BOIL share investors await a buyer or investor in its potentially world-class Timor-Leste Chuditch Project.
Author: Charles Archer
BOIL shares could be just one RNS away from rocketing, as investors await a buyer or investor in its potentially world-class Timor-Leste Chuditch Project.
Baron Oil was by far the highest volume stock on the FTSE AIM on Monday, with over 1.3 billion shares changing hands through the course of the day. For context, its volume was a BILLION higher than the next most highly traded AIM share, the charming Premier African Minerals.
However, volume can be assigned disproportionately outsized importance by FTSE AIM traders. The highest volume stock in 2022 on AIM’s oldest brother the FTSE 100, is Lloyds, which has been on a road to nowhere since 2009.
But BOIL’s share price trajectory combined with its volume could together make it a winner. While BOIL shares are down by a third over the past five years, the possible coming breakout could leave even longer-term investors in the green.
Boil shares: the road so far
Baron Oil started out as Gold Oil in April 2004 as an independent UK-based oil and gas explorer. Finding relative success, it launched its IPO on the FTSE AIM All-Share market at 4.35p per share, raising £400,000 on a valuation a touch over £10 million. By 10 November 2006, the company had struck a record 17.8p, increasing its market cap to £42 million.
However, this rapid increase could not last. Oil and gas exploration is an expensive business, and BOIL was forced to begin issuing share placements in 2006 to raise the necessary capital to fund exploration. With regular placements over the years, it was rechristened as Baron Oil in 2013, with the current company still residing on the AIM market.
Note, mentioning its history of share placements is not a criticism of management which must act in the overall best interests of the wider company, despite diluting existing shareholders.
BOIL originally began as a high-risk, highly capital-intensive operation, developing deep-water assets with a propensity to throw up expensive challenges. But in 2021, it pivoted towards snapping up equity interests in lower-risk exploration projects in areas which can be quickly and cheaply monetised.
Accordingly, BOIL now maintains an interest in two key projects.
The first is the UK P2478 licence at Inner Moray Firth. The company increased its interest in the project from 15% to 32% in 2021.
The second — and arguably more important — is the Timor-Leste-based (East Timor) Chuditch product sharing contract (PSC). BOIL has also increased its interest in this project, from 25% to some 75%, with the remaining quarter controlled by the state of East Timor.
And it’s this second project that could be sending BOIL shares to the moon.
Recent developments
BOIL shares have essentially been trundling along within a fairly non-volatile range over the past year. Then in mid-October, they suddenly spiked from 0.09p at the close on 17 October to 0.29p by close of the 20 October.
However, they have since fallen to 0.17p, undergoing uncharacteristic volatility bearing the hallmark of investors waiting for an implied catalyst. For context, Baron Oil has issued an unprecedented 22 price monitoring announcements since its share price spike.
Of course, medium-term investors will be pleased with the one-year 138% return. But further rewards could be coming.
The share price spike arose on 18 October, when BOIL released an RNS entitled ‘Chuditch PSC Extension Granted & Investor Webinar.’
Essentially, the FTSE AIM company’s wholly owned subsidiary — SundaGas Banda Unipesoal — which operates the Chuditch production sharing contract (PCS), was granted a six-month extension to contract year two by Autoridade Nacional do Petroleo e Mineraus.
The practical effect was that the final decision to enter the drilling phase can now be taken at or before 18 June 2023, the now new expiry date of year two of the initial three-year licence. If all goes to plan, BOIL would expect to begin well drilling shortly after.
In addition, the RNS referred to a ‘simplified’ work obligation — in essence, the PSC originally included a legal obligation to reprocess 800km2 of 3D and 2,000km2 of 2D seismic data in the initial two-year period — and this obligation was upped to 1,270km2 of 3D seismic data. As this data had already been delivered, the update meant that the preliminary PSC obligations had been fulfilled.
Moreover, BOIL enthused that these results were creating a ‘step-change’ in its confidence and informed investors that a ‘comprehensive view’ of Chuditch’s potential would be released later in the month.
In FTSE AIM language, this was clear advice to manically refresh BOIL’s RNS announcements at around 6.59 every morning for about a week.
On 24 October, BOIL released an even more bullish RNS, significantly boosting its Chuditch aggregate gas-in-place and recoverable gas resource estimates, having fully analysed its 3D seismic data. The best case aggregate gross gas-in-place estimate rose to 5.5 trillion cubic feet, and the best case recoverable resource to 3.6 trillion cubic feet.
Further, BOIL noted that the Chuditch-1 gas discovery’s best case recoverable resource estimate had risen to 1.35 trillion cubic feet and therefore is ‘materially larger and may independently represent a liquefied natural gas (LNG) scale resource.’
For context, a £23 million minnow could have a 75% interest in a world-class resource.
BOIL’s UK-based Dunrobin prospect at Inner Moray Firth also has huge potential, and the company is ‘working closely with the joint venture partners to realise value there as technical studies complete.’
An RNS from this side could also be in the offing, as its last update has been some time. And I consider it possible that one of the FTSE 100 oil majors, BP or Shell, could consider purchasing the asset in an effort to set aside 91% of the investment against the recently increased UK windfall tax.
Where next for BOIL shares?
As earlier noted, exploratory hydrocarbon drilling is expensive, and the clear risk for investors is that a small-cap company developing a world-class project would need to either take out substantial loans in a high-interest-rate environment or issue new shares to raise the required capital.
Having turned to share placements many times in the past, the inevitable occurred on 15 November. BOIL managed to successfully raise £5 million via a main placing, and a further £360,000 via a REX retail offer. But having issued an additional circa 4.5 billion shares at a discounted 0.12p, BOIL has already recovered to 0.17p in the space of a week.
This could be seen as an iron testament to investor thoughts on its potential. For perspective, a similar risk is hanging over fellow FTSE AIM favourite ANGS, as it may require one last capital raise before delivering profits.
With a further share placing unlikely, the company is now fully capitalised and significantly de-risked.
But where next?
Consultancy ERCE has been contracted to prepare a CPR to provide independent validation of BOIL’s internal resource estimates ‘to a SPE PRMS compliant standard, which will include a probabilistic estimate of Resources and revised risk factors.’
This could be BOIL’s first step to selling its Chuditch asset. If its internal estimates are confirmed, the 3.6 trillion cubic feet of recoverable gas would be equivalent to the entire current stockpile of the United States. The exact maths is similarly staggering, but perhaps not useful given the currently elevated prices and projected timeline to production.
The alternative to a sale is bringing in larger companies — some have speculated Italy’s Eni — to help develop Chuditch as a strategic investor to help accelerate BOIL’s proposed timescale.
For context, the company’s subsidiary SundaGas had planned to begin drilling appraisal wells in late 2023, with each costing around $20 million, equivalent to BOIL’S entire market cap. With plans for a ‘hybrid floating and platform LNG system,’ to avoid pipelines or border crossings, first production could start circa 2028.
The numbers present an interesting dilemma for negotiations between BOIL and the majors. BOIL needs either a sale or a huge strategic investment to realise the profitability of its exceptional asset. BP, Shell, Eni and all other potential suitors will know this, making the power dynamics within the negotiation a perfect example of the prisoner’s dilemma.
Of course, a lot can happen to hydrocarbon prices between now and 2028. Russia and Ukraine could be at peace. The Chinese slowdown could accelerate. The coming global recession could develop into full-scale demand destruction. The 1970s energy crisis became the 1980s oil glut in short order, and history has a habit of rhyming.
But investors with a view to taking a position should see BOIL as a long-term opportunity. Its key asset is outsized compared to its market cap, and while no company can be completely de-risked, the share placement leaves the company with a stronger negotiating position than only a few days ago.
This could leave BOIL shares as a buy for long-term investors with patience, capital, and a healthy appetite for risk.
Author: Charles Archer
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Oil and gas exploration is an extremely complex investing area, and this is a simplified precis designed as a brief overview for interested investors.
Key References:
18, 24 October; 15 November
Energy Profits Levy Factsheet – 26 May 2022 – GOV.UK (www.gov.uk)
