CGX Energy’s Shares Up 100% Since March

We spoke with Mr. Jones this afternoon to get an update from him as to what his company has accomplished since we last spoke.

In that piece we highlighted the leverage that the story offered investors.  At the time, it was a company with an $8 million enterprise value that held over 3.3 million prime acres of offshore and onshore concessions in the Guyana-Suriname basin.

CGX is targeting elephants.  Multi hundred million barrel oil and gas targets.

They are in the arena typically only fit for super majors with well costs in excess of $80 million each but with the potential to find 800 million of barrels of recoverable oil worth billions of dollars.

In June CGX signed a definitive rig agreement with Japan Drilling Co., Ltd. for the use of the HAKURYU-12 offshore drill rig as well as a rig sharing agreement for the same platform with INPEX (Japan’s largest oil and gas E&P).

This is an important step for a company targeting offshore prospects as these drilling platforms are both very pricey and also hard to come by.  The fact that CGX was able to secure a rig and are now able to share the costs with INPEX speaks to the team’s network in this sector.

In a recent news release, Mr. Jones stated:  “This LOI represents the next step in drilling at our 100% owned Corentyne Block.  Being a part of the Rig Sharing Group means that CGX Energy will benefit from significantly reduced mobilization and demobilization costs typically associated with offshore drilling. The Hakuryu-12 rig is a jack-up rig that fits the Company’s well design specifications.”

Shortly after the announcement of the rig agreement, CGX announced they were granted a five month extension to their drilling deadline for the Corentyne block in order to allow the HAKURYU-12 to drill a well in Suriname before making its way to Guyana.  The company now has until October 31, 2015 to drill their well.

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“We will drill it before the deadline,” Mr. Jones told me by phone.

In the most recent MD&A, the company stated: “we will likely require additional financing and seek to widen (our) shareholder base, but still with a view to negotiating farm-out transactions as the primary way to enhance shareholder value.”

Mr. Jones told me that the amount of the financing would be determined by whether or not they find a farm-out partner.  They need the money not only to fund their portion of the drilling costs but also for seismic commitments they currently have on their blocks.

As far as finding a farm-out partner goes, Mr. Jones couldn’t elaborate much as those discussions are material in nature, but did say: “we are looking for a partner for all three blocks, remember.  Some parties are interested in one or two of the blocks but not necessarily all three.  Ideally we want someone to come in for all three.”

He told me the process CGX is going through is standard procedure for any farm-out.  Mr. Jones has over a quarter century of experience in international E&P’s so he is very familiar with the process.

With the deadline approaching relatively quickly, now just under 14 months away, a partner for one or all of the blocks should be secured soon in order to coordinate a +$100 million well.

Recall, CGX is majority owned by Pacific Rubiales (PRE:TSX) and the Board includes Serafino Iacono, Ronald Pantin and Jose Francisco Arata who all founded Pacific Rubiales and helped turn it into the largest non-state owned oil company operating in Colombia today.  PRE produces over 120,000boe/d but are in need of new productive fields to fill in the production that is currently coming from the Rubiales field where their partnership with Ecopetrol is set to end by mid-2016.

PRE’s technical team is currently finishing the re-interpretation of the seismic surveys which were recently amalgamated and reprocessed.  Mr. Jones told me they are nearly done and that it was done to reassure the company and potential partners that the large oil targets are there.

In terms of what else could be moving the stock higher; the Guyana-Suriname basin continues to see super majors actively drilling and exploring there with a slew of wells planned over the next few years.

Exxon Mobil Corporation (NYSE:XOM) and Shell (BA:RDS) are set to drill their Guyana offshore well early next year.  At least seven high-impact offshore wells are planned in the basin over the next 2 years which excludes the recently announced nine well plan outlined by Staatsolie (Suriname’s state oil company).

With all of the exploration dollars going into such an underexplored basin, the impact of any discovery made in the shallow waters there could increase the value of CGX’s 3.3 million acres by many, many multiples.

At the end of the day, investing is about risk and rewards.

CGX was cheap when we first wrote about it in March and remains cheap today relative to the size of the targets they are going after.  Given the cost of testing these massive targets, the key remains to secure a farm-out partner so that the company isn’t left solely footing the bill.

Here’s the chart: