Arrow Exploration Thesis
September 8, 2023
I attended the Proactive Investors conference on 7 September. It was my fifth time, I think. One company that particularly impressed me was Arrow Exploration. I bought its shares in the following few days, allocating about 1% of my portfolio.
Its shares are listed in London (ticker: AXL LN). The company has a market cap of £49.2mn ($61mn) and a net cash position of $10mn, giving it an EV of $51mn. Its main producing assets are in Colombia, with small production in Canada. The combined output is just under 3kb/d. Management targets 10kb/d within the next three years. There is an 8-14% royalty on the company’s properties and a 40% corporate profit tax (for small-scale producers), although the company has accumulated losses which offset its corporate tax liability for the following two years.
Assuming 3kb/d oil production, Arrow Exploration should produce over 1mn bls in one year. At $80/bl, this implies an annual revenue of $80mn and operating cashflow of c. $60mn (after 12% royalty, $5/bl opex and a 5% discount to realised price). Even adjusting for small amounts of gas production and 10% output from Canada with lower realised prices, Arrow can comfortably generate $50mn of operating cash flow in the following 12 months.
Its ’23 investment programme assumes drilling 10 wells as well as shooting and processing 3D seismic for the main block (Tapir North) for a total cost of $32mn. Next year’s budget has not been discussed but should be close to 2023 spending. Management plans to drill 11 wells.
So the company should generate almost $20mn of FCF. Its capex includes growth investments as management targets 10kb/d output within 3 years.
Management holds a 6.2% interest in the company, while Canacol, a large independent Canadian-listed oil & gas company, owns 19.5%.
I only have 1% of my portfolio in this company because it is based in a fairly high-risk country, remains an early-stage operator, I do not know management well enough, and there are 46.3mn warrants exercisable until October and November at 9p a share.
The company's Sep 2023 Investor Presentation provides a good summary of its strategy, operations, shareholders and management.
Its shares are listed in London (ticker: AXL LN). The company has a market cap of £49.2mn ($61mn) and a net cash position of $10mn, giving it an EV of $51mn. Its main producing assets are in Colombia, with small production in Canada. The combined output is just under 3kb/d. Management targets 10kb/d within the next three years. There is an 8-14% royalty on the company’s properties and a 40% corporate profit tax (for small-scale producers), although the company has accumulated losses which offset its corporate tax liability for the following two years.
Assuming 3kb/d oil production, Arrow Exploration should produce over 1mn bls in one year. At $80/bl, this implies an annual revenue of $80mn and operating cashflow of c. $60mn (after 12% royalty, $5/bl opex and a 5% discount to realised price). Even adjusting for small amounts of gas production and 10% output from Canada with lower realised prices, Arrow can comfortably generate $50mn of operating cash flow in the following 12 months.
Its ’23 investment programme assumes drilling 10 wells as well as shooting and processing 3D seismic for the main block (Tapir North) for a total cost of $32mn. Next year’s budget has not been discussed but should be close to 2023 spending. Management plans to drill 11 wells.
So the company should generate almost $20mn of FCF. Its capex includes growth investments as management targets 10kb/d output within 3 years.
Management holds a 6.2% interest in the company, while Canacol, a large independent Canadian-listed oil & gas company, owns 19.5%.
I only have 1% of my portfolio in this company because it is based in a fairly high-risk country, remains an early-stage operator, I do not know management well enough, and there are 46.3mn warrants exercisable until October and November at 9p a share.
The company's Sep 2023 Investor Presentation provides a good summary of its strategy, operations, shareholders and management.
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