pay suppliers) 443 days 606 days

*Estimated using cost of sales

Of course, things may have changed — for better or worse — in the five months since the period these figures refer to. It appears to be a struggle for Victoria to publish its annual results before the end of the first half — and that’s the problem. I no longer feel I have any idea what’s going with this business.

The company’s annual report, which is due to be made available in the next couple of weeks, may answer some of my questions, but then again, perhaps there’s a reason the company is so tardy.

Back in January, Victoria promised that the results of the Deloitte review of the RSM settlement payment would “be completed within 90 days”. Nine months later, and we’re told Victoria and RSM are reviewing the draft — but we’re still in the dark.

Will some of the $20m have to be repaid to RSM? Has Victoria spent any of this money? We just don’t know, and I’m not prepared to risk my own money on that basis anymore.

Valuation doubts: My final concern relates to Victoria’s valuation. This year, revenue doubled to $14.7m, but the company failed to make a profit due to ‘other losses’ as yet to be explained.

If we assume revenue will double again in the current year and that Victoria will deliver an operating margin of around 25%, which is not unusual for this type of business, then we’d be looking at an operating profit of around $7.5m, with post-tax profits of perhaps £3.8m, assuming a 20% tax rate and the current USD/GBP exchange rate.

That means Victoria’s current valuation is around 15 times my purely theoretical guess at next year’s profits — which may be wildly optimistic. That suggests to me that there could be limited near-term upside to VOG’s share price.

Better out than in: Victoria oil & Gas may still deliver a multi-bagging gain from here on in, but it seems very speculative for an investment that is, essentially, a small utility, not an E&P company.

I’ve run out of patience with the company’s slow and opaque reporting, and have put my money elsewhere, in grown-up company, whose reporting doesn’t raise so many questions.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in Victoria Oil & Gas. Do your own research or seek qualified professional advice before making any trading decisions.

Activist shareholder takes punt at Tethys Petroleum Ltd: should shareholders back changes?

Onshore oil installationIt doesn’t seem long ago that Tethys Petroleum Ltd (LON:TPL) appeared to be on the cusp of transformative successes. Gas and oil production in Kazakhstan looked set to rise and become a cash cow, helping to fund the company’s transformative exploration assets in Tajikistan.

The barnstorming potential of the Tajik assets appeared to be confirmed when Tethys secured a 66%, $63m farm-out deal with no less than Total SA and China National Petroleum Corporation (CNPC).

Not come to pass

As shareholders will be painfully aware, the company has failed to deliver on the promise of 2012 and 2013, and Tethys shares have fallen by 61% over the last 12 months and the company has agreed to sell a majority interest (50% plus one share) of its Kazakh assets for $75m, a deal which I think could cost shareholders dearly in the long term.

As I explained in a new article for the Motley Fool this morning, the risks of further dilution and financial frustration look high, especially as Tethys founder Dr David Robson appears to be more motivated by his seven-figure salary than his minimal investment in the firm.

I fear that Tethys could become yet another cash-strapped small cap resources stock that limps along with heavily dilutive funding from China, until shareholders are left owning almost nothing — except an expensive board of directors, who are effectively employed by their Chinese backers to manage local operations and political relationships…

On this basis, if I were a Tethys shareholder, I’d back Pope Asset Management’s call for change: the company and its assets need careful management to maximise cash generation and give Tethys shareholders a meaningful chance of benefiting from the truly monster potential of the company’s Tajik assets.

Given founder Dr. Robson’s recent form, I’m not sure Tethys can provide this under his leadership.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in Tethys Petroleum Ltd. Do your own research or seek qualified professional advice before making any trading decisions.

Should you sell Trap Oil Group PLC as costs rise?

Oil rigs in North SeaShares in Trap Oil Group PLC (LON:TRAP) fell 40% yesterday, after the firm revealed that decommissioning costs for its share of the Ithaca Energy-operated Athena Field would be 66% higher than expected — £9m, instead of the £5.4m previously accounted for.

This means that more than half of the firm’s £16.5m cash pile is already spoken for — plus there is further expenditure planned for this autumn on workover activities needed to bring the field back into full production.

Based on yesterday’s announcement and the group’s half-yearly figures, I reckon that Trapoil’s net current assets, are approximately £13m, or 5.7p per share.

To reach this, I’ve deducted 25% from the reported value of its IGas Energy shares and subtracted the £9m decommissioning cost from the firm’s cash balance. I’ve also assigned zero value to Trapoil’s licences and not accounted for future cash flow from Athena — I’d expect this revenue to at least offset the workover costs the firm incurs this autumn, so I’ve ignored both factors in this ‘fag packet’ valuation.

In addition to the current asset value of £13m, the firm also has accumulated losses of £35m, which could be of use to another North Sea operator to offset profits.

At around 3p, I reckon Trapoil shares are trading at approximately half the firm’s net current asset value, without considering the potential benefits offered by its historic losses. You’d think that a larger North Sea peer might make an all-share offer to takeover the firm at this level, which could realise some value for shareholders (including 18% activist shareholder Peter Gyllenhammar).

However, nothing is certain, especially while the oil price remains depressed, and there’s no denying that Trapoil shares remain very high risk, at present. If the market continues to ignore the firm, it will now, almost certainly, gradually grind its way into bankruptcy.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has a long position in Trap Oil Group PLC. Do your own research or seek qualified professional advice before making any trading decisions.

Quindell PLC share price slides on Q3 trading update

A share tip circled in a newspaper share listingOn the face of it, today’s trading update from Quindell PLC (LON:QPP) was positive, assuming you didn’t read it too carefully.

Revenues were double those of the same period last year, while the firm’s favourite flexible measure of profit, adjusted EBITDA, rose by 141% compared to the same period last year.

These morsels of apparent good news might have satisfied the market six months ago, but the mood seems different now, and as I write, shortly before markets close at 4.30pm, Quindell’s share price is down by 6% on the day.

Why? Today’s announcement suggests to me (and clearly to others) that the Quindell train could be coming off the rails.

Disappearing revenue

The firm has cut its revenue forecasts for the full year to between £750m and £800m — down from £800m-£900m at the time of its interim results, three months ago (although many market commentators are citing last year’s forecasts of c.£1.1bn, I can’t find this number in print from QPP, although I do remember it).

As far as I can see, there are only two likely interpretations for this revenue guidance downgrade: either Quindell is turning away new work, because its cash flow is so dire it cannot fund the working capital situation, or the firm is writing down accrued income, which forms a substantial part of its annual revenue.

Rising profit margins

Quindell claims that it will meet full-year guidance for cash generation and adjusted EBITDA, thanks to rising EBITDA margins. The firm has now increased EBITDA margin guidance for 2014 to between 40% and 45% — the third increase this year, as I commented in a new article for the Motley Fool this morning:

This is the third time this year the firm has increased EBITDA margin guidance: in July it rose to “35 to 40%”, then in August it rose to “35% to 45%”. Now it’s risen again.

Hearing loss

There’s also a puzzling situation regarding hearing loss, where the case numbers — in my view — seem very high compared to industry-wide claim figures.

I explain this aspect of today’s Quindell update more fully in my Motley Fool article, which you can read here.

What next?

In my view, today’s update was the tip of the iceberg. In addition to the factors I’ve mentioned above, the trading update ended with this paragraph:

The Board continues to consider and pursue, with advisors where relevant, all options available to it, including share buy backs, North American listing, disposal or demerger of assets or divisions and strategic and/or financial investments by third parties, in order to maximise shareholder value. 

To me, this smacks of desperation and is somewhat bizaare: how can a company with such poor cash flow (the firm boasted of achieving adjusted operating cash flow of £9m in today’s update) possibly consider share buybacks?

Indeed, I suspect a shortage of cash flow may be at the root of the problem; the firm’s mention of asset sales and third-party investments sound to me like rescue funding, rather than ways of maximising shareholder value.

Incidentally, Gotham City Research agrees: the short sellers, whose original report wiped 50% off Quindell’s share price back in April, tweeted today:

We can only wait and see, but in the meantime I would remind bullish investors that while the market sometimes misprices assets, it rarely errs to the extent of assigning healthy, profitable companies a forecast P/E of 2.7…

Disclosure: This article is provided for information only and is not intended as investment advice. The author has a short position on Quindell PLC. Do your own research or seek qualified professional advice before making any trading decisions.