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Home » UK Shares » Pharos Energy buoyed by 2022 performance

Pharos Energy buoyed by 2022 performance

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Pharos Energy [LON:PHAR], the London-listed oil and gas exploration and production company primarily operating in Egypt and Vietnam, recently released its interim results for 2022.

The company has seen a significant uptick in it fortunes over the last year. As 2021 closed, the oil producer posted a USD4.7m (GBP4.2m) loss for the financial year. However, the company’s confidence has surged as the oil has started to flow and it completed significant infrastructural and developmental milestones on its projects in Vietnam and Egypt.

The company is so buoyed by this year’s performance that its chief executive, Jann Brown, in an investors’ presentation yesterday (21st September) reiterated Pharos’ desire to return to regular dividend payments in 2023 and continue its share buyback programme initiated this July. She said: “We have the confidence with the cashflow generated this year to resume [shareholder] returns, starting with the share buyback scheme.” The company has ring-fenced USD3m for buy-backs and has allocated USD1.6m of this already.

Pharos Energy expects to return regular dividends

Brown continued: “We also expect to return to regular dividends [payments] with a clear policy of distributions based on operating cash flow. We chose this metric as it takes into account oil price, tax – which is the main government take in Vietnam – unlike Egypt where it is a production share of the revenues line, and it also considers working capital movements.”

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She said the minimum distribution is going to be 10% of the company’s operating cashflow, and Pharos expects to declare the final dividend for 2022 based on 2022 operating cashflow which it hopes will be approved by shareholders at the 2023 AGM. The company will make the payment after that. From 2023 the company will move to paying two dividends a year – one interim and one final.

The company opened trading today at 19.95p and by mid-morning was trading at 20.03p. The company’s shares have traded in a range of 18.58p to 32.93p over a 52-week period, offering a year-to-date return of -22.95% and a one-year return of 4.12%. The company has a market capitalization of GBP87.1m.

The company is on a rising wave, and its momentum – despite some operational difficulties at the end of last year and a lack of rigs in the Egyptian marketplace – has seen it treble net profit to USD98.2m in the six months to 30th June, from USD26.7m a year earlier. Revenue more than doubled to USD112.3m from the USD59.2m reported for the previous year. Most of this increase derived from Pharos’s business in Vietnam, where revenue increased 84% to USD103.8m from USD56.3m.

Oil price support

Sue Rivett, chief financial officer, joined Brown on the call. She said that production for the first half of 2022 was just under 8,000 barrels of oil a day, however the company did farm down production from 100% to 45% on its Egyptian assets “so on a like-for-like basis production was over 9,000 barrels a day, with Vietnam production up 8% on the year.”

The rise in oil prices as a result of the war in Ukraine has helped Pharos this year. Rivett said: “As you would expect, the [company’s] revenues have increased considerably this year to [around] USD130m due to the oil price, which was USD65/bl in 1H21 and was just under USD110/bl this period.”

From a cash-generative position Pharos could boast an increase of over 200% which strengthened the balance sheet to USD353m, “largely a result of being able to bring back impairments from a previous period, so a reversal of [previous periods] and the oil price, but also due to an improvement in the fiscal terms in Egypt and a cost recovery improvement from 30% to 40% which gives us an extra 20% on our revenues,” said Rivett.

The company has managed its capital prudently, with debt making up 26% of equity. This means that it has predominantly funded its operations from share issuance, and its low debt obligation reduces the risk around investing in company despite its previous losses.

But can Pharos keep up momentum? Well, the company has had a really busy year in which it has secured license extensions, actioned share buybacks and undergone management changes. Whether it can continue at this pace remains to be seen.

Farm out

Pharos currently has production, development and exploration interests in Egypt, Vietnam and Israel. In Egypt, Pharos holds a 45% working interest share in the El Fayum Concession in the Western Desert, with IPR Lake Qarun, part of the international integrated energy business IPR Energy Group, holding the remaining 55% working interest.

Pharos completed the transfer of a majority stake in and the operation of its Egyptian assets to a subsidiary of IPR Energy earlier this year. The deal, approved by the Egyptian government, saw Pharos sell 55% of its assets and their operation to IPR Lake Qarun Petroleum. Pharos said it would get USD5m, USD2m of which has already been paid, and a “disproportionate funding contribution” from IPR of USD38.425m net plus a maximum of USD20m a year until the end of 2025 depending on the price of Brent crude.

At the time Brown said: “IPR’s long track record of success in Egypt, the enhanced field economics agreed with the Egyptian General Petroleum Corporation in January, plus the carry over our remaining 45% interest all combine to put us in the right place to deliver the full potential from these assets.”

The El Fayum Concession produces oil from ten fields and is located 80km southwest of Cairo. It is operated by Petrosilah, a 50/50 joint stock company between the contractor parties – IPR Lake Qarun and Pharos – and the Egyptian General Petroleum Corporation. Pharos also holds a 45% working interest share in the North Beni Suef (NBS) Concession in Egypt, which is located immediately south of the El Fayum Concession. IPR Lake Qarun operates and holds the remaining 55% working interest in the NBS Concession.

In Vietnam, Pharos has a 30.5% working interest in Block 16-1 which contains 97% of the Te Giac Trang (TGT) field and is operated by the Hoang Long Joint Operating Company. Pharos’ unitised interest in the TGT field is 29.7%.

Pharos also has a 25% working interest in the Ca Ngu Vang (CNV) field located in Block 9-2, which is operated by the Hoan Vu Joint Operating Company. Blocks 16-1 and 9-2 are located in the shallow water Cuu Long Basin, offshore southern Vietnam.

Pharos also holds a 70% interest in, and is designated operator of, Blocks 125 & 126, located in the moderate to deep water Phu Khanh Basin, north east of the Cuu Long Basin, offshore central Vietnam.

In July 2022 Capricorn, Ratio and Pharos reached agreement to relinquish the Israeli licences, and Capricorn as operator has informed the Israeli Ministry of Energy of the parties’ intention.

Brown said: “Our cashflow engine is working well, we have a wide range of organic growth opportunities in the pipeline, we have [operational] developments in Egypt and Vietnam – Egypt [has] fully-carried into this year and next – and we have agreed enhanced licence terms that have added about 10m to the top line on our share [of the project] so far. In both markets we have exploration prospects – but very different types of plays. So, we have lots of organic growth, for the next 12 to 18 months to offer and have circled around back to a focus on shareholder returns.”

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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