Dome/PED deal with CEO-interview

2015-05-05 14:21

Background: I have been a stock owner in the swedish oil- and gas-company Dome Energy listed on the swedish stock exchange for more than 1,5 years now. The sluggish development of oil and gas-prices have put a wet blanket over the oil stocks in the last 9-10 months. However during the last couple of months the oil prices have started to recover, but their stills seems to be a reluctance to invest in oil stocks on the stock markets . On February the 24th Dome Energy (from now on called Dome) and Pacific Energy Development (from now on called PED) announced a merger in which PED makes a acquisition of Dome's all assets in the United States by issuing 140 Million PED-stocks.

Dome is a Swedish company producing oil and gas from low cost fields also called conventional oil- and gas fields and are projecting a EBITDA-result of 10 MUSD this year. PED is a US shale oil producer which has experienced very hard times during the last year due to the crash in oil prices. However PED is located in an area were it is still economically beneficial to produce shale oil in contrast to a lot of other shale producers. Too learn more about the differences between conventional and non-conventional oil production see this short video: https://www.youtube.com/watch?v=2PBCTXHqZec

PED and DOME US anticipates that the combined company will have the following upon closing:

• Production : ~3,300 BOEPD
• Proven Reserves : 15 Million BOE
• Debt : $70 Million
• EBITDA : $35 Million
• Shares : ~220 Million
• PV10 of 1P reserves of approximately $280 Million
• PV10 of PDP reserves of approximately $100 Million

The long term goal is to produce 10000 Barrels of oil/ year

Interview: As always I like to have full insight in my investments and i decided to interview PED's CEO Frank Ingriselli. If you want too know more about Frank and his background reed more here: http://www.frankingriselli.com/#0

Now too the questions that I conducted based on the PED's latest presentation watch the presentation here, it is a must see presentation, I romise:): http://www.investorcalendar.com/console/173839

1. What is your opinion about your recent merger plans with Dome Energy? What will Dome bring too you and what will you bring too them?

CEO: We are very excited about the merger with Dome, and we believe the combined company will be stronger than each standalone company. The combined company will have substantial cash flow, a stronger balance sheet and future inventory. Please reference slide #10 in our most recent investor presentation for the answer to what each company brings: http://content.stockpr.com/pacificenergydevelopment/media/910d154a91dadd205e85f9fb7aa85f9d.pdf.

2. In January Pedevco announced production testing results on the Dj Basin, what are the current production figures on these three wells?

CEO: We announced the 30-day IP rates for the three wells we completed in January 2015 (Loomis wells), which can be found on slide #22 of our most recent investor presentation. They are still in production and in fact, two of the wells represent the 2nd and 3rd highest average daily production over 60 days among the 19 wells located in the entire township.

3. What is your total current production?

CEO: We are producing approximately 700 boepd (as of March 2015), which includes the three Loomis wells.

4. When do you plan to initiate you next drilling program and will you be able too use Dome's credit facility to this program, if not how will you finance the program?

CEO: We plan to initiate our next drilling program once we determine the most optimal way to finance it, which could be with Dome’s credit facility or with external financing.

5. In your recent presentation under investment highlights, access to infrastructure it states that: crude differentials less than 9 USD/bbl WTI, what does this mean?

CEO: We pay a marketing company to purchase our crude and they sell it on our behalf. When they purchase it from us, they will buy it at the West Texas Intermediate (WTI) benchmark less a “differential” or “deduct” of some amount – in this case ~$9/bbl. For example if WTI was at $55, they would pay us $46 for a barrel of oil. As a producer, we prefer much lower differentials which give us higher realized prices. We have reduced our differential by 20% since December 2014.

6. Is the marketing company cost of 9$ included in the ROI you state in the presentation?

CEO: Yes, the marketing company cost of $9 is included. As you can see from our latest investor presentation, we have very competitive ROI (slide #18) relative to our peers in the DJ Basin, and the DJ Basin has among the highest ROI across all shale plays nationwide.

7. When or at what price do you plan to price hedge your production?

CEO: We are evaluating a hedging strategy, and will publicly announce these hedges when/if they are established. Dome has secured its cash flow through long-term hedges for the majority of the production at $90/bbl and $4/mcf, which will continue to benefit the combined company post-merger.

8. In your presentation you mentioned that you have a 6% stake in an Asian company and that you had the opportunity to sell it for 10MUSD a couple of years ago. What is your plan with this stake and how much do you think it's worth today?

CEO: We are interested in divesting the asset and will entertain offers if and when received. We are carrying it on our books for effectively $0, but we wouldn’t be surprised if it was sold for $10 million or more at some point given certain market conditions.

9. Do you have any plans to increase the turnover in the Pedevco stock maybe by changing your listing on the stock exchange or anything else?

CEO: We do not have any plans to change our listing on the stock exchange. We will continue to tell our story to the market with the hope of attracting more buyers.

Valuation: In the merger situation PED shares valued at $ 0.66 which gives an enterprise value after the merger of (220M shares * 8.37 * 0.66) = 1215MSEK = + liabilities (70USD * 8.37 = 586MSEK) = 1801 MSEK or 215MUSD.

To compare the valuation, I have looked a similar company which also operates on one of America's most profitable fields namely DJ Basin. The company named Synergy Resources. The company reported last year, an EBITDA of about $ 77 million and has 10 PV reserves the 534MUSD. It also has debts of about 100MUSD. The company is currently valued 1230MUSD + liabilities 100MUSD = 1330MUSD. Thus valued then Synergy almost 6 times higher in spite of showing an EBITDA which is "only" about twice as high as the PED / Dome forecast and has reserves that are less twice as large as the PED / Dome

Perhaps most interesting here is that the DOME shares have not kept up with all the turns and are valued significantly below the price that the PED shares are valued at. Dome will receive 140Millions of the total number of shares 220 Million. If Dome would be valued at PED stock price today the value of a dome-share to be around 22,5SEK ((140 * 0.66 * 8.37) / 34.4). Today Dome shares are traded on 8 SEK which is a very substantial discount. What strikes me most is that valuations in the United States of companies operating in profitable fields are very much higher than the valuation of the PED / Dome today. I think, if the joint companies manage to show the numbers they say that they will in my analysis above it does not feel too unbelievable that we could see a sharp appreciation of Dome share.

Recommendation: If the joint companies manage to develop in the right direction and increase their production to let's say 6,000 barrels in a years or two they should be valued as highly as SYNERGY and then, we can see prices on the Dome of over 100SEK or 5 USD for the PED stock. I highly recommend a purchase of the Dome share and see this as an opportunity to seize the market's uncertainty about the deal. Good luck!