Amerisur Resources - The Jigsaw Comes Together

Thursday, Nov 23 2017 by

The long and winding road for a resource company can be tortuous for investors. From unfulfilled promises through to countless fundraisings. That said, the rewards can be enormous. If looked at as any other business, it produces at X and sells at Y. So long as both factors are within reason, the results can be astounding. I would suggest that Amerisur Resources, the Colombian focused oil company, is one of those few resource companies that really is on the verge of paying off.

It goes without saying, that it has been many years in the making. This includes exploration, development, acquisitions and the construction of an oil pipeline during Colombia's civil war. And, of course, the collapse in the oil price. Leaving aside, the perennial floods and political issues. So where is it now? The answer, I would argue, is in very good shape - both profitable and debt free. And with enormous upside. Essentially, the heavy lifting has been done.

Yes, I know. Who's interested in oil? Why bother? It's a yesterday industry. Well, for starters, Amerisur's cash cost of production has collapsed from around US$26 per barrel to under US$15 per barrel due to the completion of its OBA pipeline earlier in the year. This logistical improvement has also allowed it to change its oil blend and therefore improve its profit margins – it receives a little more than the WTI price rather than a little less. The pipeline has a capacity of some 50,000 barrels of oil per day and it recently installed pumping equipment to give it the ability to put through more than 28,000 barrels per day. At a cash cost of production of, say, US$15 per barrel and the WTI oil price at, say US$57 per barrel, it's a very profitable business model. And, of course, pumping other people's oil can be lucrative.

With low overheads and no grand London offices, it can afford to leave the oil in the ground when it suits. If the oil price is too low or the weather inclement, it can come back to it at a later date. Incidentally, it has a well respected and established in-country management team.

As for the OBA pipeline, it's 100% owned by Amerisur and stretches to Ecuador. Not only does it substantially reduce its cost of production but it also gives it…

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Amerisur Resources plc is an independent full-cycle oil and gas company. The Company's principal activity is investing in oil and gas exploration and development in South America, principally in Paraguay and Colombia. It operates through oil exploration and development segment. It operates in Colombia, Paraguay and the United Kingdom. In Colombia, it is an operator and has interest in the Platanillo block, which includes the Platanillo field, an approximately 11,341-hectare block located in the Putumayo Basin. It has interests in block Put-12, which is adjacent to Platanillo. It also has interest in Put-30, an approximately 38,514-hectare block. In addition, the Company has an interest in the CPO-5 contract, located in the Llanos basin and a working interest in the Tacacho contract, located in the Caguan-Putumayo basin. In Paraguay, it owns over 5.2 million hectares covering approximately five oil and gas permits in the Paraguayan part of the Chaco and Parana Basins. more »

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42 Posts on this Thread show/hide all

clarea 20th May '18 23 of 42

In reply to post #365514

Hi aflash,

Thanks for the reply management have always been optimistic, and they don;t see to have risen as much as other oilers with recent improvement in the oil price. There was a constant seller which hasn't helped so possibly he;s done for now. On paper if forecasts come right they look cheap as chips but been a lot of false dawns with this one.

Thanks Andy

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LongValue 21st May '18 24 of 42

False dawns have littered Amerisur's path. At the same time, it has built a portfolio of opportunities and has lined up, what could be, a transformational drilling programme in proven areas where it has a great deal of expertise. This is being crammed into H2 2018. Basically, it's crunch time.

Will it succeed? Considering the number of wells that are planned, their locations and the prospective resources being targeted, I believe it will be successful. At current rates of depletion, it has something like seven years' reserves – these need to be replenished. I would argue that with higher levels of reserves coupled with higher levels of production, the company may well be re-rated by the market. And, of course, it's a fully funded programme with oil at US$45 per barrel. That said, there are upcoming Colombian Presidential elections due to be held on 25th May. But the company appears to feel confident that the peace process will hold.

Taking a closer look at its substantial shareholders, we can see the likes of Fidelity and Legal and General. I suspect that their patience may be wearing very thin. The Board owns something like 4% of the company and has been given a free rein. If they do not deliver very soon, I would guess they will be out of their jobs and their overly generous remuneration packages. That means a new Board and possibly a very close look at exactly what their predecessors did with the money. A forensic accounting approach could be on the cards. After all, the institutions have a lot to lose – both reputationally and financially. Put simply, the Board now has to prove its worth.

Incidentally, it recently announced a financing arrangement with Shell that amounts to payment up front. The US$35 million working capital facility represents a major saving for the company, which is still debt free. The latter appears to be keen to be involved with the development of the company.

Yes, I think that, at long last, it's about to move to another level. Both the Board and the institutional investors have much to lose and also much to gain.

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Edward John Canham 31st May '18 25 of 42

Huge sell trade today - 26m shares.

Any thoughts?


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clarea 31st May '18 26 of 42

In reply to post #368724

Unsure Phil about 8 x the normal vol so maybe the big seller is done or someone knows something either good or bad guess we will have an rns next day or so.

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bsharman 1st Jun '18 27 of 42

In reply to post #368724

Hopefully Rex Harbour has finished selling ! I wonder who bought ?

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LongValue 1st Jun '18 28 of 42

In reply to post #368724

The very high level of trading volume appears to be the result of Amerisur being dropped from the MSCI Global Small Cap Index. The relegation was announced on 14th May with effect from 31st May. So it's not a big surprise. But it obviously reduces demand for the stock from index-tracking funds.

It might be worth bearing in mind that the company will be drilling up to 14 wells by the year-end and is targeting around 22.2 MMBO. The programme is due to commence within weeks. Should it be successful, I suggest that there will probably be a re-rating. In which case, it will find itself back in the MSCI Global Small Cap Index. And the tracker funds will be compelled to buy. At the end of the day, it comes down to the success or otherwise of the drilling campaign.

As a slight aside, it's on track to complete the building of the re-pumping station at Chiritza in Ecuador in October 2018. This will increase its guaranteed minimum flow through the Ecuadorean pipeline to at least 9,000 BOPD. In my opinion, the company clearly believes that it's about to significantly increase its production.

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Whitbourne 12th Jun '18 29 of 42

In reply to post #365849

Thank you for an excellent summary LongValue. I am not currently a holder of Amerisur Resources (LON:AMER) but contemplating dipping my toe in, after recent falls on the back of operational difficulties (water ingress and drilling delays) which I think are overdone. I am always amazed at how the market wipes 10% or 20% off the value of a company based on one month's news, which is just noise really.

Anyway, I thought you and others would like to see this recent article on Research Tree (you need to register but then it's free) from the much-missed Naked Fund Manager, who last posted about a year ago. It's good to have him back... and he raises many of the same points that you did.

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LongValue 13th Jun '18 30 of 42

In reply to post #373234

As lawyers are often keen to point out, at the end of the day it comes down to the totality of the evidence. Amerisur Resources (LON:AMER) is strongly cash generative, a low-cost oil producer, debt free and now has an array of opportunities. On balance, I think the odds of success are in its favour. And something that is easy to forget is that it's drilling on its doorstep – territory that it knows very well. It also has the capacity to rapidly monetise any discoveries.

By the way, that was a very good piece by the Naked Fund Manager. The only area that I disagree on is in respect to the performance of the management. Their rewards, in my view, should have been much more closely tied to total shareholder returns, which have been poor for long-term investors.

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Whitbourne 14th Jun '18 31 of 42

In reply to post #373549

Yes, I agree with "On balance, I think the odds of success are in its favour" (it reminded me of the Hunger Games trilogy which is perhaps not the best analogy!) I am now long Amerisur Resources (LON:AMER) .

This question of boardroom rewards is tricky. You want good people and if they are good, they could probably command high salaries in a larger company. So in a relatively small E&P business, board remuneration ends up as quite a high proportion of your overall cost base whereas in Shell or BP, even though the directors are paid far more their salaries are negligible in the context of the company's finances overall.

I do agree that the key thing is for the directors' rewards to be aligned with long-term shareholder interests, so that you don't get a position where the board members are doing well against the metrics they have been set (and are rewarded accordingly) at the same time as long-term holders are suffering from negative returns.

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LongValue 14th Jun '18 32 of 42

In reply to post #374249

The results of the forthcoming election may prove a major tipping point not just for Amerisur but for the Colombian oil industry in general. Again, “On balance” it looks quite likely that Duque, a pro-business candidate will win. By Monday evening we should know the answer. If he does win, I would suggest that it will underpin Amerisur's development. The flipside is if he loses to Petro, a candidate who basically wishes to reduce the country's dependence on oil, there is a considerable downside. I get the impression that Amerisur, along with many other oil companies, has pushed back its plans until after the election results. Understandable but rather frustrating.

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Zoiberg 5th Aug '18 33 of 42

Here's some good on the ground reporting from the BBC on the war against cocaine. In short, it shows that the FARC have been replaced by the big drug gangs as the major producers of coca.

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LongValue 6th Aug '18 34 of 42

In parts lawless, it may be, but the situation in Colombia has clearly improved over, say, the last five years. And Amerisur Resources (LON:AMER) is a long-standing operator that has produced oil even when the civil war was raging. That said, my main concern is not the security issue; it's the management issue. The company is cramming an extensive drilling programme into a very narrow time frame. There seems to be serious delivery issues and it's unclear how much focus the Directors have on the day to day running of the business. Basically, in my view, the company needs a strengthened Board and new leadership.

Having pointed out its deficiencies, I still think that this is an undervalued business that is yet to reach its full potential. With oil at its current price, its cash netback per barrel is approaching US$55. Current production is just over 5,000 BOPD – a major producing well is off production and is now undergoing a workover. And of course, there is the wide spectrum of fully funded (With oil at US$45 per barrel) near-term drilling opportunities.

Flushed with cash, I suspect that management is now under pressure to return at least some of this money to shareholders via a dividend. Should that happen then I think that a significant re-rating could be on the cards.

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Housemartin2 6th Aug '18 35 of 42

In reply to post #388454

'Flushed with cash, I suspect that management is now under pressure to return at least some of this money to shareholders via a dividend'

Do you think so ? I thought the end game for these small E&P oil & gas companies was to discover and get into production enough to create a valuable asset and be taken over by a much bigger company. Given the low level of exploration in the last few years by the Majors, I thought that market was fast approaching.

Just IMHO - based on less knowledge that you though.

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LongValue 7th Aug '18 36 of 42

That's a very valid point. Build up the business and sell it on. However, in this case, I am unsure as to how practical that strategy is. For starters, most large oil companies have substantial fixed overheads. There are projects that are simply of no interest to them due to the scale. Overseeing fields in remote locations with scattered wells that produce in total less than, say, 5000 BOPD probably does not make economic sense for a major outfit.

Sure, if Amerisur Resources (LON:AMER) makes a large scale discovery then selling the company to a big operator who can exploit the situation is viable. But with its current asset base, I am not sure who will buy it. After all, the company has been listed for some 11 years and no one, thus far, has made a bid. It already has substantial and varied assets therefore further acquisitions for cash seem unnecessary. It has not fully developed what it already owns.

Incidentally, paying a dividend does not prevent the company from growing organically. It also, in my view, imposes a good financial discipline on the management as it makes their actions accountable should the dividend need to be cut or abandoned. Although difficult to prove, I suspect that it forces management to pay itself more in line with the company's performance. How John Wardle, Amerisur's CEO, got away with his pay awards is completely beyond me.

As a slight aside, I have noticed that most small resource companies operate to the same formula with the implicit promise that the company will be sold at some point in the future. Therefore, paying a dividend is unnecessary. At the same time, the Directors of these companies are generally very well rewarded from the start. Their rewards are frontloaded while total shareholder returns, if they materialise at all, are at the backend.

And just a final thought, this morning a bid was made for Harvey Nash (LON:HVN), a recruitment firm. Even though the stock price has risen over 45% since the start of the year and it's up over 16% today as I write, it still yields a little under 4%. Paying a dividend does not seem to discourage takeovers.

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Housemartin2 7th Aug '18 37 of 42

Good point about the remoteness of the geography. I think implicit in your response is that Amerisur is never going to become a significant producer sufficient to merit the attentions of Big Oil. Interesting that I have not actually thought about how big I feel Amerisur could become (just 'bigger than now' )

Not that I have anything against divis - love 'em really - and it does impose some discipline on management and increase visibility. This can become a virtuous circle.

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LongValue 7th Aug '18 38 of 42

The company is cash rich and has a plethora of near-term opportunities. At the same time, it has been adversely impacted by all types of issues – everything from the weather to Colombia's recent elections. I think that it's undervalued by the stockmarket and the easiest way of changing that is to start paying dividends. It would underpin the share price and demonstrate its ongoing cash generating ability.

Big US companies such as Facebook may not pay dividends but they can point to rising stock prices – investors can sell part of their holdings to obtain income. Amerisur and many other resource stocks are not in that position. In my view, it's a major flaw in AIM's resource sector. Too many companies are predicated on being bought out.

And why should a resource company be viewed differently from any other business? In an interview with the Wall Street Journal on 6th August, John Thornton, Executive Chairman of Barrick Gold, and a former President of Goldman Sachs with no background in mining outlined his ideas. At the fore was a focus on free cash flow and not the production of more Gold. Under his leadership, the company has been turned around. In 2014 it had some US$13 billion in debt. It's looking at reducing that to around US$5 billion by the year-end. But he appears to be running it as a business first and a resource company second. And yes it pays dividends.

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gus 1065 13th Sep '18 39 of 42

Interim results out for Amerisur Resources (LON:AMER) this morning.

Some of tomorrow’s jam seems to have finally arrived in terms of increased production, cheaper operating costs from the OBA pipeline coming on stream and with higher prevailing oil and gas prices it’s finally starting to make some decent profits. Still seems unloved by the wider market but possible grounds for cautious optimism.


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LongValue 13th Sep '18 40 of 42

Yes, “Cautious optimism” seems quite appropriate. The company's drilling campaign is being delivered late. That said, it now seems to have gained some serious traction. Most notably, it recently spudded its first well of this campaign, Pintadillo-1. Should this well be successful, the company is planning to drill a further two wells at the same location (The Platanillo N Sands). In total, it's targeting some P50 resources of 11.44 MMBO at this one spot alone. Oil from these wells will then be pumped through the company's pipeline (Basically low-cost production).

The spudding of the Indico-1 well on CPO-5 is due in the next several weeks targeting P50 resources of 10.3 MMBO. This should be followed by two additional wells. The only concern I have with this is that its partner, ONGC, seems to be in no hurry. It appears to have no sense of urgency. But according to today's RNS the rig has been mobilised and is on its way to the target area.

Importantly, the company has completed building the Chiritza re-pumping station in Ecuador. This raises the production that it can run through the RODA pipeline in Ecuador up to 9,000 BOPD. So oil from its cluster of assets close to its OBA pipeline can be delivered to market relatively cheaply (Its transport costs are now just US$3.5 per barrel). What today's RNS did not mention was that Amerisur's cost of building the re-pumping station will be offset against its fees for using the RODA pipeline in Ecuador. So effectively it increases its throughput at no extra cost, aside from management time.

On the downside, there seem to be issues with Put-8, in which it has a 50% non-operating interest. It has been informed by its operating partner, Vetra, that due to organisational changes at Ecopetrol, the Colombian state oil company, its drilling of the Miraparriba-1 well is “Under review”. This well is targeting some 4.4 MMBO gross. The implications are unclear – it may simply be an administrative delay. Ironically, Amerisur views it as a low-risk prospect – it's covered by 3D seismic. But the outcome should be known in the next few weeks.

In total, its fully funded drilling campaign through to 2019 is targeting some 131.53 MMBO and it's underway with results coming through shortly. And that's underpinned by some good numbers: Revenue is up 93% to US$67.9 million and it's sitting on some US$49.3 million in cash (H1 2017: US$29 million).

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LongValue 3rd Oct '18 41 of 42

Certainly a long time in coming, the Pintadillo-1 well has proved to be a success albeit in a slightly different way than was originally envisaged. It will immediately add some 590 BOPD to production. That will go through the company's OBA pipeline and so is low cost and high netback output. Amerisur estimates that the well will have a payback period of one year. It will also add significantly to its reserves.

The focus now seems to be moving on to the drilling of Indico-1 on its CPO-5 acreage. The civil works have been completed and the rig mobilised. Should this be successful, a further two wells are planned to be drilled at the same location. Considering that the first well, Mariposa-1, is still on long-term testing but has managed to produce around one million barrels of oil in less than a year, the upside could be substantial. The company is targeting 5.1 MMBO net to Amerisur.

Underpinning the campaign is the low cost of drilling. It's fully funded at US$45 per barrel. The cost of drilling the three wells on CPO-5 is US$6 million.

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LongValue 25th Oct '18 42 of 42

After much reflection, I recently sold my holding in Amerisur. Why? A chronic failing of management. With no debt, high levels of cash generation and multiple drilling opportunities, I expected it to be a good deal further down the line in terms of production than it now finds itself.

Peace in Colombia and a relatively high price of oil presented the company with a window of opportunity that it could not climb through. Of all the variables that might be considered, the one that I failed to grasp was inactivity. I simply assumed that it would drill considering its publicly announced plans. In its interim report for the period ended 30th June 2017 and published in September of that year, it laid out its intention to drill up to 16 wells by the end of 2018. Thus far, it has only drilled one, Pintadillo-1. Depending on interpretation, the results that came in were far less than expected. The next well, Indico-1 is due to be spudded within days. However, this is on its CPO-5 acreage where it has a 30% non-working interest.

Considering just how tired its core Putumayo assets appear to be, much is riding on the success of Indico-1. This is not a gamble that I am prepared to take. The strategy that I bought into mitigated the risk through being a varied campaign with many opportunities.

With what I believe to be a bloated and over-compensated Board of eight people, many with international business interests and without a clear focus on the task at hand, I became disillusioned with the management. There appeared little or no alignment of interests between the Board, owners of around 4% of the business, and the rest of the shareholders. If there was a final straw, it was probably the company moving from monthly production reports to quarterly. The next production report will be in January 2019. It strikes me as clearly wanting to limit the flow of information. Incidentally, I would have thought that monthly production figures would create trading activity and encourage liquidity for the stock.

Basically, I think that it could, with some luck with its CPO-5 interests still deliver. But it's a risky proposition based largely upon the success or otherwise of one well that is about to be drilled. And finally, it's difficult to see the way out for investors. It has, thus far, resisted attempts to persuade it to pay a dividend. And there seems no buyer on the horizon. It may be a model that works for the Board but it doesn't seem to work for investors.

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