President Energy - Update

March 5th 2021

President has come a long way since it acquired its Rio Negro assets from Chevron in September 2017 for US$22 million. Largely as a result of that acquisition, production has gone from 533 BOEPD (Barrels of Oil Equivalent Per Day) in 2016 to 3,300 BOEPD by December 2020.

In summary, with the acquisition from Chevron, it shifted its focus from Puesto Guardian in Argentina's Salta province in the north of the country to Rio Negro in the South. It has also pivoted from being purely an oil producer to the balanced output of both natural gas and oil. On the journey, it has bought more assets and has even constructed a 16km pipeline to bring its natural gas at Estancia Vieja to market. The backdrop since 2019 both in terms of Argentina's macroeconomic environment and collapsing oil prices in the face of COVID has been grim. That combination has resulted in the company not expanding its well stock as it had anticipated. Oil production has stalled while natural gas, as a proportion of its output, has increased significantly. Interestingly, since 2017 it estimates that it has increased its Rio Negro reserves by some 167% - it appears to be managing its fields to maximise their long-term profitability. Important, as this is where its core and most profitable production is situated.

In 2016, production from its sole Argentine asset, Puesto Guardian, was 342 BOEPD but this was 100% oil. The Chevron acquisition lifted its Argentine production to 830 BOEPD for 2017, however, this includes natural gas. By the end of 2019, its Argentine production had grown to 2,415 BOEPD (Oil production rose from 125,135 bbls in 2016 to 768,594 bbls in 2019).

For 2020, group production averaged 2,700 BOEPD (Obviously including its US output). And, as the company points out, it drilled two new wells (LB-1001, in Las Bases and EVN-x1, in Estancia Vieja) at a time when few were prepared to drill in Argentina. Following the success of LB-1001, the company carried out a workover of LB-1 in Las Bases. This produced 120 BOEPD but does not appear to be in production. However, for a cost of just US$350,000, the company may have opened up another lucrative avenue for development. LB-1 appears to reaffirm the potential of a shallow reservoir running across its Rio Negro fields. And to its credit, President has lost little time. As outlined below, it's drilling three wells in March 2021 aimed at exploiting this (Centenario) formation. Another notable workover was of an older well at Estancia Vieja (EVx-1, cost: US$250,000) in Q4 2020. Initially viewed as a success, however, it suffered a casing collapse at the start of 2021. So, presumably, the average 3,300 BOEPD for December 2020 that it reported was an aberration. It's difficult to know as both new wells are now undergoing testing. During 2020, it carried out several other workovers mainly aimed at restoring production rather than expanding its production base.

The outcome for EVN-x1 is particularly interesting. The company estimates that this will open up the Estancia Vieja north structure with the prospect of 5-14 mmbbls of oil and 11-26 BcF of gas in place. It currently appears to have no 2P booked for Estancia Vieja north.

President's natural gas production has gone from zero per cent of its output in 2016 to around 50% by the end of 2020 (The split for 2019 was 71% oil and 29% gas).

Production For 2020 Increased In Tough Conditions

For the year ended 2020, production was up 12% year-on-year to an average of 2,700 BOEPD. But, as yet, the company has not stated where the output came from. This is important. It receives some US$6 more for oil from its Rio Negro assets than it does from Puesto Guardian. That differential appears to have shrunk over the past year from a US$10 difference (In an RNS from the 8th February 2021, it reported that the February realised price for oil from its Rio Negro fields was US$52 per barrel (PB) while it received some US$45 PB for its Salta output). This reduction may be related to Trafigura (A 16% shareholder) giving it greater leverage in pricing negotiations (In 2020, it exported oil for the first time from Puesto Guardian at ICE Brent less US$6). The relationship with Trafigura also appears to have been pivotal in keeping President's wells flowing during the meltdown in oil prices in 2020 by providing it with an offtake partner.

Making Up For Lost Time

Seems to describe its drilling programme for 2021. It plans on drilling four new gas wells by the end of March 2021. That's three at Las Bases at a cost of around US$1.3 million each and one at Estancia Vieja at around US$1.5 million. The latter will twin the collapsed well (EVx-1). Considering that EVx-1 was producing around 470 BOEPD before its collapse, the twin well should be low risk. Getting these new wells operational as quickly as possible will be important. From the company's recent presentation, it seems very confident that Argentina is facing a natural gas crunch from the summer. So presumably that will result in strong local gas prices - it expects winter (Starting May) gas prices to rise to some US$3.60 per MMBtu. While President is basing its drilling plans on a realised oil price of some US$51/52 PB for oil from its core Rio Negro assets. Incidentally, the Argentine Government recently produced Gas Plan 4 - this is aimed at massively boosting domestic production of natural gas and so reducing the country's dependence on imports. Increasing domestic energy production is a major national priority. Even at a local level, the Rio Negro Government is encouraging oil and gas production - In December 2020, it approved law 5,490 which provides tax and royalty benefits for companies putting back into production previously poor performing oil and gas wells.

President's assets in the north of Argentina are largely under-developed and offer much scope for growth. It plans on acquiring 3D seismic for its non-producing Canada Grande field as well as its producing fields in its Puesto Guardian concession with a view to drilling in 2022 should the results be positive. As it points out, the concession has been prolific in the past with wells drilled based on 2D seismic. And it's going ahead with drilling three wells in H2 2021 targeting oil at the Dos Puntitas, also in Puesto Guardian. Although the realised price of its output from Puesto Guardian may be lower compared to that from its Rio Negro fields, it stands to benefit substantially from operational gearing. I would suggest that a successful campaign could also result in a remapping of its resources - in 2019, it incurred an impairment charge of US$39.9 million, reflecting a downgrading of reserves. A relatively strong oil price obviously makes this asset a far more attractive proposition.

It's worth pointing out that President has completed all its mandated work for the Puesto Guardian concession (Licence running to 2050) - it's not simply drilling because it's obliged to do so. It's drilling because it believes it makes commercial sense. Below can be seen its Puesto Guardian assets with its fields in green.

For 2020, President's capex fell 15% to US$11 million (Including capital leases). Looking at its 2019 accounts and it points to capitalising workovers in both Puesto Guardian and Puesto Flores. One concern I have is how much that is being capitalised is recurring in nature? It projects on spending some US$18 million on capex for 2021.

Paraguay Farm-Out Seems Imminent

Depending on one's viewpoint, this may be a relief or a potential cause for concern. But President appears to have found a partner to press ahead with its Paraguay drilling. It revealed no details regarding any contract but gave every indication that the deal was close to finalisation with an agreement largely based on AIPN (Association of International Petroleum Negotiators) norms. My understanding is that around 18 months ago the company was looking at the project costing some US$9-US$12 million. Whether this still holds, I am unsure. As for the business environment in Paraguay, according to the World Bank's Ease of Doing Business Survey for 2020, Paraguay ranked 125 (Out of 190 countries). Not exactly a stellar rating but a notch above Argentina at 126. That said, Paraguay's creditworthiness is sufficient for it to have been assigned a BB+ rating by Fitch for a recent issuance of US$600 million of Government bonds.

President estimates that the complex it's targeting holds some 230 mmbo of unrisked oil in place. Should a deal be concluded, it's looking at drilling early in 2022 (The concession runs until Q1 2022 but can be extended if the drilling proves successful). The company has declined to reveal what it believes to be the chance of success. And nor has it defined success. Should it go well, it will likely be the making of the company. Unfortunately, it may simply come down to luck. And luck has no memory. It has no basis on past performance. If I was still an investor in the company, I would keep a very close eye on what the downside of this will be in a worst-case scenario.

Tilt Towards Green Energy

What this means, I am unsure. But the company has set up a separate unit to explore the prospect of producing (Green) Hydrogen and ammonia. Mary Rose de Valladares, a former General Manager of the IEA's Hydrogen Collaboration Programme, has been appointed a Director of the company. Aside from that appointment, the company has made no further comments aside from stating that the project would be outside Argentina. It did, however, make a point that President operates to World Bank ESG standards.

Treatment Plant Set To Reduce Operating Costs

A new oil treatment plant at Puesto Flores has been funded by a US$5 million loan (Importantly, this was taken out in Argentine Pesos, comes with a 12 months payment holiday and is repayable within 36 months. Although the interest rate is high at 30%, the rate of depreciation of the Peso against the US dollar appears to be even higher - it's repayable in Pesos for the total amount at the original exchange rate when the loan was taken out). The facility will allow it to bypass using a third-party treatment plant. Commissioning is projected for June 2021 and it's expected to reduce operating costs by US$4 PB from H2 2021 (Estimated savings of US$2.5 million pa). It will give it greater flexibility in allowing it to supply smaller nearby mini-oil refineries. On a broader note, President has a good track record for delivering projects on time and to budget. It's also focused on cost reduction - It reduced its well-operating costs by 19% to US$20 per BOE year on year (Excluding royalties and workovers). The company plans on upgrading its pipeline facility in H2 2021.

Building Critical Mass

This is key to its overall approach. For example, the company acquired the Angostura exploration contract area in November 2019 for a US$1.825 million subscription of new shares in President. It came with a work commitment of US$9 million and appears to have four active wells. But its current production levels are unclear. However, the real point is how the company is constructing a portfolio of interests around its processing and transportation facilities.

It makes a lot of strategic sense. In 2020, it built a 16km pipeline linking Puesto Prado with Las Bases. So gas can be transported by pipeline to its Las Bases gas plant (Originally built by Chevron but later been upgraded by President) and from there via the company's regional pipeline to off-takers. It also illustrates how much it stands to benefit from operational gearing. It has a means to profitably transport the gas it extracts. In addition, it may be in a position to process and transport third-party production.

?If Shares Were Barrels Of Oil

President would indeed be a wealthy company. In 2016, it had 525,321,000 ordinary shares in issue; By 2019, the number had increased to 1,135,283,000 ordinary shares. In fairness, shareholders have been given the right to subscribe to a variety of offers. But the upshot is that they are compelled to invest more in a company whose stock price has deteriorated over a long period. The alternative is dilution. Fortunately for investors, in an RNS dated 28th February 2021, President stated that its capex programme "...is planned to be funded through own cash generation complemented by additional non-equity sources as required." If it really wants to differentiate itself from other AIM-listed stocks, it needs to get off this addiction to issuing stock.

US Interests Appear Outside Its Core Business

Its US interests add little to the company's production but, in my view, cloud its profile as a Latin-America focused resource company. Total net production appears to be in the region of some 280 BOEPD. I would have thought that disposing of it and concentrating on its core assets makes sense.

Improving Debt Position

Its net debt fell by 25% to around US$16 million from the end of 2019 to the end of 2020. However, this includes a US$5 million loan secured from Banco Hiptecario to fund its Puesto Flores treatment plant. It mentions that it achieved US$10 million of free cash generation for 2020. But this does not include the cost of workovers. While it does include some US$6 million of what it describes as "...astutely managed treasury income, taking advantage of market volatility". That sounds smart when it works but when it doesn't the opposite is true.

Bottom Line: It Needs More Wells

That's about it. Its well stock appears to be too low and so it has difficulty in managing the volatility that seems inherent with its assets. The only solution, aside from making acquisitions, is to drill more wells. And that's what it plans on doing. That will also give it the flexibility to alter its gas production levels to reflect seasonal price variations and, so, optimise its profitability. And most importantly, it has the infrastructure in place to benefit from reduced unit costs.

While its pivot towards natural gas makes sense - the domestic market is strong and growing. It needs a great deal more volume. Looking at the company's reports and RNSs, there appears a slight fudging between barrels of oil and barrels of oil equivalent. It sometimes seems unclear how much oil is being produced and where it's from.

Putting the above to one side and as Peter Levine, Executive Chairman, correctly points out, President is not simply an idea. It's a real business. And a business where he has put a lot of his money where his mouth is. With a little luck, President could move up a league within a year. It stands to benefit hugely from operationally gearing - its natural gas operations are scalable. While strong oil prices and its relationship with Trafigura put it in a position to further exploit its Puesto Guardian concession. Importantly, from an Argentine perspective, the company appears to be viewed as a medium-sized local operation with engineering prowess.

Using its H1 2020 figures and it's on an EV/2P of just under $2 PB. Hardly expensive. And that's not factoring in its drilling programme for 2021 and the impact that could have on reserves. Importantly, it's now negotiating an early extension of its Rio Negro concessions (Its Puesto Flores/Estancia Vieja licences currently run to November 2027. But it will exercise its right to renew and extend these to November 2037). It's noteworthy because its reserves are largely based on the remaining duration of the licences and not simply geology. An extension of these core licence areas will almost certainly increase its 2P Rio Negro reserves of 10.9 mmboe (Moving its contingent resources to 2P will increase its 2P reserves to 19.9 mmboe based on its year-end 2020 figures). The negotiations are expected to conclude by the end of this year. By the way, its resource estimates are independently audited with the auditor rotating on an annual basis.

The company's projected output for 2021 is 3,600-4,000 BOEPD. That strikes me as very reasonable. But it needs increased production from more wells and that is proving tough. This year should demonstrate the quality of its assets. For the moment, I will sit on the side-lines. But I'm certainly still interested in the company.

Most recent research:

February 12th 2020

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