Tethys Petroleum: Funding Development And Exploration
Edison | Jun 21, 2015 12:47AM ET
Funding development and exploration
In May, Tethys Petroleum Limited (LONDON:TPL) announced that the proposed 50% farm-down of its Kazakhstan assets to SinoHan for $75m would no longer proceed. The company launched a strategic review of the business, and announced $18.7m in new loans year to date. Operational performance is sound: the shallow gas fields should see 2015 sales volumes double y-o-y and benefit from increased pricing, and a recent MOU with PetroChina underlines regional interest. However, the company will need further capital until realisations/volumes pick up enough to produce free cash flow (possible in 2016), and possibly to fund material prospects such as Klymene (which could hold 422mmboe, more than 15x TPL’s current 2P reserve base). TPL is negotiating on an exclusive basis with AGR for funding. We have adjusted our valuation, resulting in reduced core NAV of 27p/share, although we are cautious of near-term funding needs.
New management has a clearer focus
Headed by John Bell, the new management has already had an effect. By end 2015 G&A should roughly halve and investment plans are clearer. Focus on a reduced number of core assets, including Kazakhstan (production and exploration) and Tajikistan (long-term, high-potential exploration) should help the company survive the current macro weakness and leverage the shares to greater upside on exploration success. We note its achievement in extension of contracts and reduced production costs.
Re-emphasis on gas assets
The current low oil prices have reduced cash flows in the Doris oil field to such levels that investment in oil development has been put on the back burner. Instead, the company aims to continue to invest in the shallow gas fields, where it has low operating costs and high discovery rates. When combined with a doubling of gas volumes/prices in 2015 and a recent MOU with PetroChina, the gas fields have become more attractive investment targets. If and when oil prices recover we would expect oil assets to regain prominence.
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