Summary:
BOE is a Canadian based resource company with petroleum and potash interests in South America. It is a large holder of shale acreage in Argentina’s Neuquén basin, and the majority owner of a potash brine project in Peru. Today the company has 1,000 barrels a day of conventional production. Successful drill results this year should provide visibility for the company, lead to recognition of material reserves, and provide catalysts for stock appreciation. BOE should further be viewed as a probable takeover candidate by one of its partners, most likely Exxon, as the company successfully completes its drill campaign and de-risks its shale exposure.
At $3.71 a share, BOE offers an interesting risk reward profile. The energy interests are conservatively worth $7 per share, and the potash project is worth another $1 per share. M&A activity could lead to an additional premium over our conservative evaluation of BOE’s interests. Management is aligned with shareholder interests and controls 23% of shares outstanding. BOE’s market cap is $690mm. The company currently has about $55mm of cash currently and no debt.
Background:
Americas Petrogas operates 14 blocks, covering 1.3 net million acres, in Argentina’s Neuquén basin. The Neuquén is a proven area with a highly prospective shale play as well as long standing conventional production from fields operated by Exxon, Apache, Chevron, Repsol/YPF, and Petrobras. The unconventional oil and gas shale in the Neuquén, called the Vaca Muerte, is akin to the Eagle Ford shale formation in the United States, but with favorable differences. Foremost, the Vaca Muerte shale runs as thick as 250 meters through the Neuquén, and will probably favors lower cost vertical wells. This is compared to an average of 70 meters of shale in the Eagle Ford. Unconventional vertical wells drilled by YPF exploiting the Vaca Muerte have flown at IP rates of 200 to 600 barrels a day, compared to an average rate of 100 barrels a day in the Eagle Ford. You also have the benefit on substantial infrastructure in the region with an 80 year production history. BOE is one of the largest holders of shale acreage in the Neuquén (only behind YPF, Apache, Petrobras).
The prospectivity in the Vaca Muerte has been known by the geologists and the petroleum industry for years, but shale exploitation, which relies on oil service sector investment, is still early stage. Last year the play received some attention when YPF announced a 150 million barrels shale discovery on its Loma La Lata block. YPF later increased its estimate to 927 million barrels after drilling 15 wells on the property. With higher net pay, superior production rates, and high quality infrastructure already in place; it is probable that Vaca Muerte well economics (vertical wells averaging $5mm, F&D costs $15/boe, lifting $5/bbl) could eventually exceed what US based shale drillers see today. Most of BOE’s acreage appears to be in the wet gas and condensate zone of the shale zone.
Americas Petrogas also owns 80% of GrowMax: a Peruvian situated surface potash project that’ll begin operations in 2015. Annual production should reach 250k tons, and the project will run for 30 years. A 43-101 feasibility report will be released this year providing in depth detail, but management has already indicated cash costs to be in the $100 to $125/ton range. Under current potash prices I reach a NAV of $200mm for the project, or just $1.00 a share. The company has stated on occasion it will spin out GrowMax sometime in the next 18 months.
Divesting GrowMax is meaningful in it reduces one’s basis in the energy portfolio meaningfully. When adjusting for GrowMax and the majority of the cash held today, a strategic buyer could acquire the 1.3mm acres of acreage in Argentina’s most prolific basin for about $420mm or $310 an acre. Compare this to prime Eagle Ford acreage trading between $5,000 and $25,000 an acre. The value discrepancy is stark; recall Japan’s Marubeni recently announced a deal to buy 52,000 acres in the Eagle Ford from Hunt for $1.3 billion, or $25,000 an acre.
It remains to be seen what portion of BOE’s land accesses the Vaca Muerte source rock. This year the company will drill 10 shale wells. Some wells will be drilled independently, and others are partnerships with Exxon, Apache, and Gran Tierra. If you choose to analyze the company’s farm-outs, you’d do well to start with the one made to Exxon. It was in August of last year that Exxon came into BOE’s Los Toldos blocks, committing $76mm to earn a 45% stake in four blocks. Exxon seems to understand Argentina well, and its move to increase exposure to the Neuquén further validate the Vaca Muerte play and reconfirms its potential magnitude, as well as ensure access to oftentimes hard to secure rigs and oil service support for all of BOE’s wells. Furthermore, there’s good reason to think that Exxon, a company that tends not trifle with small projects, believes that BOE’s Los Toldos blocks are on trend with YPF’s billion barrel Loma La Lata block.
If the exploration wells BOE drills this year reveal that the Vaca Muerte is accessible from a fraction of its acreage, there can be a real stock rerating. A scenario where proven wet gas and condensate or oil shale rich land trades for $5,000 an acre in the Neuquén is not unlikely. Should just 20% of BOE’s land qualify, that land alone would represent $7+ of value a share alone. And that neglects significant conventional potential in the portfolio as well. With an effective basis close to $2.00 a share in the energy portfolio, and numerous drill results to come this year, BOE stock is currently compelling. I reiterate my view however the most likely outcome is that BOE is acquired by either one of its partners or another major operator in the Neuquén following the spinout of GrowMax. Major international oil companies in the region have been consolidating in the Neuquén, and are aggressive about increasing shale exposure. I expect energy investors will recognize this year that Americas Petrogas is one of the few acquirable Neuquén portfolios available to the majors in the region, and that its days as a standalone enterprise are numbered.
Disclaimer
Our fund or I might have an existing poistion in this company, and may trade in or out of the position without announcement. While we think the information provided here is accurate and current, you should perform your own diligence.