I recently spent 3 days in Colombia touring NG Energy's properties and newly built gathering system, the company is one of my investments in the oil/gas sector. What I saw and learned more than confirmed my original thesis. Though there has been delays in the past due to the logistical challenges caused by covid and the permitting process, the company is on track to begin cash-flowing and to announce a substantial discovery in the next few weeks.
In general I'm a long term investor, with any investment thesis I have the confirmation time horizon is few years not a few weeks or months.
GAXS.V
GASXF
Market Cap: $140 Million USD
Enterprise Value $170 Million USD
(EV adjusted after drilling 4 high impact wells of Sinu-9 that potentially unlocks +1tcf of gas and 60MMcf of production)
KEY ASSETS
1) The SINU-9 Block FLAG SHIP (exploration) covers an area of 311,353 acres located in the north part of Colombia sharing area in Lower Magdalena and San Jacinto basins, two of the basins with the largest gas and light oil potential in the country. The region has excellent infrastructure with open access to national oil and gas pipelines, 50km from port access, and coverage of a reliable electricity grid.
RESOURCE POTENTIAL IDENTIFIED
-Dry Gas with some liquids production 1.3 TCF (215 million BOE dry gas excluding associated liquids)
-Light Crude Oil 253 million barrels of recoverable
-4 high impact well program (gas) on-going, first well spudded in March followed by 3 more back to back.
2) The Maria Conchita Field (development and exploration) located in the Guajira Basin on Colombia’s Caribbean coast. The property neighbors one of the largest natural gas deposits in Colombia, the Chuchupa field, with more than 900 MMboe in reserves and accounting for 40% of Colombia’s daily natural gas output. The Ballena–Barrancabermeja pipeline is located just 14km from the Maria Conchita property and is one of several TGI networks servicing the country with Natural Gas.
RESOURCE POTENTIAL IDENTIFIED
-Dry Gas 375 BCF + Liquids production
-Production of 20MMcf/d begins in March
3) The Tiburón block is in the Upper Guajira on Colombia’s Caribbean coast and belongs to the same basin as the Chuchupa block to its south, one of the most prolific gas blocks in Colombia. Tiburón holds various similarities to the massive offshore Perla and Orca discoveries in Venezuela and Colombia. The team intends to shoot a seismic survey and then evaluate next steps.
The current state on the company
Note: The follow information came from visual conformation, interviews withnot only the CEO but also the Head Petro Engineer, The Drilling Contractor, the company’s Structural Geologist, and the Gas Marketing Company.
Sinu-9 East Block (Dry Gas)
-The pad is in the final stages of being constructed for the Magico 1X Well (The Dept of Environment made them move it from the original location 50 meters so that's the delay to original timeline) , drill pipe is on site, drill rig has arrived, the drill contractor is on site. Drilling will start in 2-3 weeks due to prior delays from the Environmental Dept which are now resolved and disruptions caused by covid
-Total drilling time will be 27 days, the completion phase is planned for 16 days which includes the isochronal well test (7days). At least three hydrocarbon intervals of interest already identified will be tested. Deeper zones may be discovered.
-The rig is a new DRILLMEC HH300, 1500HP with a self-loading pipe stack. It’s very fast and reliable.
-CPVEN is the operator, they also drills all of Canacol wells with a 100% success rate on the property adjacent to Sinu-9 targeting the same formation where IP rates have exceeds 30MMcf/d
-3 additional fully-funded high impact wells are scheduled to be drilled back to back after Magico is completed, those pads are being constructed concurrently.
-The Structural Geologist and Petro Engineer both agree that conservatively each of these wells to produce at 15MMcf/d – 20MMcf/d of dry gas plus a few hundred barrel of liquids.
Economics
At $5.50 gas, (prices are averaging $5.50-$6.50 in Colombia) Company stated Cost of $1.50 per Mcf , these 4 wells using the bottom of range will add 60MMcf/d in production/10’000 boe/d
Full development of the Sinu-9 field by 2024 is stated as 200MMcf/d
10’000 boe/d x 365 days x $24 margin = $87.6 Million USD ebitda (net of 72% WI = $63 Million USD )growing to 34’000 boe/d generating $292 Million USD in ebitda (net of 72$ WI - $210 Million) in 2024
Conclusion: Geological risk is very low due to de-risking of property by prior historical drilling and by the extremely successful drilling and wells on production by NG Energy’s neighbour Canacol who is exploiting the same formation. The drill will be turning by the end of March.
Note: The Governor of the State Mr. Orlando Benitez joined NG Energy for lunch and publicly endorses the development of the Sinu-9 block in the media after our meeting.
Sinu-9 West Block (Light Oil)
Prior to the visit I had heard of the oil potential on the West Block but had dismiss it because I hadn’t seen any data on it. During this trip the company provided the historical data and I was blown away.
Over a decade ago a 4 slim diamond drill holes were drilled around the property during a geological survey to gain understanding of the underlying stratigraphy. Remarkably drill hole La X-1 hit a 363ft column of light oil (API of 33) over 9 intervals.
Structurally the oil is associated with the anticlines and naturally trapped by the faults
This is very exciting because of the huge scale and quick pace to develop. The company has three anticlines that run multiple kilometers in length, the following photos were obtained from the gov’t archives, buried away for decades.
The light green is the oil situated rock in the drill cores, the dark blue is the water contact. Some of these zones were over 150 meters in continue oil.
The company plans to drill a few holes later this year and test if the oil will flow naturally or with the installation of a submersible pump.
It’s early days but the oil is obviously there, so NG Energy has oil. What’s very interesting is the oil is very light with an API 33 and will get a prem. pricing over Brent.
Compared to gas, oil requires substantially less cap-ex and much shortly lag times to get the first dollar of cashflow. You could easily truck it to market or tie into the existing pipeline under 20km away.
Currently oil is priced at +$120/ barrel. These wells will cost only $2.5-$3 million to drill, the IRR on only a few hundred barrels a day would be in the mid-triple digits at todays prices.
I asked the companies Structural Geologist to model the potential recoverable resource bases on the known data, his answer 253 Million barrels of oil.
This could be a very big story for NG ENERGY in the back half of 2022 because if it flows its low cost, high margin, close to export terminals and pipeline and can be trucked if needed.
It’s pure upside that I hadn’t modelled prior. The data is available now so I’m comfortable talking about it.
If it is scalable the expectation of reaching 10’000 b/d within 18-24 months is plausible.
The cost per barrel would be in the $35 range.
10’000 x 365 days x $85 margin (using $120 per barrel) = $310 Million in EBITDA (Net of 72% WI = $223 Million USD)
The Governor (the most powerful man in the state) is in full support of NG Energy developing SINU-9 and has pledged to assist with whatever the company needs.
The Maria Conchita Field
-All the permits are approved
-Testing is complete and system is approved to test live gas from the wells
-The permit to connect the Aruchara 1 Pad (40 meters of pipe) to the gathering system was approved and is being done now
-The testing of live gas and liquids will take approx. 2-3 weeks at which time the company will announce commercial production of 20MMcf/d plus 200-300 barrels a day of liquids
-Pricing will be between $5.50-$6.50, costs $1.50
-Gathering system is connected to the national gathering system
-Relationships with the Wayuu people is very strong, the Tribal leaders meet with us and have publicly supported the project.
-The gathering system has space to connect 6 wells, The Tinka (re-entry) well will be next adding 8-10MMcf/d as per the Petro Engineer on site
-Plan to drill new wells and bring production to 60MMcf/d by YE 2023
Conclusions
Everything is in place, we are on the government’s timeline for testing live gas which can’t be avoided, by the end of March we will be on production and cash flowing 20MMcf/d (3333boe/d) plus liquids, approximately 3500boe/d
Using low end of pricing of $5.50 gas and $1.50 cost
3500 boe/d x 365 x $24 margin per barrel = $30.6 million USD in EBITDA (net of 80% WI = $24.5 Million USD ) growing to +$90 million USD (Net of 80% WI = $27 Million USD) annually over the next 21 months
Final thoughts as a whole…
Current market cap is $144 USD
-Maria Conchita is three weeks from generating $30.6 million in EBITDA annually growing to over $90 million by YE 2023, Sinu-9 within a year will add $87 million in EBITDA after the 4 well program is complete then scaling to over $290 million in EBITDA in 2024.
-Capital has constrained growth in the past but going forward they will not have that problem and will accelerate growth internally.
-There exists an incredible upside to oil on Sinu-9 with the potential of 253 million barrels of recoverable light oil.
-Currently NG Energy trades at less than 5x EBITDA just on Maria Conchita initial production of 20MMcf/d that is 3 weeks away.
-Two years from now this company has a path to generate +$380 million USD in EBITDA without the upside of the light oil potential on Sinu-9.
-I believe the company is looking to acquire assets and expand it’s footprint potentially outside of Colombia
-Total potential +1.7 tcf dry gas, +253 million barrels of light oil = 535 million boe of low-cost, high-margin resources with the potential of achieving an exit production rate of 40’000-50’000 beo’s by YE 2024 that generates hundreds of millions in EBITDA.
-So what is it worth? Current EV of $170 USD that includes drilling 4 wells at Sinu-9 that likely will add 60MMcf or +$60 million net in ebidta and $5-50 million net in Ebitda and Maria... plus oil upside and expansion upside to +200MMcf/d in production in 2024. More. Much more.
I have my numbers figures, calculate your own. Vet the data.
RECENT PODCAST ABOUT SITE VISIT: http://www.kereport.com/2022/03/07/doc-jones-his-background-and-investing-journey-a-site-visit-to-ng-energy-and-macro-insights-on-the-energy-sector/
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I’m a PRIVATE (obviously Doc Jones isn't my real name) HIGH NET-WORTH INVESTOR, enjoying early retirement after a successful and fulfilling career managing a private investment portfolios with a focus on the resource sector (including oil and gas) .
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