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Risk and reward: Elixir Petroleum plc

Friday, July 04, 2008

Jon Stewart isn’t afraid of taking a few risks. For the chairman of AIM-listed oil and gas operation Elixir Petroleum plc, funding exploration work in the potentially hostile seas off Sierra Leone is all part of creating a balanced portfolio.

And while drilling in far-flung locations might be nail-biting for some, the Australian numbers man is equally keen to take his chances in the City. Elixir has just finished a new fundraising round comprising a share placing and rights issue. Most of the new cash was raised in Australia, with a smaller proportion done in London.

The final figures fell short of original expectations, but nevertheless with AU$12 million in the bank the company is well placed to crack on with its production and exploration work. Ultimately, the shortfall reinforces Stewart’s view of where the business is right now.

“It is a difficult and turbulent market at the moment,” he says. “In reality our concerns about the market in the short to medium term drove us to seek to raise funds in addition to what we needed for our portfolio of projects. We have about AU$12 million in cash, and revenue for July due of about US$1.5 million, with ongoing cashflow from US production. So we are in a very healthy financial position – just not quite as cashed up to be opportunistic in difficult market conditions as I had hoped.

“As a producer, we are also currently enjoying record high oil and gas prices internationally and certainly the cashflow from our US operations is significantly above our estimates before entering in to the fundraising.”

Getting the message across

A tax specialist by trade, Stewart was introduced to oil and gas by seasoned industry entrepreneur, Alan Burns, who at the time was building up Hardman Resources Ltd. Stints in Canada, the UK and Russia followed where Stewart was involved in several key projects, including laying the groundwork for EuroSov Energy, which later folded into Sibir Energy plc, and Dana Petroleum plc.

Until late last year he was working in the US with Australia-listed Gawler Resources Ltd. A coming together of Gawler and Elixir – with Stewart as chairman – is a completely new beast.

In the US the company has producing assets at High Island and Pompano in the Gulf of Mexico. It has ongoing exploration interests in the UK North Sea and more to come pending the outcome of the 25th Licensing Round later this year. There is also some promising acreage offshore Sierra Leone.

“Elixir has been listed in London for several years and I was keen to reinvigorate the company in the market here,” Stewart says.

“I think all oil and gas companies on AIM have to question whether they are effective enough in getting their message across to the market in terms of what they have and what they’re trying to achieve. If I look at Elixir, I don’t think we’ve done a good enough job of that to date.

“I think our story at Elixir has real relevance to the market. I recognise that having a good relationship with the City involves investment of your time and effort, so we need to be here regularly and telling people what we’ve achieved and what we want to do.

“Over time I think that engenders trust and confidence in the management; it helps with raising finance and it also means you have a better chance of achieving valuations along the lines of what you think you’re worth, rather than what people are prepared to give you.”

According to the company’s broker, Blue Oar Securities, Stewart and his team should be looking at something like two and a half times its current trading price of around 13p – with a view to reaching 31p.

“To our mind you get a company with cash, cashflow and producing assets – and that largely accounts for the current market value,” he says. “On top of that you’re provided with opportunities in several projects that have significant upside.”

Uplift potential

Stewart maintains that the balance between producing and exploration is fundamentally important. He says Elixir has an unusually broad and well-balanced portfolio across the spectrum, which is something that’s generally quite difficult for small companies to achieve.

“Our US production gives some confidence in terms of cashflow and really means our exploration efforts are largely self-funded,” he says. “But at the same time those types of low-risk projects in the US perhaps don’t have the significant uplift potential that investors in small companies are looking for.

“We’ve really got two sets of exploration potential within our portfolio. One is in what would be considered to be a low-risk jurisdiction – the UK North Sea – and within that we’ve got higher risk technical-type plays and lower risk appraisal. The other scenario is in Sierra Leone.

“Our business plan in the North Sea has always been to generate the prospects and farm-out to industry to drill, and that still remains our strategy. But at times I think it is helpful to have a strong enough balance sheet to participate to some degree in deals. For instance, we have a very close eye on our Mulle appraisal scenario with a view to what level of participation we might take on there.

“In Sierra Leone we have a fantastic project in our opinion. It’s obviously considered to be a higher risk jurisdiction, although things have improved there a lot. From what we’ve seen from the existing 2D seismic across our block we’ve identified about 16 large targets, and we’ve just finished acquisition of 3D seismic. We expect from the 3D to better define those targets and ultimately go to the market to farm-out to large deep water specialists to drill those targets.

“If the targets are attractive enough we’ll do big deals and if they’re not attractive enough then we won’t. But if you look at what we’re spending for the opportunity versus the potential upside, it’s a fantastic risk/reward scenario and a really good part of an overall portfolio for the company.”

With the new money Stewart says the company is well funded for forthcoming drilling projects at Pompano in the US and further work in Sierra Leone. In addition, it is eyeing high impact wells at its Leopard and Mulle prospects in the UK North Sea during the next year.

Looking further ahead, the company is waiting on the outcome of the UK’s 25th Licensing Round to hear if it has been successful in securing additional North Sea licenses.

“We have to realise that not all of the prospects that we’ve put together will be successful,” he says. “Having said that, what is fundamentally important – and what is a pat on the back to our technical team – is that we’ve been able to generate a number of prospects all of which have been of sufficient technical merit that industry has been prepared to farm-in and pay for them to be drilled.

And it’s doing those deals that that Stewart sees as central to his remit and what shareholders demand from him and his team.

“I like to do deals, it is fair to say,” he says. “We’re ambitious from that perspective and we look to continue to grow the company and take on new opportunities. I think that’s what investors in small companies want their management teams to do. Shareholders want to see us enunciate a plan for the company, a strategy and a methodology for achieving the strategy, to finance it and then to go as hard as we can to achieve it. That’s what we intend to do.”

Ben Hobson, SmallCapNews.co.uk