(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long TXP.TO)
Touchstone Exploration (TXP.TO, last at $0.90) was briefly halted yesterday afternoon as the company announced a financing led by Shore Capital out of London, where the company continues to focus its attention; presumably in light of the dearth of energy investors left in Canada these days. The financing was oversubscribed (US$11.6mm was raised versus an initial target of US$9.1 million) and closed before the Toronto market opened today. At a Canadian price of 68 cents, the financing came at a steep discount to yesterday’s pre-halt price of 96 cents, but when a stock goes as parabolic as TXP has, metrics like recent moving averages come into play when pricing a deal like this… c’est la vie. The important thing is that TXP has followed rule #1 of the capital markets from a broker’s point of view… i.e., “Take the Money” when it is available to you. By getting some cash in the door, TXP has ensured that it will be able to finance the drilling of the upcoming Chinook and Royston exploration wells without difficulty. When it comes to the markets (and exploration), anything can happen, and at this early stage of what’s looking to be a new chapter for TXP in Trinidad, it’s nice to see the company cashed up and on track for a period of continued activity in its 80%-owned Ortoire block. I suppose I could gripe about what a gift the financing was for the clients of Shore Capital, but it wouldn’t do much good and the actual difference in the share dilution incurred relative to, say, a financing at 80 cents, is about 2.5% (it’s the difference between issuing 22.5 million shares or 18.5 million shares on a 160 million share base), which is a non-factor in the grand scheme of things for me. In my mind, TXP has done exactly what it’s supposed to do by getting the money in the door at this stage, so my hat is off to Paul Baay, who I’ve yet to meet, but certainly hope to if he finds his way through Toronto any time. With the stock trading in London at the equivalent of 73 cents as I type this, it will be interesting to see what kind of buying shows up at prices 20 cents below yesterday’s pre-halt price (Note: after a trip to the dentist and coming back to my computer to finish this note, the stock is now at 90 cents on the TSX on 2.3 million shares, so I guess I got my answer).
I’ve been thinking a lot about this story and another presentation by the CEO in London (see below) did little to deter my view of the potential on the table. Touchstone has drilled into a Herrera turbidite fairway that is much thicker than TXP’s initial expectations at Cascadura-1 and arguably this sets up a “re-think” of the greater exploration picture for the overall Ortoire block. That’s a bigger discussion than is warranted given the early stage of the Cascadura discovery and the fact that there are two more drill-ready targets (Chinook (oil?) and Royston (gas?)), but my point is that there could be others as well, so the playing field is fairly wide open.
Soon, TXP will be testing the upper interval of Herrera sands at the Cascadura-1 well with results expected in early March. Granted there is still some risk on the table here, but I’ve been trying to figure out what the goal line looks like in the meantime. The best thing I can come up with is a comparison to a company called Aventura Energy that discovered the Carapal Ridge field in a block that is directly adjacent to TXP’s Ortoire in Trinidad. Aventura was bought by BG in early 2004 for C$228 million. Aventura had a 65% interest in the Carapal Ridge discovery that tested at 62 mmcf/d of gas and 1,625 barrels of condensate from turbiditic sandstones very similar to what Touchstone is testing at Cascadura. Aventura’s net 2P reserves at the time of BG’s takeout offer were about 300 BCF, and the natural gas price in Trinidad was US$1.10/mcf then, versus about US$2.20/mcf today. I believe that Aventura’s discovery well had been on long term production test for about a year when BG made its move. I would argue that production costs really haven’t changed all that much since that time, and a big onshore conventional discovery (close to pipeline) is likely to have high margins; so if TXP can confirm the vertical extent of the discovery with this next well test, I think that something in the C$300-400+ million range could ultimately be on the table, particularly given the shortage of domestic onshore gas supplies in Trinidad. Now, I’ve been down this road of counting chickens before they’ve hatched before, but Mr. Baay points out in his presentation that the Royston target is (was?) actually the biggest target of the four that are being drilled in this program (Coho was the first, Cascadura is the second), so I’m still optimistic about the risk-reward balance. Show me a good test from the next zone at Cascadura-1 and I’ll be sleeping a little more soundly though; no doubt about that.
Touchstone should be wrapping up its build-up test in the lower zone at Cascadura any day now, and the market’s attention in the near term will be the flow rates from a 450-foot-thick zone that is directly above the one just tested. That result is expected to come in early March, which is not that far away, and I would assume that TXP will be making preparations to drill its next two prospects in the block in the meantime. All I can say is that it’s nice to see something in the energy sector working for a change… knock on wood.
And I just found this post-financing interview with Paul Baay. I haven’t even watched it yet…