Coastal Energy Increases Oil Production, Full Subscriber Report FREE
Tue, Jul 13, 1:26 PM ET, by Keith Schaefer, Oil and Gas Investments Newsletter
Coastal Energy (CEN-TSXv) is one of my top oil picks for the rest of 2010. It is the only stock from the subscriber portfolio I update publicly. I have included here my latest, complete stock report on Coastal. On July 12 the company announced its first 3 wells at its "Bua Ban" property in the shallow waters of the Gulf of Thailand were producing a combined 3,000 bopd of 30 degree API oil, and that they had struck one new zone as well. The company is now producing 13,000 boe/d total, and Coastal is drilling another seven wells before the end of this year at Bua Ban. Analysts are predicting that Bua Ban will add as much as 8000 bopd total to Coastal's production this year, giving it an exit rate (what the company will be producing on Dec. 31 2010) of 18,000 boe/d. At 13,000 boe/d production, the company trades at $36,513, per flowing barrel (my calculation), compared to the average of $84,000 per flowing barrel for domestic intermediate producers, and $61,661 for Canadian listed international producers, according to Canadian brokerage firm Canaccord Genuity in their Energy Daily on July 13 2010. ____________________________________________________________________ The Unstoppable Technological Revolution If I could tell you about a company that"¦ * Is employing new technology that gives it a powerful advantage over the rest of the marketplace"¦ * Is increasing its production and cash flow at a rate decidedly higher than its peers"¦ * And has the potential to make early investors as much as 112.5% "¦ You'd want to hear about it, right? Here's the thing - I've issued alerts on more than 17 such companies since April 2009"¦and to date, those investments are up a whopping 112.5%. It gets better"¦ There are dozens of new opportunities about to "pop" over the next 12 months. I've prepared a new report that spells out exactly why this is happening - and how you can stake your claim. Click here to read this Free report right now. ____________________________________________________________________ I first purchased Coastal Energy for the Bulletin portfolio in the summer of 2009 at $2.56 per share. It was one of the few oil producers I had ever seen that had a dramatically lower valuation than its peer group. Within days the stock was over $3, and then as oil prices continued to improve and the company successfully completed more wells, the stock hit $6.50. I told everyone it was one of my favourite stocks then, and it promptly fell back toward the $3.00 level following a couple of disappointing exploration well results in Q1/10. I bought another 10,000 shares at $3.86 on the way up as the stock broke out, and then another 5000 shares last week at $3.86 again as a large institutional seller sold the stock off almost $1 a share in one day. Today the stock is trading back near $4.75 on the back of these positive drilling results from Bua Ban. The company already has production facilities in place at Bua Ban, so production from the wells can be tied in quickly and cheaply. Four Canadian brokerage firms have coverage on the company. And the fact that two directors bought stock in late June in 25,000 and 150,000 share blocks also gives me strong comfort in the stock moving forward. Trading Symbols: CEN-TSXv; CEO-AIM (London, UK) Share Price (Jul 12 10) CAD$4.25 Current Production: 13,000 boe/d Shares Outstanding: 106.3 million Fully Diluted: 113.4 million Market Cap: $451,775,000 Net Debt: US$22.9 million Enterprise Value: $474,675,000 Price per flowing barrel $36,513 POSITIVES -Coastal still has a low valuation of $36,500 per flowing barrel of production (peer group average is $66,000-$85,000, depending on which analyst you read) -Coastal is trading at a nearly 35% discount to its 2P Net Asset Value (meaning I'm getting any growth for free - none of it is priced in yet if it's trading below NAV) -7 more wells from Bua Ban will be drilled in the next few months -4 Canadian securities firms have coverage on the company -low net debt – $23 million on estimated 2010 cash flow of $160 million -low 10% royalty -low operating costs in the $15/bbl range - their wells are in very shallow water -management owns more than 25% of the stock NEGATIVES -oil production can, and has, decline dramatically from initial production rates because of increased water flow in the wells. However, the oil and water rates at Songkhla have been relatively stable for some time, and there is so far no sign of water at Bua Ban -for a stock with 100 million shares out, it trades relatively thinly, which can make for big intraday moves THE PROPERTIES Offshore Thailand Coastal owns 100% of, and operates block G5/43, a 5,000 square kilometer shallow water (less than 25m, or 80 feet, water depth) block in the south western portion of the Gulf of Thailand, which include the Songkhla and Bua Ban fields. Songkhla A Field The Songkhla A field is producing approximately 8,000 bopd out of four wells which were drilled in 2008 and 2009. These wells started off with very high production - 3,000 to 5,000 bopd - and then quickly declined to about 2000 bopd. Coastal will be drilling at least one more well into Songkhla A in late 2010. So far, they have had 100% success rate in development at Songkhla A. Bua Ban The Company began development work at Bua Ban in May 2010. The first 3 wells have are now producing a total of 3000 bopd, though most analyst expect that most of the production is coming from one well, A-05. All three wells have encountered oil in the Lower Oligocene reservoir. And one well hit a new pay zone in a new reservoir – the "Upper Oligocene" - which had about the same net thickness as the "Lower Oligocene" pay zone. A fourth well is expected to be brought on production quickly, with six more wells being drilled this year, potentially before the end of September. The Bua Ban area covers 282 square kilometres, and there are many targets. Coastal has all approvals to drill wells throughout the 75 km 2 Songkhla field and the 282 km 2 Bua Ban field, along with many satellite structures. Lastly, the Company says they are looking to diversify their asset base with other oil projects in other South East Asian countries as well as continue exploring and developing their current assets. Thailand Onshore Natural Gas Most of Coastal Energy's stock value is in its offshore oil properties; so despite the prolific nature of their onshore natural gas production and properties, I'll only touch on them briefly. The Net Present Value of Future Cash Flow (2P) from the gas assets, discounted at 10%, (this is called NPV10) is $200 million. And the stock really trades just on the oil production, and yet, the Company's onshore natural gas pricing is linked to the price of Singapore Fuel Oil, making the Company 100% levered to the price of oil. The gas is sold under a 15 gas sales agreement with PTT, which runs through 2021. Located in northeast part of Thailand near Laos, Coastal owns the largest single interest (36.1%) in a company called APICO, which has several natural gas assets in Thailand. The main asset is roughly 1/3rd interest in the Phu Horm gas field which is currently producing in the range of 90 mmcfd-105 mmcfd (million cubic feet of gas per day) from three wells (which gives Coastal a net 12% interest). FINANCIALS Coastal markets its crude to a variety of buyers in Southeast Asia. The company's benchmark for crude oil sales is "Dubai" pricing (which is the Asian benchmark price; think of it like Europe's "Brent Crude" or America's "WTI"). The Company's current discount to Dubai is between $5 – $6/bbl. I estimate 2010 cash flow to be $165 million, given a 10,000 bopd average (which will now go up), and a $49 netback (profit per barrel) and a par Canadian dollar and US$70/bbl oil. With capital expenditures expected to be $115 million, Coastal will generate almost $50 million in free cash flow and end the year with $20 million net CASH (most producers have net debt, giving them a very strong balance sheet). VALUATION Based on the figures above, the Company is trading at roughly 3x this year's cash flow (before the Bua Ban discovery) using my numbers (and I am NOT a financial analyst of any kind). The peer group trades between 5x and 7x 2010 cash flow. For new readers, I want you to know that I try to keep things simple. Analysts use all kinds of formulas like Enterprise Value over Debt Adjusted Cash Flow (EV/DACF) and PE ratios etc. I have found the simplest, most effective metric to use is "price per flowing barrel of production", which all the analysts use as well. To me, that prices in everything the market knows about and expects of the stock. I take the market cap, add the net debt (or subtract the net cash) to the get the "enterprise value" of a company. Then I divide that over their daily production rate. I use it as an all-encompassing verdict on the company. Generally, the more profitable the company's production is the higher their valuation will be. (I do use other metrics, but this is by far the main one.) I generally avoid stocks with cheap valuations, as they are always cheap for a reason, and tend to stay cheap. (They're called value traps.) Coastal is like that – it is actually trading at a lower valuation per flowing barrel now than it was when I first bought the stock and put it in the portfolio - it was trading at $40,222 per flowing barrel. The average of the BMO Nesbitt Burns international producers was $66,000 at the time. But the company has profitable oil production, and a very good growth profile. Moving through 2010, I believe that Coastal can trade at least at the current peer group average of $66,000 – $85,000 per flowing barrel. If add in some decent production growth, I am hoping to make some good money on this stock this year. The stock is well covered by Canadian analysts, so good news here will get rewarded. It also trades on AIM, the junior board of the London Stock Exchange in the UK. For my own portfolio, I was looking at a potential valuation on my Coastal shares before the Bua Ban success of between, roughly - $6.50 and $8 per share - 10000 bopd x $66000-$85000/boe, divided by 106.3 million shares. Exploration success will cause me to increase my target for my portfolio. (Just FYI, a valuation of $65,000 per flowing barrel x 15,000 bopd = $9.17 a share, with zero net cash or net debt. I tell subscribers that when making projections, it's important to have one foot planted firmly in the sky.) WHAT THE ANALYSTS SAY: Firm Target Price Canaccord Capital* $7.25 GMP Securities $6.85 Macquarie Capital Markets $6.35 RBC Dominion $7.30 Thomas Weisel $5.50 (with no exploration success) Paradigm Capital $7.50 *their Vice Chairman is on the board THE STOCK The last two equity raises for the company were done at $5 and $3.20. The stock had a great run in late 2009 on the back of exploration success. After some exploration failures in early 2010, the stock had an almost textbook 61.8% Fibonacci retracement, though MACD was showing positive divergence for the last three months. Now it has just broken out above its 200 day moving average (dma) on volume. But the stock is also sitting at a key resistance/support line. It dropped to support at its short term moving average last week in a harsh sell off caused by one fund deciding to exit its position in one day (another opportunity for me to buy more stock). CONCLUSION My hope is that steady production growth from Coastal Energy at Bua Ban will cause the stock to be re-rated upwards by the market - its valuation actually got cheaper after the Bua Ban well results were known. It is trading significantly below its peer group average. I believe this gives me some downside protection on my investment. Coastal's development program at Bua Ban will increase production and I HOPE lead to further multiple expansion; meaning the value per flowing barrel should increase, as well as the number of flowing barrels. Even with no future success, several analysts are saying the stock is worth $6.35 – $7.50. And being so close to China I think that Coastal would be a take out target by Asian companies. And as always, I put my money on the line with subscribers; my Oil and Gas Investments Bulletin subscriber portfolio is not a model portfolio; it is my real money. I eat my own cooking. If subscribers lose, I lose. Last August I purchased 10,000 shares at $2.56, and in mid June 2010 I purchased another 10,000 shares at $3.86, and in July I purchased another 5000 shares at $3.86. -30- These are the types of energy companies I find for subscribers. Coastal's finding costs per barrel of oil in reserve is only $14 for 2009 - compare that to the Canadian average of just over $20/bbl. I look for growth, but not at any cost. This stock has already doubled once for my subscribers - but I believe that with success at Bua Ban, the Coastal story will advance from a walk to a run. There are several more current portfolio stocks that are enjoying exploration success and being rewarded by the market. Become an Oil & Gas Investments Bulletin subscriber today - and enjoy the profit potential that current subscribers have experienced. There is a 60 day, 100% money back guarantee on annual subscriptions, no questions asked, if you decide my service is not for you, and a pro-rata refund after that.
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