Otto Energy (ASX:OEL): cashflow not being recognised

April 27, 2018

The shift from explorer to producer amongst resource stocks is often a time of confusion. Frequently there is more excitement priced into a stock when it is looking for resource than there is when it is producing it and generating cashflows. The hype associated with potential discoveries of the latest hyped commodity tends to be ambivalent when it comes to extracting it from the ground.

 

Glennon has had a holding in Otto Energy (OEL.ASX) for some time now and have done well out of it.  We bought it on the back of its drilling program in the Gulf of Mexico with 50/50 partner Byron Energy (BYE.ASX) – in fact we switched out of Byron into Otto when the latter’s share price failed to match the momentum of the former. We bought more when it was clear production was imminent.

 

Byron is the operator of the SM (South Marsh) 71 platform and does have a superior portfolio of potential farm-in agreements but with a market capitalisation nearly three times that of Otto (and with their cashflow prospects virtually identical) it made financial sense for us to chase the value in Otto.

 

 

 

 

With the platform built and drilling underway Otto released the financial metrics it expects to achieve (based on current oil and gas flow rates and sales). It adds up to approximately A$160,000 of net cash profit per day (based on the WTI price of US$68 per barrel). Annualised that equates to $58m a year – not bad up against a market cap of just $90m.

 

The current proven and probable reserves should last two years but new drilling in the block has proven successful and is expected to result in a material uplift in reserves for the June 30 year. So Otto is likely to yield very strong cashflows over a number of years which it can utilise to grow its portfolio of assets and ultimately its returns to shareholders.

 

The starting point is nearby properties. Byron has been recognised as the highest bidder in the adjacent Vermillion Block 232 which, if ultimately approved, gives Otto an option to be joint venture partner as it is with SM71. Otto itself has been awarded an option for 45% of an inshore Southern Louisiana field called Bivouac Peak (over 2800 acres of what Otto describes as highly prospective).

 

The fact is Otto is now a serious player in the oil and gas discovery and production game. Cashflow is an important ally in the game and Otto has an abundance coming through. The share price has a fair way to go before it reflects that.

 

 

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