Criterium Energy Ltd (TSX-V: CEQ): Growth within cashflow
• The FY24 guidance reflects a self-funded development and debt repayment programme. While a reduced capital programme, we believe this is a prudent strategy with upside optionality should additional funds from the Bulu sale or higher oil prices materialize.• As a result of the Bulu sale not completed yet, Criterium is carrying more debt than we expected (the repayment of US$5.5 mm of debt in March would have also triggered a US$3.8 mm debt write down). Pending the divestment of Bulu, we expect debt servicing (8.6% interest per annum plus US$1.5 mm principal repayment every quarter) in 2024 and beyond could be much higher than anticipated.
• The higher debt servicing combined with higher opex results in less than expected cash resources available for drilling. The FY24 capex is therefore expected to be US$4.8-5.5 mm (we anticipated ~US$10 with the proceeds from the sale of Bulu) and production is expected to grow from ~820 bbl/d currently to only 1.2-1.3 mbbl/d by YE24 (we anticipated ~2.0 mbbl/d with a US$10 mm capex programme). Should the Bulu acquisition close, the capex could be increased to US$10 mm and close the gap on production.
• The FY24 programme includes 12-15 work-overs (US$0.06 mm per work-over adding 10-30 bbl/d with a payback of 2-5 months) and only 2 new wells (US$1.6-2.0 mm/well adding 75-200 bbl/d with similar payback).
• While the company has an inventory of a further 15 wells, we have made the cautious assumption that new oil wells beyond the 2024 programme would not be drilled before 2026 as Criterium’s cash resources (excluding the proceeds from selling Bulu) would be allocated to the gas aggregation project in 2025 to be also partially funded with new debt or offtake arrangements. Should the company fund the gas development with the offtaker, additional oil wells could be drilled in 2025. We now expect oil production to grow to >2 mbbl/d only in 2027.
• As we assume a slower production ramp-up and attribute a 50% chance of Bulu being sold, we change our TP to C$0.30/sh in line with our ReNAV.
Cash and debt
Criterium held US$7 mm in cash and US$28 mm of debt (US$25.5 mm net of US$2.5 mm to be converted into equity in 2025) as at 3 January. Excluding the divestment of Bulu, we assume that financial liabilities will increase in 2025 given the capex required for the construction of the gas aggregation project. Once oil production has reached ~2.2 mbbl/d (plus 8 mmcf/d of gas) in 2027, we forecast recurrent free cash flow of ~US$20 mm per year at US$70/bbl.
Revisiting our valuation
Pending visibility on Bulu, we have (1) excluded the proceeds from the sale from our financials and carry only US$8 mm x 50%, (2) reduced our oil production forecast and (3) moved the oil 3P reserves and 2C oil resources to our risked upside. Our new Core NAV is C$0.22/sh with a ReNAV of C$0.34/sh.
Auctus Advisors is a specialist Equity Capital Markets and Advisory business with a focus in the Energy Sector.
The partners have complementary skill sets, with decades of experience across Equity Capital Markets, Investment Banking and the Energy industry. We have worked at Société Générale, Canaccord Capital, BMO Capital Markets and Schlumberger. Most recently we have worked together for many years at GMP FirstEnergy.
Auctus has been set up at the beginning of a new decade in which we see significant opportunities in the Energy space. Globally, demand for energy is at record levels and continues to grow. Conversely, investment in traditional energy sources has been severely constrained. We believe this imbalance creates opportunities for both companies and investors.
Auctus provides Corporate Broking, Equity Research and Investment Banking services.
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