Trinity Exploration - Update

August 10th 2021

The pandemic may have impacted Trinity's ability to present its investment case in person. Nevertheless, using the Investor Meet platform, it has reached out to investors. So, using those presentations and piecing together its news flow, I thought it was time to revisit the company. And, I should point out I'm still a shareholder.

Death Of Executive Chairman

The unexpected and tragic death of Bruce Dingwall was announced by the company on 4th August. Clearly the driving force behind the business, his death leaves a management void. What this means for the company is impossible to know. But the impression I gained from the Trinity presentations I have attended is that the day-to-day running of the enterprise was firmly in the hands of Jeremy Bridglalsingh, Trinity's Managing Director. In September 2020, Bridglalsingh relinquished his position as CFO to concentrate on his role as Managing Director. Bruce may have been the public face who was in the driving seat at presentations but it was Jeremy who was dealing with the nuts and bolts of the organisation. Not wishing to diminish Bruce's role in the business but he was very well rewarded (2020: US$1.24m in total annual remuneration). And as I pointed out in a previous update here , I was unsure as to what his time commitment to the company actually was. Nevertheless, as a qualified geologist with a huge local knowledge, he will be sorely missed. But I don't believe this will have any impact on Trinity's current production. While its onshore and offshore bids are in conjunction with Cairn Energy, an established international player. And it should be remembered that the latter looks set to benefit from a resolution of its dispute with the Indian Government over a retrospective tax issue. That involves an arbitration award of some US$1.7b with India apparently offering a settlement of US$1b.

Moving Ahead But Progress Is Slow

Considering the global impact of COVID-19, a slowdown in the company's development was probably inevitable. Putting the lack of drilling to one side and it has made progress and has also consolidated its low-cost production base.

Remarkably, considering the circumstances and the absence of drilling, production for 2020 was 3,226 BOPD, up 7.3% up on the previous year. However, the collapse in oil prices during the period took its toll on the bottom line with revenue falling 31% to US$44.1 million (m). Its guidance for 2021 is 2,900-3,100 BPOD (Excluding production from new wells). It's also worth pointing out that its spread of assets gives it a degree of visibility in terms of production. It has some 284 producing wells in three separate areas - onshore and offshore.

The company's net cash pile increased 46% to US$21.7m (Including the drawdown of US$2.7m of a US$5m overdraft facility) for the year ended 2020. Largely a result of a sharp decline in capex (Falling 58% to US$5.3m) as well as a focus on cost reduction (Its General and Administrative costs fell 9% to US$5.1m). By the end of Q2, its net cash figure fell to US$19m but this includes some US$4m of capex (Including the onshore seismic acquisition and the cost of acquiring the PS-4 onshore block). It's also worth mentioning that it paid US$700,000 in SPT. Which gives some idea of how beneficial the SPT reforms could be for the company.

Acquisition of 2/3D Seismic Opens Up Step Change Opportunities

The purchase of the 4 square kilometres PS-4 block in May 2021 for US$3.5m could be viewed in light of the company's acquisition of 37 square kilometres of seismic data from Heritage Petroleum in November 2020. Some 80% of the PS-4 acreage is covered by this seismic. Moreover, this block appears to be largely underdeveloped. As Trinity points out, PS-4 has produced some 9m barrels of oil since the early 1930s. However, when compared globally with similar reservoirs, its recovery rates are low. Some 12.5%-17% compared to an average of 25%-30%. While there has been little drilling - only six wells over the past 30 years. Located contiguously to its WD-5/6 fields, its development offers synergies for Trinity. For 2020, the field produced some 83 BOPD. Just how successful this acquisition will be, who knows? But I think that one would need to go a long way to find a more suitable bolt-on purchase. It's producing, albeit at low levels. It's next door to Trinity's most prolific fields. And most of the acquired area is covered by Trinity's 3D seismic. While it sits in the North West District: an area that Trinity is seeking to win in a bidding contest.

Strategic Partnerships To Facilitate Growth

Trinity has partnered with Cairn Energy and is in the bidding for two projects in Trinidad. Namely, the offshore west coast Jubilee field and the onshore North West District. It also has a memorandum of understanding (MOU) with the National Gas Company of Trinidad and Tobago. This covers the development of a Micro Liquefied Natural Gas business, renewable energy projects and the exploitation of stranded gas assets in its existing portfolio. Again, looking to energy rather than oil, it has recently agreed to an MOU with the University of the West Indies. This is largely but not exclusively focused on renewables and appears reasonably well advanced with a Wind Resource Assessment project planned.

Hedging Underpins Its Investment

The company has successfully used hedging in the past to mitigate the impact of SPT. For 2020, it received around US$2.4m in hedging income. It now appears to be using hedging instruments to deal with the potential downside of oil prices. According to its 2020 Annual Report, at March 2021, it was hedging some 45,000 bbls of oil per month (Around 45% of its 2020 exit production) for H1 2021 and 30,000 bbls for H2 2021 and 10,000 for H1 2022. It will receive hedging income should the price of oil fall below US$42.50 per bbl in H2 2021 or US$60 per bbl in H1 2022. It has subsequently bought additional hedging instruments covering 15,000 bbls per month for H2 2021 and 12,500 bbls for 2022 but has not revealed the terms. However, it refers to downside protection. So, presumably, it's not limiting its exposure to high oil prices.

Tendering Process Slower Than Anticipated

The outcome of its bid for the Jubilee Project has been delayed due to COVID and so will probably be known by the year-end. The prize could be considerable - The field is estimated to hold 14 mmbbls proven and 1 billion bbls Stock Tank Oil Initially In Place (STOIIP). While current production from the field is around 2,800 BOPD.

Trinity's bid for the onshore North West District is at an early stage and the company is awaiting access to the data room. But it's worth remembering that the 3D seismic, purchased in November 2020 covering its onshore assets, came with a 4km buffer. This can be seen below and appears to give the company the heads up on the North West District field bidding process.

Source: Trinity Exploration

It's also worth considering the location of the Jubilee field in terms of its current West Coast assets where production rose to 245 BOPD for 2020 (2019: 189). It's not difficult to imagine logistical synergies given its geographic proximity. In addition, synergies with the development of its Echo assets on the East Coast. I would suggest that there could be an overlap in terms of the capital equipment required.

Incidentally, Trinity came close to disposing of its West Coast assets for US$4.55m in August 2017 when the price of WTI was a little under US$50 per barrel and its production from the field was around 217 BOPD. The deal fell through in November 2017. But it gives an indication of the value of its assets and, of course, the potential value of winning the Jubilee bid.

More Favourable Licence Renewals Pave The Way For Resumed Drilling

This covers its WD-2, WD-5/6, WD-13 and WD-14 blocks. For starters, the lease periods have increased to ten years, starting 1st January 2021, as opposed to the previous five years. The work commitments appear attractive. Trinity says that it's "Highly confident of exceeding" these obligations. There also appears to be a focus on enhanced oil recovery strategies which works well with Trinity's recent acquisition of 3D data. The company also seems to be more comfortable with a revised Overriding Royalty Rate for its portfolio.

Trinity has also renegotiated its Galeota licence agreement, with the new agreement effective from 14th July 2021. In essence, this makes a joint-venture agreement to fully develop the asset a lot easier. Trinity now has a 100% working interest (Previously, it held a 65% working interest) in the block, Heritage's 35% working interest has now been converted into an overriding royalty. There is also a new crude oil sales agreement giving greater pricing clarity and based more on international norms. Again, the joint operating agreement has moved to more generally accepted international standards. While there has been a reduction in work commitments and performance guarantees. Importantly, the new format allows the company to bring into play its substantial (US$237m tax losses - these can be used to shelter revenue from Petroleum Profits Tax). However, the company has relinquished a substantial chunk of acreage - the licence area now covers some 7,802 hectares while previously it was 12,300 hectares.

Capital Reduction Allows Dividends And Buybacks

Whether it will pay a dividend or embark upon share buybacks is unclear. However, it's now legally able to do so. The capital reduction was finalised last month.

Political Change Could Give Impetus To Trinidad's Oil Sector

In April 2021, Stuart Young was appointed as Trinidad's Minister of Energy and Energy Industries. At a recent energy event, he stated that:

"The optimal fossil-fuel policy shift is the accelerated exploitation of these resources"

Pointing to the need for Trinidad to accelerate the development of its hydrocarbon resources to avoid the risk of stranded resources. It's also worth mentioning that he advocated a "Facilitative fiscal regime". I would have thought that further reform of the SPT regime could be on the cards, especially relating to offshore production. In concrete terms, he appears to be aiming to increase Trinidad's production of crude oil to some 80,000 BOPD by 2025. For April 2021, production averaged 58,500 BOPD. Moreover, he seems to have taken on board the need to balance strategies to deal with climate change and Trinidad's high dependency on the hydrocarbon industry. In essence, he seems to be pressing for the country's hydrocarbon assets to be developed before it's too late.

At the same event, Young also emphasised the need for oil producers to utilise the most up-to-date techniques and equipment. The impression given, in my view, was that the Government would make Trinidad an attractive energy investment destination but the quid pro quo was that oil producers had to up their game and employ advanced technology. This is something that Trinity has been doing for some time - automation has played a major part in reducing its breakeven cost (It's still rolling out Supervisory Control And Data Acquisition Systems for its onshore assets). While the proposed development of its Echo project is highly automated. That emphasis on technology may put it in a strong position as Trinidad seeks to rapidly develop its hydrocarbon assets. With oil production currently dominated by five large players, I would suggest that there is room at the top. And, easy to forget, Trinity is viewed as a local champion. But it only produces around 6% of the country's oil. This can be seen below.

Source: Trinity Exploration

Reserves And Resources Look Set To Increase

Without a great deal of effort and within a reasonable period, I believe that the company could see a substantial uplift in its 2P reserves. As at the end of 2020, these stood at 19.55 mmstb (2019: 20.94 mmstb). Importantly, its current estimations are based on the immediate geography surrounding each onshore well. Of course, it has many wells. But the 3D purchased from Heritage should give a greater understanding of its core onshore assets. And that 3D should facilitate the drilling of high angle or even horizontal wells. Again, positively impacting 2P reserves.

Looking at its East Coast assets and its booked 2P reserves only relate to its Trintes field. However, it has recently renewed the licence on its Galeota block on what appears to be more favourable terms - it now has a 100% working interest (Previously 65%). This increase in ownership is now reflected in its increase in 2C resources. Its Galeota Echo 2C resources are now some 22.32mmstb. On making a final investment decision on the project, these 2C resources will probably be reclassified as 2P reserves. It's also worth bearing in mind that those resources are likely to be revised upwards as a result of the dynamic modelling that is being undertaken.

There also appears to be scope to expand the company's West Coast production through exploiting existing discoveries.

East Coast Development

The company appears to be aiming to make the Galeota Echo project as automated and as "Green" as is realistically possible (Which fits with Trinidad's broader objectives as outlined above). For example, powering it through onshore renewable energy and avoiding the need for diesel-powered engines on platforms as well as ensuring that the platforms can operate unmanned. Incidentally, my understanding is that the financial modelling of the development of the Galeota project was based upon no reform of the SPT regime. Any positive fiscal change will be a bonus. While the goal is an additional 4,000 BOPD of peak production.

Source: Trinity Exploration (TGAL figure amended to show impact of licence renewal)

It may be useful to place the Echo development into perspective in terms of what is happening more broadly in the Columbus Basin. As this illustrates, there are major operations in the same vicinity. Taking a long-term perspective and, in my view, it's quite possible that as these assets deplete they could be sold to smaller and more flexible operators.

Source: Trinity Exploration

For 2020, its East Coast output was 1,188 BOPD (2019: 1,205 BOPD) representing some 37% of its total production. The company appears on track to complete the construction of a new 10,000 bbls onshore tank farm for Trintes by the year-end. It believes that this will give it additional operational flexibility but it's unclear whether this will increase production.

A Make But Not Break Year

Trinity has many irons in the fire. Some of which will almost certainly take it to another level of production in the medium term, should they come to fruition. Importantly, they all have a high chance of success.

The renewal of Trinity's Galeota licence has been completed. And so the development of its TGAL/ECHO asset now seems a question of when rather than if. While the technical foundations of this development have been laid. How it will be funded strikes me as the next big question. When I raised this issue at previous presentations, the response given was that it would be done in a way that's not against the interests of shareholders. So, presumably, it will not involve a dilution of equity.

The results of its bids for onshore and offshore fields will probably be unknown until the end of the year. But winning either will almost certainly open up many growth opportunities.

Even its producing onshore assets have been given a new lease of life with licence renewals on improved terms and, of course, the 3D seismic data purchased from Heritage gives the prospect of high angle and even horizontal wells. As well as a remapping of its onshore 2P reserves.

The big question mark, in my view, is just how serious a blow the Executive Chairman's death proves to be for the company. He had great local knowledge and presented the company well. But I still feel that the day-to-day business has been run by its Managing Director with strategic oversight by the Executive Chairman. While, in frankness, it should be fairly easy to put in place another well qualified senior management figure to oversee the strategic direction of the business.

Most recent research:

https://www.dhirubhai.net/pulse/trinity-exploration-update-michael-crilly-1f/