By Stewart Dalby
The latest announcement and operational update from Circle Oil has attracted a lot of coverage from analysts and brokers – I have five notes spread across my desk as I write including those from Peel Hunt, Westhouse, SP Angel and Investec. All of them have homed in on the conversion of the US$30 million loan due this year as a key issue for the company.
SP Angel says: “The operational update provides us with nothing to get excited about simply because the company continues to perform solidly and according to expectations. However, news that an agreement with the KGL, regarding its convert has been reached is significant, as it frees up much needed resources to deploy in its operations.
Investec, meanwhile, says: “Circle has removed a key balance sheet risk, in announcing it has renegotiated (pending EGM approval) the terms of July 2015 due KGL convertible. We see dilution at circa 5 per cent with the increased coupon of 8 per cent comfortably serviceable. We estimate COP will generate around US$245 million of post-tax and capex from 2015-2019. The new convertible matures in July 2017.
Separately in an ops update COP has guided that Egyptian and Moroccan production continue in line with expectations and available cash stands at US$34 million.
In the context of these financials SP Angel’s remarks about not getting excited look a bit like damning with faint praise. Output has been growing steadily. Moreover, Circle’s chairman Steve Jenkins has said: “The recent fall in oil prices has had a substantial impact on the sector and on market sentiment towards companies involved in exploration and production activity. While Circle is not immune to the impact of falling prices the impact is somewhat moderated by gas production in Morocco, where the company continues to benefit from stable pricing”.
In Morocco production from the Sebou field (COP- 75 per cent) is currently running at between 6.5 – million cubic feet a day (mmscf/d). The 12 well near field exploration programme also continues with the fourth well (KAB-1bis) recently spudded.
In Egypt production at the Al Amir SE (AASE) and Geyad fields continues in line with previous guidance at 9,100-9,200 bopd (gross) and approximately 10 mmscf/d of gas (gross). The current work programme is focused on maintaining the current production levels throughout 2015. The programme includes drilling three new wells in the second half of 2015 one on AASE and one on Geyad as producer wells. A third well will be an injector well.
Receivables from Egypt have also improved. The company continues to receive regular payments from the EGPC, in line with expectations. In addition the recently announced payment of US$15m has significantly reduced overall receivables.
On the exploration front there is the excitement of Tunisia where Circle will start looking for a farm-in partner for the 100 per cent Mahdia permit offshore Tunisia, on which it announced a circa 1 be00 mmboe discovery last year, in the near term. It has also spudded a well on Block 49, onshore Oman which is targeting two potentially oil bearing sands with gross prospective resources of 14 mmbbls. The company is limiting expectations here saying the well is very high risk.
On top of all these operations the company has been strengthening its management. It recently appointed a new CFO and two new NEDs and soon expects to be able to announce the appointment of a new CEO, following the resignation of the former CEO, Chris Green, last year.
With the share price standing at 11.87p last Friday evening the analysts feel the company is undervalued. Investec says, for example, because of dilution it has set its new target price at 45p (previously 50p), still a long way north of the current price.