Like all small oil companies, Global Energy has been hit by rising costs and falling oil prices.
Noel Coward once told Mrs Worthington never to put her daughter on the stage. If the Master was still alive today, he would probably add a coda -- 'and make sure she never invests in oil exploration and production companies'.
I have never been on the stage but unfortunately I have invested in oil exploration and production (E&P) companies. One of my many unsuccessful oil E&P investments has been Global Energy Development (LSE: GED).
Keeping the faith
To keep the faith with Global Energy and to avoid selling my shares at a big loss, I need to meet the management on an annual basis to avoid the temptation to press the sell button. So two years ago I made my way to the office that Global Energy rented in Dover Street for the 2007 AGM, Mayfair, last year it was a dingy basement in a hotel in central London, the name of which escapes me.
This year I found myself in central London late on Friday afternoon -- Global Energy held its 2009 AGM at Norton Rose, close to London Bridge, kick off at 4pm. It was good to see another private investor in the audience. I would like to say his appearance was the result of Alice's AGM reports inspiring him to attend an AGM but that would not be true, I live in hope. A goodly number of suits were in attendance, plus several members of the Global Energy team -- the majority of whom are usually based in Houston.
The suits did not prevent the AGM being conducted in a friendly atmosphere. So friendly that when I commented that times must be hard for Norton Rose because there were no homemade biscuits on offer, the senior partner (there were at least four lawyers in the audience) dashed off and found some homemade biscuits. Smiles around, and with my bluff called I had to consume several biscuits.
My investment in time has paid some dividends (metaphorical rather than monetary as Global Energy does not pay actually dividends), the directors are now friendly and open with me.
When first met, one thinks, these guys keep their cards close to their chests, and boy, they don't seem very enthusiastic, but these Americans, specifically Mikel Faulkner and Steven Voss, are the original quiet Americans, and notwithstanding the twang in their voices, they don't like to talk things up. Stephen Voss is particularly knowledgeable and was willing on Friday to give me a good overview of what happened last year. Both men have been with Global Energy a very long time.
Company cheat sheet
Global Energy is a petroleum exploration and production company focused on Latin America (mainly Colombia and Peru), an area which the management team has decades of operating experience and in which they have pursued a long-term strategy of finding and developing reserves.
They are unusual for a small oil E&P in so far as having a six-year record of increasing turnover and gross profits. Last year net production to the company was 438,007 barrels, resulting in:
- Turnover: $33m (2007 - $27m)
- Operating profits: $11m (2007 - $10m)
- EPS: 21 cents (2007 – 20 cents)
- Cash flow from operations: $22m (2007 -$12m)
Not bad for a company with 35m shares, a share price of under 60p and a market cap of £21m.
So where is the catch?
Well for a start, if you Google Harken and George Bush you come up with an entertaining Wikipedia article. Harken, as in Harken Energy Corporation, is Global Energy's largest shareholder with 34%.
It is fair to say that the majority of the shares are tightly held. Mikel has mentioned 75% being the percentage held by folks who know Mikel and Stephen well. So liquidity is poor.
The company has a lot of convertible bonds outstanding but they are well out of the money:
- $6m convert at 305.8p, convertible into 1.1m shares; and
- $12m of convert at 179p, convertible into 3.5m shares.
Otherwise, Global Energy has no debt. There are 5.1m options are outstanding, options range from 50p to 265p.
Lack of reserves?
The company does has an embarrassment of reserves.
1P: 64.3 million barrels of oil equivalent ($971m NPV10, WTI $44.6)
2P: 131.0 million barrels of oil equivalent ($1.5bn NPV10, WTI $44.6)
Note: 1P denotes proven reserves while 2P is classed as proven plus probable. NPV10 is the estimated net present value of these reserves discounted at 10% pa and WTI refers to the oil price assumed in the calculations. See this discussion board thread for a more detailed description of how reserves are measured.
As any fule knows all small oil E&P companies should be valued at $5 per barrel of 1P reserves. In the case of Global Energy, 64.3m times $5 equals a market cap of $320m yet the current market of Global Energy is $30m.
Why such a big discrepancy?
Followers of Nighthawk Energy (LSE: HAWK) will be aware that there is often a big difference between what directors believe is under the ground and what the market believes is under the ground.
In the case of Global Energy, the directors have had the reserves independently verified by Ralph E Davis, a reserve engineering company. However, the reserves are still under the ground, it would be much better if the oil had been tapped and the oil was flowing along pipes to refineries. And that takes money, and nearly every single small E&P company does not have lots of money.
Global Energy is much better off than many, so it does not need to continue to tap shareholders for small placings, thereby only enriching their brokers (bad luck Matrix Corporate Capital). But they do need to conserve their operating cash flows. Hence in the light of the banking crisis, and the economic downturn, they are counting the pennies.
This is the main reason behind the brief appearance of Stephen Newton on the board of Global Energy, with a cracking CV specialising in Colombian oil. He was appointed managing director on 12 February 2008, executive director on 7 March 2008 but resigned on 31 January 2009. He was brought into the company to drill wells. When the well programme dried up, he had a limited role and so decided to depart.
A tough 2008
Mikel described how difficult it was in the latter part of 2008, with the capital markets drying up and oil prices heading towards $30 a barrel. This was the perfect storm for a company whose operating costs are relatively high (high because of the need to use diesel, the price of which had not kept pace with the fall in oil, oh the power of monopolies).
Thankfully for Global Energy shareholders, the company has weathered the problems of the last nine months, and is looking forward to benefiting from the increase in the oil price. There is a time lag for Global Energy of about 45 days with regard to pricing, so the benefit of $70 a barrel oil will not be reflected in the figures until the second half of this year.
There is an excellent presentation on the company's website by the way.
Global Energy is committed to spend $6m in 2010 on seismic, otherwise life is about pumping oil and cutting costs, with regard to the latter three initiatives:
- the purchase of Colombian national grid power to replace site generated power which uses high-cost diesel fuel;
- the elimination of temporary field rental equipment; and
- the reduction of trucking transport costs for oil sales by engaging oil purchasers in closer proximity to the Rio Verde contract area.
The Rio Verde Colombia contract will take precedence through 2009 with the Block 95 Peru contract also building in terms of activity levels towards the end of the year.
So the message is that Global Energy is ticking along generating turnover, profits and spending the cash on developing its licenses. An agreed bid for the company is extremely unlikely given the divergence between market cap and the potential value of the reserves. What may result in a step change in the share price is a joint venture with a large oil company.
Global Energy has considerable experience and some promising licences in Colombia. I am confident that it's looking for partners, but whether the directors can agree terms with another oil company with the resources to fund an accelerated drilling programme, who knows? Only time will tell.
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