Toreador Resources TRGL
December 24, 2007 - 4:57pm EST by
2007 2008
Price: 7.39 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 143 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Investment Thesis


Toreador Resources (TRGL) is an orphaned equity that presents an interesting investment opportunity for a patient long term investor.  The stock has traded down from $28 at the start of 2007 to under $7.50 as of December 24th.  The primary catalyst are increased cash flow generation as Turkish Phase I operations eventually come on line, farm-in joint ventures to explore in Hungary, France and Turkey and development of Phase II  in Turkey.    


TRGL Background


  • Toreador was founded in 1951 as a mineral and royalty company. In 1997, the company became an international exploration company.


  • TRGL purchased Madison Oil Company, which provided TRGL with their two key assets, onshore oil production in France and an exploration permit in Turkey that has almost a million acres.


  • The France asset is producing over 1,150 bbl/day.  French operations are the main producing asset for TRGL.


  • Hungary has 950 MMCF of proved reserve gas, and Romania has 3,041 MMCF.


  • TRGL divested it US operations in 2007 – Turkey is the primary focus of the company.  


Turkish Assets


There are seven wells dedicated to the Phase I production:


The first seven wells in Phase I are shallow and low pressure. Three other wells, Ayazli-1, Bayhanli-1 and Alapli-1 have similar pressure and are in the vicinity of the producing platforms of Phase-1. The remaining three wells Akcakoca 3,4 and Guluc are in deeper water (maybe 60 more feet), are completed in deeper formations (~1000 feet) and have higher pressures (+100 to 200 Psi). They will be connected to the Phase II system.



Reserves Analysis:


All reserves have been fully evaluated by Laroche and Associates Ltd of Dallas. Laroche is considered a good firm, and they have done Devon's lower 48 corporate evaluation. Their YE 2006 reserve numbers are conservative and comparable to the grossed up reserves of Stratic. In the reservoirs, in which Toreador owns 36.75%, Stratic owns exactly one third, or 12.25%. On a 3P basis, Laroche has booked 50 Bcf net to Toreador corresponding to 136 Bcf gross. 




On purely exploration (non-development) wells, TRGL has gone 14 for 16. This success has been attributed to the successful implementation of AVO. AVO is a collection of several attributes and is a giant step beyond routine amplitude anomaly mapping. All of their drilling prospects including PUD's, probable, possible locations as well as the unrisked exploration potential possess AVO seismic anomalies.



Turkey Economic and Natural Gas Sector Background:



Turkey is a significant net importer of natural gas. As of January 2006, Turkey had 300 bn cubic ft of reserves (Bcf) of proven natural as, while consuming close to 1 TCF of natural gas.


Prior to 2001, Turkey’s natural gas market was monopolized by state-owned Botas. After May 2001, Turkey enacted a new Natural Gas Market Law, with the intention to liberalize the natural gas sector, and enable private sectors to invest in E&P infrastructure project. Turkey’s Energy Market Regulatory Authority (EMRA) becomes the governing body responsible in implementing the Law, while setting the natural gas prices.


Historically, much of Turkey’s natural gas production occurred at sites where crude oil was also produced. Turkey’s small natural gas production is carried out primarily by state-owned TPAO, which accounts for roughly 63 percent of the domestic output. Given the diminishing supply and increasing demand outlook for Turkey in the next 20 years, TPAO has a mandate to continuously pursue Greenfield projects for Turkey’s energy security.


TPAO’s modus operandi has been centered on working with international E&P firms in developing producing assets. TPAO’s priority for the last few years has been for exploration at offshore natural gas basins. In September 2004, TPAO found a viable gas deposit at the Ayazli-1 and Ayazli-2 wells off the western Black Sea coast. Since then, a joint venture of TPAO (51 percent), Toreador (37 percent), and Stratic (12 percent) has conducted extensive exploratory drilling and seismic testing in the region. Estimates from Toreador have put recoverable natural gas reserves in the Western Black Sea Project at 1.4 trillion cubic feet (Tcf). This project is believed to be the largest gas discovery in Turkey thus far.



Corporate Events Causing Distressed



Why does an E&P company trade from $28 to $7 as oil trades from $55 to $95 and natural gas in Turkey trades from $5 to $10? 



1.      Incompetent Previous Management & Corporate Governance: In the past several years, TRGL management has been consistent in under-delivering and over-promising on their production estimates, capital expenditures and cash flow generation capability.


  • January 25, 2007 – TRGL CEO Thomas Graves III resigned to pursue alternative business and charitable activities.  Replace by Nigel Lovett a former investment banker and board member.  In reality Thomas Graves was fired because TRGL capital expenditures spending created a short term liquidity event.  Basically, spent and committed to spend more money than on balance sheet.  This forced the company to do an unscheduled equity raise - 2,710,843 shares of common stock for 45 mil. to four institutional investors.


2.      Lack of Operational Skills: TRGL historically never produced offshore assets. Unfortunately, neither does their two partners.


  • The Turkish Black Sea area lacks the oil services and drilling infrastructure for offshore exploration and production.  TRGL management mainly relied on sub-contractors for Phase I development.  Our channel checks show that TRGL tried to do some of the development on a shoe string budget as the company was dependent on equity market financing to develop the projects.  In Phase II development is handled by TPAO.      


3.      Over promise and never deliver: As mentioned above, TRGL’s management gave production guidance they have never met.  From 2004 to 2007, TRGL investor communications was focused on selling a growth story with exploration upside in Turkey.  The investor slide shows were color pictures of exploration potential with minimal focus on cash flows.  The failure to transform production success into cash flows has taken TRGL from $30 to under $10 during 2007.


4.      Liquidity Risk and Fear of Equity Capital Raise: Given production hiccups and the private placement in March 2007,  there is fear of another equity financing to capital raise.


5.      Jefferies downgrade: As the largest investment bank covering the name, Jefferies analyst, Subhash Chandra initiated with a Buy rating at 32 (03/03/07). He quickly changed this rating to Hold at $18 (0/23/27) and subsequently $10 (9/20/07) and $8 (11/5/2007.  Jefferies sell side research coverage has been negative on TRGL for the last six months.                                                    


6.      Tired JV Partner Stratic Energy: Stratic the 12.25% interest holder in the Turkish JV is known to be an accumulator of production asset rather than either an explorer or producer of oil and gas. Most of their strategy hinges on investing in late stage E&P asset.


7.      Recent Operational Issues: Last conference calls have been revolved around operational issues, especially in the production outlook for the different wells of Phase I, mainly the tripods in Ayazli-2 that has experienced shut-ins.   A fishing trawler damaged sub sea pipelines in late November.  The pipeline damage has shut in all production until  sometime 1Q 2008. 


With all the above-stated issues TRGL looks like a far better short candidate than a long value investment.  The reason to buy TRGL is the operational issues and management blunders have driven the price to a point where the assets and implied optionality significantly mitigate any downside risk.   The valuation section and the positive catalyst sections lay out the story to be long this orphaned value equity.



Positive Catalysts


  • Moving Beyond The Abandoned Orphaned Equity


1.      Transition from Growth to Value: TRGL has shifted from being a roll-up of high potential exploratory asset and thus with valuation that fully reflects those potential. Thanks to all the internal issues above, TRGL is now as a value play trading at a significant discount to NAV.

    • TRGL institutional ownership base has changed from growth investors – Wastach Advisors - to more deep value investors.
    • On historical financials TRGL does not screen as a typical deep value E&P name.  One needs to looks past financials to look at assets and production plan over 2008-2010 to see cash flows.
    • Starting 2 Q. 2008 – TRGL will start reporting earnings and cash flows as production in Turkey picks up pace.  The financial metrics will attract value investors in second half 2008.   


2.      Ugly Financials-In Hindsight: TRGL’s financial position reflects the mismanagement of assets.  On a quarter to quarter basis, TRGL’s operating income has turned increasingly negative from -$3.9mm to last quarter’s -$10.9mm. On an EPS basis, EPS to shareholders is ($1.08) for Q3 vs. 0.33 for Q3 ’06. However, looking closer to 3Q numbers there is a positive surprise in currency gains. Simply put, TRGL recorded a $34mm non-cash currency gains added to shareholder equity and is reflected as a loss in the income statement due to accounting rules relating to functional currency standards.


3.      Only one sell side analyst and he is continually negative on TRGL.  Unless an investor is willing to do his or her own analysis on an asset by assets basis – TRGL is a tough story to understand on simple E&P financial analysis.  


·        Unless one digs into the underlying assets in France and Turkey, TRGL looks ugly on basic financial analysis using historical metrics.  There is too much noise in the financial statements.


Asset Value



no of shares






France Value


Turkey (Phase I)


Turkey (ex-Ph I)








Net Debt


Equity Value








 $  7.39

% difference





  • Liquidity Issues – Cap Ex is Production/Cash Flow Dependant


1.      Only fund operations via cash flows: TRGL management has reiterated numerous time that they will only contribute future expenditure through cash flows generated from Phase I and France. TRGL ought to have positive cash balance until 2Q 2009, without tapping into the IFC loan.


2.      IFC Loan: The IFC loan is a revolver with a $50mm maximum line used for the production of Turkey. TRGL had $35mm drawn, they paid down $5mm to IFC, giving TRGL a $20mm credit available. This line has a Libor+200 cost of debt.


3.      Phase II Capital Contributions:


The capital contribution for phase II is split evenly throughout the next two years.

TRGL CEO has stated that all phase II development will come out of current cash flow.  Given its current equity price and market cap – it is unlikely that TRGL will do an equity financing.  An alternative would be to sell part interest in the Turkish operations to another E&P company. 


  • Phase I operational issues


1.      Dogu Ayazli: Dogu Ayazli has had mix production issues. The Dogu Ayazli-2 well has been underperforming. TPAO the operator in conjunction with TRGL is considering an intervention to increase well production.  TRGL  has indicated that pressure is building after initial production was shut in indicating that the issue might be mechanical.  In December the decision will be made weather to perforate other zones in the well (there are 7 gas bearing zones) or to do a wire line intervention to increase production.  TRGL management and technical staff have repeatedly conveyed that well still has potential to generate gas and the issue of underperforming in initial production does not imply that the well or the reserves are permanently impaired. 


2.      Ayzli subsea issues: The Ayazli tripod connection to the pipeline has been delayed.  According to TRGL when the pipeline was laid some extraneous items were left at the end of the pipeline by the subcontractor.  To connect the pipeline to the tripod these items have to be removed and a value needs to be fixed.  Since the pipeline and the tripod are in 85 meters depth, divers can only work 15 minutes at a time.  There have also been storms in the Black Sea limiting dive time.  The company expects Ayazli tripod to be connected in 1q 2008.  The sub sea pipeline should be repaired in the 1 Q 2008. 

·        The operational issues are another strike against TRGL.  But the market reaction has been that of a death blow.  Basically the loss in the equity market value implies that the market values Turkey at close to zero.  The operational issues are a disappointment but they don’t imply that there are no hydrocarbons.  The delay affects the NPV of the assets but does not mean they are worthless as the market is implying.

  • Asset Valuation


1.      France: France’s PV-10 is valued at $131mm as of 2006. According to management, they believe that France’s value is $175mm-200mm.

·        From $7.50 price – what is downside in TRGL.  Assume Turkey worth zero as is Hungary and Romania.  France worth $175 – Net Debt is $103 mil.  Equity should be worth $3.60 on France alone.  Downside of $4 if we assume $500 mil. aggregate investment by all JV partners in offshore Turkey is worth zero. 


2.      Turkey Cheap Optionality: At current stock price, net of debt, Turkey is valued at only $4, or a value of $80 mm for TRGLs interest. TRGL had a book investment in Turkey at $180mm, which implies either value destruction of $100mm or market’s severe discounting on TRGL’s ability to convert gas on the ground to production. TRGL shareholder today own Turkish asset at a discount to TRGL’s purchase price in 2004, where the asset has been proven up and there is production occurring at the moment.


·        Focus on the Commodity:  The street has lost focus on the natural gas commodity in Turkey and the implied optionality in TRGL.  TRGL JV will most likely be able to sell gas at $10 plus in 2008 – twice the price when the project started.  There is only one gas storage facility in Turkey.  The strong natural gas market in Turkey and relative stability in pricing natural gas is being overlooked by the market.  This is not a Rocky Mountain natural gas cash market.

·        According to TRGL technically staff only 40% of the anomalies have been drilled in Phase I and Phase II.  There is a lot of opportunity to drill for gas around Phase I and Phase II infrastructure.  TRGL technical expertise on exploration is valued by TPAO especially AVO skills.  TRGL also has additional acreage to drill offshore in the Black Sea – one mil. acres in all.  There is no additional acreage for lease of the Turkish Black Sea coast.  From our industry contacts we know that other international E&P firms have sought acreage in the Turkish Black Sea.  The market is giving zero value to TRGL acreage position in Turkey.

·        A question to ask is was TRGL so lucky that it was able to find the only natural gas along the whole Turkish Black Sea.  From TRGL operational skill set we know they are not the world greatest oil and gas firm.  But somehow they found gas in Turkey.  Once TRGL and their partner overcome their teething pain they should be able to realize cash flows to justify their $500 mil. capital investment in Phase I and Phase II.  What TRGL was able to do was establish itself in a frontier exploration and production zone what was located relatively close to a great long term natural gas end market.  There is significant optionality in TRGL’s Turkish operations. 




  • Downside Protection from France PV-10: As stated above, France has a $131-200mm value. It’s a mature, producing asset, and that can be easily monetized if needed.


  • Phase II development -TPAO as asset protector: As the main operating partner, with 51%, TPAO sees the Western Black Sea asset as critical to the energy security of Turkey. If there is further mishap in future production, TPAO will protect the value of these assets at reasonable market price.  TPAQ will prevent a fire sale by Stratic or TRGL.
    • Phase II – main wells have already been tested.
    • TPAO will oversea construction of topside and platform.  Platform is larger scare than tripods – will be built outside Turkey.
    • Platform will have ability to install drilling equipment.


  • Farm in  on Turkey France Hungary & RomaniaHungary and Romania are two small assets that’s valued at PV-10 of $16mm in 2006.   TRGL farmed in Hungary  and stated that it expects farm in announcements in France and Turkey in 1 Q 2008. 


  • Insider Buying: One issue that has given me comfort is the continuous buildup of insiders buying on the stock. As of last Q3 2007, management and insiders own approx 14 % of the company.  The insiders have been buying from $14 on down. 


  • Corporate transaction to realize value: Given management’s willingness to part with their assets, there lies a significant possibility of TRGL being broken up in pieces.


Key Risks:




The primary risk with TRGL lies on its ability to execute on their target as a going concern. Given past performances, the market has severely discounted their ability.


Operational Issues


Turkey Risk




Cash flow generation as operational issues are resolved in Turkey, farm-in JV in Turkey, France and Hungary and Phase II development in Turkey
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