Very detailed analysis, thanks. I have some comments and thoughts, it would be interesting to know your views on those as well.
Going Concern.
The cash position reduced from $194m to $70m in six months. It would be reasonable to assume that cash has continued to decline in the intervening months prior to December's expected tax rebate as capex > sales receipts. So maybe $40-$50m at bank now. It wouldn't take much flexing to the gas and oil prices to have reduced that (maybe a 20% decrease in gas/oil prices compared to what happened? Not out of the question based on recent years) so I suspect the auditors were indeed genuinely worried about a cash pressure point about now prior to the tax rebate.
I think the elephant in the room here is the UK decommissioning security posting for 2025 (explained in note 1.2 to the interim report, and elsewhere). Previously that has been satisfied by buying bonds at a rate of what looks like around 3.5%. They need to cover $80 million by the end of the year. If done by bonds again, that will "only" cost around $3m again. But if the market for bonds has tightened, or the insurance providers are a bit spooked by current performance and share price, that will need to be cash covered. Even if only half of it needs to be cash covered, that's quite a significant amount of cash that is locked up until decommissioning time.
Tax
On the subject of the tax rebate, surely you also need to account for the current tax payables. That was $80m at 30 June, of which $50m is the Dutch windfall tax that you have covered elsewhere. So there is $30m of other taxes due (and more will accrue, especially in the UK, throughout the remainder of 2024) which need to be deducted.
Orion
Given the significant reserves downgrade on the gas part of Q10 since Kistos purchased Tulip back in 2021, I would take the "independently verified estimates" for Orion 2P reserves with a large pinch of salt. The slides you link to in your note 11 state 2P reserves at Q10 of 19.7 mmboe at 31 Jan 2021. Netherlands 2P reserves at 31 December 2023 were 2.6 mmboe. Production since early 2021 to end 2023 was around 6 mmboe, so that is a massive downgrade, and casts doubt on the original estimates.
Furthermore, the recent Analyst Presentation uploaded to the Kistos website dated 11 November 2024 states the 2C resources at the Q10 area is only 1.35 mmboe (slide 18)
M10/M11
Published information on NLOG, the Dutch oil and gas licensing authority, seems to indicate that Kistos has pulled out of the M10/M11 licence ("Application withdrawn by Kistos as of February 15, 2024"). Some clarification from the company would be useful here.
GLA
The company's own material indicates net 2C resources for GLA of 6.25 mmboe (11 November presentation, slide 16). This is much lower than the 20 mmboe you attribute to Glendronach,
There is also the question of if the changes to the tax regime and investment allowances on the Energy Profits Levy changes Prax's mind on sanctioning any developments.
General
Do you factor into your calculations the compounding / payment in kind effect of the current bond debt? I estimate it increases to circa $300m by the time of repayment due date (that amount excludes the hybrid $45m bond which I agree will go away).
If AA thinks the share price is undervalued, why has he or other Directors not purchased any additional shares during the year? It cannot be all due to closed periods, as new grants of options were made in August which cannot be done in close periods. Ergo, there was an open window for Directors to make purchases as recently as a few months ago.
Thanks for the write-up. When a CEO dismisses a 'going concern'-note, I think investors would be wise to be sceptical. You can be sure that the CEO did everything in his powers to NOT have a 'going concern'-note, and as the auditor is paid by said CEO, you can be reasonably sure that they'll go very far so as not to include said note. I have no idea whether this works or not, but I think that's a big red flag and enough to keep me away either way. Best of luck!
True but Kistos is in structure similar to RockRose, i.e small asset on the North Sea. Not like Igas which was focused on UK onshore, which just wasn't a good business.
With iGas he wanted to develop fracking in the UK, it was an opportunistic move, and nothing to do with onshore/offshore. Offshore uses the same onshore fracking practices that are essential for exploiting shale. Instead of thinking about the type of operation, you should look at how he managed the company and how he broke his promises there. He took a loan using his iGas shares as a security; he never paid that loan back, so the lender kept the shares. iGas released several RNSs on this.
Very detailed analysis, thanks. I have some comments and thoughts, it would be interesting to know your views on those as well.
Going Concern.
The cash position reduced from $194m to $70m in six months. It would be reasonable to assume that cash has continued to decline in the intervening months prior to December's expected tax rebate as capex > sales receipts. So maybe $40-$50m at bank now. It wouldn't take much flexing to the gas and oil prices to have reduced that (maybe a 20% decrease in gas/oil prices compared to what happened? Not out of the question based on recent years) so I suspect the auditors were indeed genuinely worried about a cash pressure point about now prior to the tax rebate.
I think the elephant in the room here is the UK decommissioning security posting for 2025 (explained in note 1.2 to the interim report, and elsewhere). Previously that has been satisfied by buying bonds at a rate of what looks like around 3.5%. They need to cover $80 million by the end of the year. If done by bonds again, that will "only" cost around $3m again. But if the market for bonds has tightened, or the insurance providers are a bit spooked by current performance and share price, that will need to be cash covered. Even if only half of it needs to be cash covered, that's quite a significant amount of cash that is locked up until decommissioning time.
Tax
On the subject of the tax rebate, surely you also need to account for the current tax payables. That was $80m at 30 June, of which $50m is the Dutch windfall tax that you have covered elsewhere. So there is $30m of other taxes due (and more will accrue, especially in the UK, throughout the remainder of 2024) which need to be deducted.
Orion
Given the significant reserves downgrade on the gas part of Q10 since Kistos purchased Tulip back in 2021, I would take the "independently verified estimates" for Orion 2P reserves with a large pinch of salt. The slides you link to in your note 11 state 2P reserves at Q10 of 19.7 mmboe at 31 Jan 2021. Netherlands 2P reserves at 31 December 2023 were 2.6 mmboe. Production since early 2021 to end 2023 was around 6 mmboe, so that is a massive downgrade, and casts doubt on the original estimates.
Furthermore, the recent Analyst Presentation uploaded to the Kistos website dated 11 November 2024 states the 2C resources at the Q10 area is only 1.35 mmboe (slide 18)
M10/M11
Published information on NLOG, the Dutch oil and gas licensing authority, seems to indicate that Kistos has pulled out of the M10/M11 licence ("Application withdrawn by Kistos as of February 15, 2024"). Some clarification from the company would be useful here.
GLA
The company's own material indicates net 2C resources for GLA of 6.25 mmboe (11 November presentation, slide 16). This is much lower than the 20 mmboe you attribute to Glendronach,
There is also the question of if the changes to the tax regime and investment allowances on the Energy Profits Levy changes Prax's mind on sanctioning any developments.
General
Do you factor into your calculations the compounding / payment in kind effect of the current bond debt? I estimate it increases to circa $300m by the time of repayment due date (that amount excludes the hybrid $45m bond which I agree will go away).
If AA thinks the share price is undervalued, why has he or other Directors not purchased any additional shares during the year? It cannot be all due to closed periods, as new grants of options were made in August which cannot be done in close periods. Ergo, there was an open window for Directors to make purchases as recently as a few months ago.
Thanks for the write-up. When a CEO dismisses a 'going concern'-note, I think investors would be wise to be sceptical. You can be sure that the CEO did everything in his powers to NOT have a 'going concern'-note, and as the auditor is paid by said CEO, you can be reasonably sure that they'll go very far so as not to include said note. I have no idea whether this works or not, but I think that's a big red flag and enough to keep me away either way. Best of luck!
Andrew also founded and led iGas before RRE. In case you want to use his background, it would be fair to look at the whole picture.
True but Kistos is in structure similar to RockRose, i.e small asset on the North Sea. Not like Igas which was focused on UK onshore, which just wasn't a good business.
With iGas he wanted to develop fracking in the UK, it was an opportunistic move, and nothing to do with onshore/offshore. Offshore uses the same onshore fracking practices that are essential for exploiting shale. Instead of thinking about the type of operation, you should look at how he managed the company and how he broke his promises there. He took a loan using his iGas shares as a security; he never paid that loan back, so the lender kept the shares. iGas released several RNSs on this.
Incredible analysis and write-up. I'm going to reread it now 😉