Permex Petroleum (CSE: OIL) is different than most other junior oil and gas plays in North America in many ways. For starters, the Canadian based-based company came public via an initial public offering, rather than a reverse takeover like most others do. Pick your cliché, “the sum of the parts is greater than the whole,” “1+1=5” or any other to paint a picture of a disconnect between the fundamental strengths of the company and its valuation and you’ll describe Permex. All maxims aside, a look at the numbers, timing, geography and structure are all reasons that Permex stands out amongst its peers.
1. Timing
The savvy management team, led by CEO and President Mehran Ehsan, used the downturn in oil prices to their advantage. Many project owners panicked when oil prices sunk from over $100 a barrel in 2014 to around $26 a barrel early in 2016. During the oil down cycle, while analysts posited oil could go under $25 and would remain cheap because of a supply glut, Permex was building a position in the vaunted Permian Basin at discounted prices.
The oil-rich area has been the target for a stunning $90 billion of deals (based upon a minimum deal size of $100 million) between January 2013 and July 2018, according to a report by Ralph E. Davis Associates, an affiliate of Houston energy consulting firm Opportune LLP.
As it stands now, Permex has 72 producing oil and natural gas wells, 34 salt water disposal wells (which saves on operating expenses) and more than 145 O&G wells in its portfolio. There is plenty of runway for the company to add to those totals, considering Permex controls over 6,500 acres in the Permian Basin across Texas and New Mexico.
2. Geography
The Permian Basin is the U.S.’s biggest shale oil producing region and is showing no signs of slowing down. In fact, IHS Markit forecasts that output from the Permian will more than double to 5.4 million barrels per day between 2017 and 2023. At that rate, the Permian will rival the Ghawar field in Saudi Arabia, the world’s biggest oil patch with capacity of 5.8 million barrels a day.
At 3.2 million barrels of oil produced daily currently, the Permian already outstrips many producing countries, including Kuwait and Mexico.
In order to hit IHS Markit’s prediction, frackers will need to drill approximately 41,000 new wells in the next five years. Permex plans to be a part of this robust growth, drilling different targets across its six projects in Texas and two in New Mexico.
The company focuses on properties with mature, proven assets with existing or shut-in wells that management believes can be re-entered or stimulated to increase production. The cash flow generated can then be used for additional drilling, a strategy that mitigates developmental risk.
For instance, Permex this month said that it completed the first phase on its Bullard Property Enhanced Oil Recovery (EOR) Waterflood Modelling Project. The work determined not only that the waterflooding will increase oil production, but also the injection patterns that would work best. At its Bullard and Pittcock properties, waterflood EOR work has been successful, increasing production by up to 20 percent. Management has a goal to re-enter and stimulate wells between the two properties to yield daily production of nearly 400 barrels of oil per day.
Even at $55 oil, that’s $22,000 daily in production, or $8.03 million annually, from these two projects.
In June, Permex acquired Energy Properties 2000-1, giving them an interest in the ODC San Andres Unit and W.J. “A” Taylor lease located in Gaines County, Texas. A few things should not go overlooked with this acquisition. The owner of the remainder of the interest on the project is Occidental Petroleum Corp. (NYSE: OXY), an international O&G major with significant experience in the Permian and a market capitalization around $60 billion.
Permex, the operator on the project, couldn’t ask for a better partner than Occidental.
The field currently has production of 158 barrels of oil per day and 13,000 cubic feet of gas per day from the San Andres and Devonian formations. The San Andres formation, situated at a depth of 4,500 to 5,000 feet, has a massive 70-foot-wide pay zone. It is the formation that just keeps giving, with over 30 billion barrels of oil collected from it in the past 90 years, much of which has come from vertical drilling. Fracking, or horizontal drilling, opens the door for decades more of additional production.
In a phone conversation, Ehsan painted a visual of the San Andres, telling Baystreet.ca to envision a layered cake. “Our fields have stacked layers of producing zones, pushing a straw down into one of these layers such as the San Andres will only produce a small amount sounding the opening of the straw relative to the layer as a whole. But, bend the straw that’s already in the layer, and production is multiplied exponentially,” he explained.
That’s the intention of Permex and Occidental at the two contiguous sections that cover a total of 1,220 gross acres.
3. Structure
Permex has kept a tight share structure and its books clean. In avoiding possible pitfalls of a reverse takeover (RTO) by choosing the IPO route, Permex built strong and long-lasting relationships with investment banks that have a long-term view of the company. All too often, RTOs are characterized by the holders of the shell company having no interest in the vision of the new company, resulting in an onslaught of selling as they exit their position as soon as possible. Permex doesn’t have to worry about that and now has established relationships with investment banks to lean on for future growth rather than having to rely upon toxic financing like many other juniors are forced to do.
Permex came public in May, completing an IPO by selling 8.135 million shares at a price of $0.50 each for gross proceeds of about $4.07 million. Permex only has about 35.7 million shares outstanding. With zero debt on its books, the company has a very nimble structure conducive to future growth.
Add It Up
The numbers are all in the right places for Permex. A large land position has been amassed without collecting debt in one of the world’s most prolific oil and gas regions. The U.S. has backed off on regulations and taxes, making the country more favorable than Canada for O&G activities. The San Andres formation is the formation of the past, present and future in the Permian. Stacked formations and “basement rights” means that Permex has the option to drill deeper (the Permian extends to more than 10,000 feet) or sell the rights if they choose. There is only one number that doesn’t fit, a market capitalization of $14 million. It would seem only a matter of time before Bay Street corrects this to something that is more appropriate for a company in the position that Permex is.
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