Touchstone Exploration: A New Beginning
Edison | Jun 11, 2014 02:02AM ET
Post the successful consolidation of Petrobank in May 2014, a renewed Touchstone Exploration Inc (TO:TXP) is now moving forward with a C$28m, 21-well recompletion and infill drilling programme in Trinidad, which we expect will be financed by cash from operations, as well as from cash available from Petrobank, post consolidation. In line with guidance, we are also modelling a 30-well, C$29m capex spend in 2015, with the proposed 2015 drilling programme increasing our forecast oil production to over 3.0mb/d, and in turn generating sufficient cash flow to cover capex and potentially partially pay down old Touchstone outstanding debt. Currently trading below our core NAV of C$1.34/share, we find value in the story, should drilling and production targets be met.
We are positive about Touchstone’s all-share union with Petrobank, which we see as a great opportunity to add capital to the current ongoing workover, reactivations and drilling programme in Trinidad. New capital allocation increases our Trinidadian production forecasts in 2015 from 2.4mb/d (before the merger) to 3.0mb/d, and in turn lifts our EBITDA estimate from C$40m to C$47m. While early days, we are also expecting increased investments in 2014 and 2015 to benefit from recently announced changes to Trinidad’s tax incentives, leading us to expect an increase in after-tax operating netbacks over our forecast period.
h3 Beyond this year’s 21 wells/h3We are expecting Touchstone’s 2014 operations and financials to be consolidated into TXP (ie new Touchstone) from 14 May 2014, and with this our models assume that the proposed C$28m capex budget for 2014 will have to be funded mostly from Petrobank’s Q114 C$26m net cash position. Beyond 2014, we are forecasting the production average to increase to over 3.0mb/d, with our models realising after-tax cash generation in excess of proposed C$30-35m pa expenditures, which we estimate is sufficient to sustain drilling capex budgets over our forecast period.
h3 Valuation: Revised higher post-Petrobank merger/h3Our core valuation makes use of the company’s 9.5mmbbl of 2P reserves (net of royalties) and Petrobank’s 1.4mmbbls of heavy oil reserves, realising a core NAV of C$1.34/share, while our RENAV, which includes an exploration licence for the East Brighton offshore exploration block, finds value at C$1.41/share.
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