Description

Background:   I originally wrote up CEN.V on 9/22/2008, with the stock at $2.50. Despite CEN having more than doubled since that write-up, I am revisiting the idea now because I still see CEN as a compelling opportunity.

CEN is a Thailand junior E&P on the cusp of a large production (and cash flow) ramp and a significant exploration campaign.  CEN is undervalued on all standard valuation metrics vs peer group and sector (cash flow, flowing boe and reserves) plus combines significant exploration potential.  This is a rare and desirable combination, especially as CEN has modest debt (roughly $50MM), is self funding and is generating significant cash flows.

The company currently produces about 7000 bpd 30 API waxy crude that trades at Brent less ~$6 discount (opex is roughly $20 bbl, so roughly $50 netbacks at current prices).  They are mobilizing a workover rig to replace a defective pump on a recently drilled ~4000 bpd well that failed in December and expect to be back over 10,000 bpd by early Feb.  They also produce ~2000 boed from their onshore gas field (~1TCF gross, 120Bcf net) that has ~17 year supply agreement to local power plant.  Gas pricing is based on Brent on roughly 10:1 basis.  

CEN will set 2 platforms in shallow offshore waters (~75' depth) this quarter in preparation for development drilling (6 producers, 2 injectors to start) in their Bua Ban field (~22MM bbls 2P).  Company guidance is btw 5,000-10,000 bpd around mid 2010, depending on production results. Wells were tested in 2005 and saw IPs of around 750 bpd natural flow (although one test was ~2500 bpd).  They will install pumps and expect significantly higher production (as in multiples), similar to what they experienced in their first field (Songkhla Main) when they installed pumps.  Management expects the Bua Ban wells to produce about ~1500 bpd.  So 6 wells x ~1500 bpd = ~9,000 bpd.

That said, CEN has had several pump failures soon after installation, so production has been spotty.  They've decided to replace all pumps and install larger pumps in hopes they will last longer. Time will tell if they are successful.

Due to shallow water and relatively shallow wells (9000' +/-), wells take about 2 weeks (or less) to drill and complete with all-in costs less than $5MM per well.  With relatively high production rates (1500-5000 bpd), their wells payout in a matter of months.  An important fact is they control the basin 100% and have all production licenses and permits in hand, allowing discoveries to be put into production within a few months (rather than years as is typical for most offshore fields).


Exploration Targets:

CEN has about 750MM bbls of prospective and contingent resources, about 65% are oil.  What makes CEN's exploration attractive as all their targets are offsets of existing discoveries, so risk is much lower than with normal wildcats.  Also, the Songkhla Basin has enjoyed excellent historic wildcat success rates - 5 for 7.  Chevron went 13 for 13 in 2008 on their much larger adjacent block.

That said, they just drilled what was deemed to be the first true wildcat on their Songkhla B target.  They made a discovery, but results were mixed with only 10' net pay (vs hopes for perhaps 100') due to seal being partially breached.  Since the target is faulted, they are currently drilling the other fault block with results due sometime next week.  Due to high netbacks, the threshold for commerciality is about 1000 bpd.  First well is estimated to be able to produce 300-500 bpd, so they need success on the currently drilling well to declare the field commercial.  I estimate that there is probably a 50-50 chance of that happening.  In any event, we will know by end of the month.

There are a slew of additional targets - several are ~100MM bbl OOIP- that will be tested in the next year.  Very likely one or more will be successful based on the basin's historic success rate.

CEN also controls a slightly smaller basin (Kho Kra) over which they recently shot 2D seismic in which they must drill a well this year.  If I had to guess, I would guess that this basin likely has several hundred million bbls of potential resources.   It's also worth noting that Oscar Wyatt Jr is a significant CEN shareholder, with a 40% stake in the company.  He built and sold Coastal Corp to El Paso for several billion.   COB is DeCombret, former VP of Total and has bought nearly 500,000 shares in the open market in the last year from $2.50 to $5. Other insiders own about 10%.


Valuation Metrics:

1) Cash flow

By mid 2010, CEN should be producing roughly ~15-20,000 boed (10K from Songkhla Main, 5-10K from Bua Ban and ~2000 boed onshore gas).  With $50 netbacks and 20,000 boed, they will see approximately $350MM annualized cash flow. Current EV is approximately $636MM- so the company is currently trading at less than 2x annualized cash flow vs a sector average of ~5x.

2) Reserves

CEN has 55MM boe 2P reserves with after tax NPV10 of over $620MM as of Dec 31 2008 and will likely show an increase in reserves due to the discovery of a stronger than expected water drive in their Songkhla field.  Reserve values will increase with higher average oil prices in '09 vs exit '08- so perhaps a bump to US$700MM/C$735MM = C$7 share. The current $5.58 share price indicates a ~20% discount to 2P NPV.

3) Flowing boe

Assuming ~20,000 boe by mid '10, CEN is trading at about $32,000 per boe, less than half the peer group average despite being 90% oil.




Conclusion:

Coastal is a very attractively priced oil-weighted junior E&P that has large near term organic growth, coupled with substantial exploration upside potential.  The company can drill wells quickly and cheaply, and most importantly, can bring on discoveries in a matter of a few months, turning exploration success into cash flow much faster than ordinary offshore players. 

Catalyst

1) Test results from the second Songkhla B target by end of month.  Follow-on drilling to appraise the field and put it into production if the field is deemed commercial.

2) Workover/pump replacement of ~4000 bpd SA-04 well by mid Feb returning Songkhla Main to ~10,000 bpd.

3)  Development of Bua Ban field in Q1/Q2 adding ~5-10,000 bpd additional production by mid '10, raising total production to ~15-20K boed.

4) Continued exploratory and development drilling on sizable (~10-100MM OOIP) targets.

5)  Spud first wildcat in their Kho Kra basin sometime in 2010.