Gripen Oil & Gas AB (publ.)

Transcription

1 Bull or Bear Independent Analysis Gripen Oil & Gas AB (publ.) Value Drivers Quality of Earnings Risk Profile Quality of Management Minimized default risk investment opportunity: Gripen Oil & Gas is a debt-free company with limited trading liabilities perfectly covered by high quality current assets. Company constantly engaging in new growth opportunities: Gripen Oil & Gas has been awarded with 30 exploration licenses and permits and is currently pursuing expansion outside Sweden. Potential for sales accumulation: The Company signed Letter of Intent covering future offtake of gas with AGA Gas AB including support for the planning and construction of facilities to process and compress the gas. Long-term strategic goals: The cardinal focus of Gripen Oil & Gas is to replace some of Sweden s import of oil and gas from long distances, thereby decreasing transportation costs and related negative side effects to the environment. Extended production flow results: Sampling tests confirming high quality methane gas resources in Östergotland. Production Uncertainty: There is no explicit representation regarding oil production initiation and estimated exploration volumes. Analyst Pavel Lisev pavel.lisev@analystgroup.se Share price 0,204 52wk high / low 0,78/0,15 Nyckeldata Shares outstanding 107,110,760 Market cap (MSEK) 21,8 Current Liabilities (TSEK) 637 P/B (Q1 2015) 1,03 Sector Energy/Oil & Gas List / Ticker GOG Next report Performance 1 month -15,00% 3 month -0,05% YTD +13,6% EPS Major owners Ownership (%) Stephen Crabtree 17,20 Brewin Dolph Secs LTD GLBL Cust 14,40 JM Finn and Company Limited 14,33 Torgny Berglund 11,47 UBS Investment BV 6,79 Management Stephen Crabtree CEO Thomas Häggkvist CFO Cash+Short Term Placements/Total Assets (%) Insider Transactions Date Insider Shares No. of Shares Patric Perenius -250,000 2,571, Tore Hallberg -250,000 2,110, Torgny Berglund +12,280,702 12,280, Stephen Crabtree +18,421,053 18,421, Stephen Thorn +15,350,877 15,350,877 0 Gripen Oil & Gas AB Lundin Petroleum Tethys Oil Company Crown Energy Ventures Corporation Petrogrand AB Shelton Petroleum AB Interfox Resources Value Drivers Minimized default risk Application for offshore licenses Potential access to credit facilities Innovative and cost-effective drilling technology Exploration & production initiation Var vänlig ta del av Please våra ansvarsbegränsningar refer to important disclosures i slutet av rapportendfddddddawwwwww at the end of this document

2 0,2 0,19 12,48 4,77 2,61 2,05 8,98 7,72 2,27 1,81 16,79 14,94 47,12 53,12 Investment Thesis Industry Attractiveness Low Entrants Threat The Energy Supply Security publication (2014) categorizes Sweden as fully dependent on imports to meet its domestic oil demand. The country s total primary energy supply consists of oil (26%) and gas (2%). This represents a significant opportunity for Gripen Oil & Gas as the company aims to replace some of Sweden s import of oil and gas transported from remote countries and thereby contribute to a decrease in transportation distances and related negative externalities to the environment. The sustainable market position inherent to Gripen Oil & Gas is a direct reflection of the 30 exploration permits and licenses granted to the company (during the first quarter of 2015 Gripen Oil & Gas has initiated the application for 4 additional production and exploration licenses offshore Lithuania). Initial exploration time-span and concession validity consists of 36 months. The leading market position in terms of size of exploration acreage in combination with the pursuit of new ventures, further contribute to the mid-term sustainability and differentiation relative the industry peers. Even though the industry does not have significant preliminary fixed cost capital requirements, high exploration and development expenditures could prevent the already mature industry from new entrants and eliminates such risk. Uncertainty regarding revenue generation Gripen Oil & Gas has signed agreements for future offtake of extracted oil production and gas deposits. The pricing for the former reserves will be based on an international crude oil index such as the North Sea Brent, whereas for the latter competitive Swedish market pricing will be used. Despite the promising results obtained from drilling and sampling tests, there is an uncertainty regarding the exact production commencement and exploration volumes. Organic growth is the preferred alternative to acquisition integration and this requires significant initial outlays. Operating Income and Net Profit for the period of 2014 comprise a total of -4.1MSEK. Gripen Oil & Gas is expected to expand its margins as long as initial sales flow to the company. Nevertheless, for the moment Net margins remain on a negative territory. Balance Sheet position Gripen Oil & Gas maintains strong current assets account that fully covers the short-term liabilities. Moreover, intangible assets component on the company s Balance Sheet represents more than 95% of total fixed assets. This confirms the notion that Gripen Oil & Gas has entered a development phase, with intellectual property rights being the driving force behind future growth accumulation. Company Description The Current Ratio for the first quarter of 2015 hovers around 5.1 which is a clear indication of the strong financial position maintained by the company. The main liquidity source is the cash balance. The figures for cash and short-term placements is concentrated around 15% of total assets. The cash burning period is estimated to be approximately 12 months. The Net debt of % for first quarter of 2015 is indicative of the augmented liquidity position maintained by Gripen Oil & Gas. ( T O T A L A S S E T S - T O T A L L I A B I L I T I E S ) / N U M B E R O F S H A R E S Reliance on equity financing The company heavily relies on equity funding to finance its variable costs (reconnaissance, development and drilling expenditures). The new share issue in December 2013 (raising SEK 15.million before costs) in combination with the exercise of granted warrants during the third quarter of 2014 (29,941 new shares issued) has contributed to the dilution of existing shares. Nevertheless, the ability and willingness of main shareholders to provide capital until actual revenue generation is initiated will remain balanced in the mid-term. Solidity ratio of more than 93% is perceived to be notably high and indicative of company s intention to remain debt-free in the near future. Stock Liquidity and Required Return Low stock liquidity, undiversified shareholders base, and lack of market depth would require relatively high liquidity (return) premium which may weaken stock appreciation opportunities. Summary The granted exploration permits, application for offshore licenses and strong liquidity position introduce confidence regarding potential growth and cash flow accumulation. Nevertheless, the uncertain production commencement and obtainable volumes introduce cautious sentiment. Gripen Oil & Gas (publ) is an oil and gas exploration and production company with granted exploration licenses in the Swedish counties of Östergötland, Öland and Gotland. Gripen Oil & Gas (publ) has further intention to expand its scope via application for offshore licenses. The company is considered the single biggest explorer for Oil & Gas in Sweden in terms of size of acreage. The main business goal is to exploit these resources in a safely, cost-effective and environmentally friendly manner, thus reducing the negative externalities caused to the environment.

3 3,15 5,1 1,02 1,04 4,1 3,31 6,1 5,56 2,13 1,78 0,18 35,28 70,88 101,84 Valuation Investment Characteristics Gripen Oil & Gas is historically recognized as a company not involved in distributing dividends. The shares are strongly held by few undiversified major stockholders with relatively blocked portion of around 65% of the outstanding shares. Stockholder base is rather limited, thus repelling control tending investors. Low liquidity increases both execution and opportunity cost and could limit price appreciation (capital gain) in case of undervaluation. The stock, by its moderate-tohigh volatility exposure, would not be suitable for risk-averse and long-term cash dividend expecting investors (e.g. pensioners). Active trading is also restricted due to low volume and turnover values. Buy-and-hold strategy is considered the most appropriate as investors would be able to assimilate valuable information concerning actual oil and gas production initiations. Valuation Notes Gripen Oil & Gas P/B has trended upwards when comparing the figures for the year of 2014 and the first quarter of The P/B discrepancy relative industry peers will be further intensified if effects of the high level of intangible assets is eliminated. Industry competitors maintain relatively higher level of debt on their Balance Sheet in order to finance the ongoing operations, thus taking advantage of the available tax shield and avoiding dilution effects. Net Debt for Crown Energy Ventures Corporation exceeds 18% for the last quarter of The corresponding metric for Gripen Oil & Gas remains negative for the same time period (-19.55) due to solid cash and cash equivalents position. Despite the higher dependence on debt financing, industry peers sustain relatively stable liquidity positions throughout both time intervals, as demonstrated by the respective Current Ratios. This emphasizes their ability to meet short-term obligations. Gripen Oil & Gas exhibits a Current Ratio of 3.15 for the former time period (YE 2014) and 5.1 for the latter (Q1 2015). Shelton Petroleum AB and Lundin Petroleum are the only companies with positive figures for ROA and ROE for the respective time-frame. Legal resolution concerning offshore filings in conjunction with inshore drilling commencement are expected to affect Gripen Oil & Gas future sales and consequent cash flow generation. The negative earnings before interest, taxes, depreciation and amortization restrict the calculation of comparable multiples (P/E, ROA, ROE, EV/EBITDA, EV/FCF remain negative in 2014). Summary and Conclusions The stock is defensive and value drivers are indicative to the difficult value creation in the near future unless the company undertakes permanent extraction of oil and gas. This contrasts with the minimized default risk and relatively stable current and fixed assets position. Nevertheless, the uncertainty concerning actual timing of revenue accumulation confines any deterministic conclusions P/B Ratio 0 Gripen Oil & Gas AB Lundin Petroleum Tethys Oil Company Crown Energy Ventures Corporation Petrogrand AB Shelton Petroleum AB Interfox Resources C U R R E N T A S S E T S / S H O R T - T E R M L I A B I L I T I E S G R I P E N O I L & G A S A B L U N D I N P E T R O L E U M T E T H Y S O I L C O M P A N Y C R O W N E N E R G Y V E N T U R E S C O R P O R A T I O N P E T R O G R A N D A B S H E L T O N P E T R O L E U M A B I N T E R F O X R E S O U R C E S Disclosure: Pavel Lisev Does not own stocks in GOG

4 SWOT Analysis Minimized default risk Experienced management team Cost-efficient technology used for drilling Strong Balance Sheet position Uncertainty regarding production initiation and estimated exploration volumes Pricing volatility concerning future offtake of gas and oil Strengths Weaknesses Opportunities Threats Application for offshore exploration and production licenses Mature industry with high entry barriers and preliminary expenditures Potential significant increase in fixed capital outlays in the long-run Issuance of more stringent regulatory directives concerning the energy sector. General Implications It is important that Gripen Oil & Gas captures the available opportunities and triggers the accumulation of profit in the medium term. The overriding interest is to stimulate revenue generation by production initiation (elaborating the existing projects and engaging in new ventures). The innovative focus in conjunction with strong financial position further conceptualize Gripen Oil & Gas potential for future growth and income-generation opportunities. Bull or Bear Value Drivers Quality of Earnings Risk Profile Quality of Management & Ownership Overall View Industry sector is considered volatile, prone to political and economic instabilities. Application for offshore licenses and inshore extraction commencements are of primary importance. Liquidity premium is required on holding the stock Gripen Oil & Gas has had consistently negative earnings. Other external costs remain the primary factor eroding the income statement. Fixed costs are expected to grow as the oil & gas production starts. Low financial leverage minimizes default risk. High industry and oil price volatility levels. Defensive business strategy during initial sampling tests and development procedures. Granting of concessions, patents and licenses complemented by the signing of Letter of Intent covering future offtake of gas alleviate risk exposure Despite the recent replacement of company s incumbent CEO, the management turnover ratio is expected to remain rather stable. Financial statements are expressed in a clear and indicative manner with no accounting discrepancies. Experienced Board members Excessive volatility and uncertainty is expected for Gripen Oil & Gas in the short-run due to unpredictability surrounding oil & gas production initiations. Upside potential exists, but is contingent on external factors. Recommendation is to undertake buy-and-hold strategy in the short term, until more valuable information is revealed to the market

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