Investing in junior oil and gas companies is a highly speculative business. Their success, and the investor’s prospect of getting a good return on the risk, depends entirely on finding provable reserves.
Normally this entails hugely expensive and time-consuming exploration, but Canadian Overseas Petroleum (CSE:XOP / LSE:COPL) has opted for another, quicker strategy: to buy another oil company that is sitting on provable reserves. On 16/3/21, Canadian Overseas Petroleum completed the acquisition of US oil company Atomic Oil & Gas for $54m.
Arthur Millholland, president and CEO of Canadian Overseas Petroleum, has secured a good deal. For the price, COPL has effectively acquired more than 31 million barrels of proved and probable oil reserves at a time when the oil price was relatively weak.
The deal was agreed in December last year, with the oil price at $39/bpd, before jumping to almost $70/bpd (15 March). The deal represents a return on investment of more than 50%, with a $2.18/bpd acquisition cost against a value of $7.52/bpd at net present value (10%).
Atomic Oil & Gas operates in the Powder River Basin in Converse County, Wyoming, USA where it has majority ownership of two oil production units and one unitised exploration area. Current production at the Barron Flats Shannon Unit is 1,400 bpd, set to rise to 5,000 bpd by 2022. The Cole Creek Unit is forecast to reach 3,500 bpd by 2026. Significantly, both oil fields are new, with an expected operating life of more than 40 years.
A step change in COPL’s growth opportunities
Millholland described the Atomic acquisition as “a step change in the strategic growth opportunities open to COPL”. The deal will materially enhance the value of COPL, as it is expected to generate an almost immediate increase in production and revenues.
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We also like other features of the deal: Atomic’s infrastructure is new, with direct access to a pipeline, and no legacy abandonment or reclamation liabilities; the Barron Flats facilities are environmentally responsible with no gas flaring, minimal methane emissions, and with electricity sourced from a nearby wind farm; and the deal requires that Atomic use the sale proceeds to pay off all its outstanding debts and loans, to achieve a nil working capital deficit.
Millholland is a man with a plan. Though the company is currently unprofitable and with a negative return on equity of -228.04%, he has with careful use of debt management and share placements been able to achieve two strategic goals: first, a restructuring of the company last year, followed soon after by the ‘game changing’ acquisition of Atomic.
The company’s fundamentals do not yet reflect the added value that Atomic represents, in particular if the oil price stays above $60/bpd. The US Energy Information Administration, Standard Chartered and Barclays among others all raised their 2021 crude price forecasts, in response to the upward pressures on prices coming from February’s Texas snow storm and the decision by OPEC+ at the end of January this year to curb supplies and push up prices just as the global economy is showing signs of recovery.
Next year, prices could ease down, though some forecasts remain unchanged, giving Canadian Overseas Petroleum a positive outlook. Shares opened trading this week at 0.35p, up 775% year-on-year, but the potential is clearly for a lot more.