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Research: Energy & Resources
Kolibri Global Energy (KEI) reported Q224 results that saw double-digit increases across all financial and operating metrics on a y-o-y basis, with production and EBITDA up 37% and 40%, respectively. Sequentially, EBITDA fell 7%, while netback was 5% higher at US$40/bbl. KEI has started drilling three new 1.5-mile lateral wells, slated for completion in early Q4. If successful, these wells could potentially see an up to 1.5x increase in production rates and lead to a change in the field development plan. We have updated our valuation to US$6.9/share as we await more details about the performance of the new wells and KEI’s next steps. The potential change in field development strategy is yet to be priced in by the market.
Kolibri Global Energy |
Longer laterals are a potential game changer |
Results update |
Oil and gas |
19 August 2024 |
Share price performance
Business description
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Analysts
Kolibri Global Energy is a research client of Edison Investment Research Limited |
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Kolibri Global Energy (KEI) reported Q224 results that saw double-digit increases across all financial and operating metrics on a y-o-y basis, with production and EBITDA up 37% and 40%, respectively. Sequentially, EBITDA fell 7%, while netback was 5% higher at US$40/bbl. KEI has started drilling three new 1.5-mile lateral wells, slated for completion in early Q4. If successful, these wells could potentially see an up to 1.5x increase in production rates and lead to a change in the field development plan. We have updated our valuation to US$6.9/share as we await more details about the performance of the new wells and KEI’s next steps. The potential change in field development strategy is yet to be priced in by the market.
Year end |
Net revenue (US$m) |
EBITDA |
EPS* |
DPS |
P/E |
Yield |
12/22 |
37.6 |
28.9 |
0.47 |
0.0 |
12.8 |
N/A |
12/23 |
50.6 |
39.7 |
0.54 |
0.0 |
11.1 |
N/A |
12/24e |
61.6 |
46.8 |
0.57 |
0.0 |
10.5 |
N/A |
12/25e |
68.8 |
53.4 |
0.70 |
0.0 |
8.6 |
N/A |
Note: *EPS is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Q224 results
KEI’s Q2 results showed a strong increase in almost all operational and financial metrics on a year-on-year basis, with average production up 37% y-o-y to 3,128boepd and revenue increasing by 41% to US$13.9m. Despite the high double-digit increase in both opex and G&A (albeit from a low base), EBITDA grew 40% y-o-y to US$9.9m (Edison). The results were affected by the reduction in realised gas and natural gas liquids (NGL) prices, yet KEI achieved a 2% q-o-q increase in basket price, which partly offset a 5% fall in production and led to a 3% reduction in revenues. On the cost side, operating expenses fell by 6% q-o-q in absolute terms, while G&A increased 21%, driving EBITDA down by 7%. Despite higher unit costs, more favourable basket price drove operating netback 5% higher to US$39.6/boe.
Longer lateral wells could change field economics
KEI announced it has started drilling its three Alicia Renee wells that will have 1.5mile lateral lengths, compared to the 1 mile before. While not without risks, a 1.5x increase in horizontal well length could lead to a similar increase in production at a reduced capital cost per foot. KEI may revise its current field development plan should the three wells be successful. Having updated our estimates for FY24, we await more details about initial production rates from the new wells, which are expected to be completed in early Q424, and the potential subsequent update to the reserves statement.
Valuation: New drilling is yet to be priced in
We have slightly increased our valuation of KEI from US$6.8 to US$6.9/share (C$9.5/share). While the new approach to drilling and potential change in field development plan still lack clarity, if implemented, it could result in significant improvements in well economics, bringing forward cash flows and increasing returns. This is especially important given the current commodity price pressures. These potential developments are not yet reflected in our longer-term estimates and we believe are yet to be discounted by the market.
Q224 results review and changes in estimates
KEI’s Q2 results showed a strong increase in almost all operational and financial metrics on a yearon-year basis. Average production was up by 37% y-o-y to 3,128boepd, while revenue increased 41% to US$13.9m. Despite the high double-digit increase in both opex and G&A, albeit from a low base, EBITDA grew 40% y-o-y to US$9.9m.
Sequentially, average production was down by 5% but this reduction was partly offset by slightly higher realised basket price, resulting in revenues sliding 3% q-o-q. Despite a visible reduction in realised gas and NGL prices in Q2, which is likely a function of market weakness, the overall basket price increased 2% q-o-q, with oil contributing 94% to gross revenues compared to a 74% share in quarterly production. On the cost side, operating expenses fell by 6% in absolute terms, while G&A increased 21%, driving EBITDA down by 7% (3% on a company basis). Production expenses in Q2 were still affected by the reassessment of prior year’s gathering and processing costs, which added US$0.5/boe, while well reworks contributed another US$0.3/boe. Adjusted for these items, Q2 operating and compressor costs were US$7.7/boe. Despite the increase in unit costs, the more favourable basket price drove operating netback 5% higher to US$39.6/boe. The company ended the quarter with a net debt of US$34m, compared to US$31m at end Q124.
Exhibit 1: Q224 results summary
US$m |
Q224 |
Q124 |
q-o-q (%) |
Q223 |
y-o-y (%) |
Average production, boepd |
3,128 |
3,305 |
-5.3 |
2,415 |
36.9 |
Realised basket price, US$/boe |
62.1 |
60.7 |
2.4 |
58.0 |
4.6 |
Net revenues |
13.9 |
14.3 |
-2.6 |
10.1 |
41.2 |
Opex |
2.1 |
2.2 |
-6.1 |
1.1 |
95.8 |
G&A |
1.5 |
1.3 |
20.8 |
1.0 |
23.9 |
EBITDA - Edison |
9.9 |
10.6 |
-7.3 |
7.6 |
40.3 |
EBITDA - Company |
10.0 |
10.4 |
-3.2 |
7.6 |
35.6 |
Netback, US$/boe |
39.6 |
37.8 |
4.6 |
38.6 |
-2.1 |
Net debt |
34.2 |
31.0 |
10.4 |
18.1 |
71.1 |
Source: KEI, Edison Investment Research
Longer lateral wells could transform field economics
In tandem with the results announcement, KEI reported it has started drilling three Alicia Renee wells. These wells will have lateral (horizontal) lengths of 1.5 miles compared to 1 mile for previous wells. While not without their risks, the longer laterals, in general, allow for better contact with hydrocarbon formations, improving recovery and increasing production rates. Typically, production benefits per foot diminish gradually with longer lateral lengths. However, for smaller lateral increases (ie moving from 1 to 1.5 mile, compared 2- or 3-mile laterals) incremental production gains are likely to be more pronounced. KEI believes that a 1.5x increase in lateral length could bring a similar increase in production but internally conservatively assumes a 1.35x improvement per well. We have updated our FY24 estimates to reflect the new approach to drilling. It is likely that the company may revise its field development plan should the new wells be successful. We await more details on the initial production rates from the wells, which are expected to be completed in early Q4, and the potential subsequent update to the reserves statement.
Overall, we now expect slightly higher average production of 3,468boepd in FY24, with Q3 performance likely to be flat-to-slightly lower, followed by a visible increase in Q4. While we now assume five well completions this year (from six before), we expect higher production rates from the new wells to compensate for the reduction in the number of completed wells and potentially result in much higher exit rates for the year. For now, we assume that the Alicia Renee wells will have initial 30-day production rates of c 800boepd at a capital cost of c US$7.5m per well. While opex is mostly variable, we could see some reduction in unit costs on the back of higher production rates.
Despite slightly higher production estimates, due to a number of small adjustments to pricing and costs, our FY24e EBITDA is now c 5% lower at US$47.2m. Although we keep our FY25 well completion and drilling projections unchanged for now, the next year could shape very differently for KEI should it adopt a new development approach. We also note that the company currently sits on two drilled but not yet completed Caney wells, which could also be fracked next year.
Exhibit 2: Estimates revisions
FY24e |
FY25e |
|||
US$m |
New |
Old |
New |
Old |
Average production (boepd) |
3,468 |
3,402 |
3,964 |
3,719 |
Realised basket price (US$/boe) |
62.6 |
64.7 |
61.0 |
61.6 |
Net revenues |
62.2 |
62.7 |
69.2 |
65.2 |
EBITDA |
47.2 |
49.9 |
53.8 |
52.0 |
EPS (US$) |
0.58 |
0.69 |
0.70 |
0.71 |
Net debt/(cash) |
35.1 |
29.8 |
28.0 |
22.6 |
Source: Edison Investment Research
The above changes to production and earnings estimates increase our valuation slightly of KEI from US$6.8 per share to US$6.9 per share (C$9.5/share) at an unchanged weighted average cost of capital of 10%. While the new approach to drilling and potential change in field development plan still lack details and visibility, if adopted it could result in significant improvements in well economics, bringing cash flows forward and increasing internal rates of return. This is especially important given the volatility and downward pressures on the oil price. These potential developments are not yet reflected in our longer-term estimates and we believe are yet to be priced in by the market. We are waiting for more details from KEI to update our model and valuation.
Exhibit 3: Financial summary
US$'000s |
2021 |
2022 |
2023 |
2024e |
2025e |
||
Dec YE |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
19,128 |
48,376 |
64,390 |
79,228 |
88,311 |
Royalties |
(4,156) |
(10,816) |
(13,793) |
(17,113) |
(19,075) |
||
Net revenue, including other income |
14,974 |
37,606 |
50,599 |
62,174 |
69,236 |
||
Production costs |
(2,962) |
(4,904) |
(5,895) |
(8,862) |
(9,405) |
||
SG&A |
(2,697) |
(3,494) |
(4,243) |
(5,190) |
(5,354) |
||
Share based payments |
0 |
(277) |
(790) |
(900) |
(700) |
||
EBITDA |
|
|
9,315 |
28,931 |
39,671 |
47,222 |
53,778 |
D&A |
(3,594) |
(7,581) |
(15,009) |
(15,774) |
(17,011) |
||
EBIT |
|
|
5,721 |
21,350 |
24,662 |
31,449 |
36,767 |
Exceptionals |
71,403 |
0 |
0 |
0 |
0 |
||
Net interest |
(906) |
(1,067) |
(2,366) |
(3,195) |
(3,435) |
||
Other |
(5,216) |
(3,640) |
343 |
(745) |
(100) |
||
Profit Before Tax (norm) |
|
|
(401) |
16,643 |
22,639 |
27,509 |
33,232 |
Reported PBT |
71,002 |
16,643 |
22,639 |
27,509 |
33,232 |
||
Tax |
0 |
0 |
3,359 |
6,877 |
8,308 |
||
Reported profit after tax |
71,002 |
16,643 |
19,280 |
20,632 |
24,924 |
||
Normalised profit after tax |
|
|
(401) |
16,643 |
19,280 |
20,632 |
24,924 |
Average Number of Shares Outstanding (m) |
23.3 |
35.6 |
35.6 |
35.6 |
35.6 |
||
EPS - normalised (US$) |
|
|
(0.02) |
0.47 |
0.54 |
0.58 |
0.70 |
EPS - reported (US$) |
3.05 |
0.47 |
0.54 |
0.58 |
0.70 |
||
Dividend, c |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
147,114 |
176,602 |
217,351 |
236,617 |
255,081 |
PP&E |
147,076 |
176,554 |
216,161 |
235,427 |
253,891 |
||
Rights of use assets |
38 |
48 |
1,190 |
1,190 |
1,190 |
||
Current Assets |
|
|
9,902 |
7,480 |
6,928 |
8,687 |
16,580 |
Cash |
7,316 |
1,037 |
598 |
695 |
8,155 |
||
Receivables |
1,999 |
5,773 |
5,492 |
7,154 |
7,588 |
||
Deposits and prepaid expenses |
587 |
670 |
838 |
838 |
838 |
||
Current Liabilities |
|
|
(6,079) |
(14,049) |
(18,844) |
(13,538) |
(14,270) |
Payables |
(3,145) |
(12,596) |
(17,648) |
(12,139) |
(12,497) |
||
Loans |
(1,000) |
0 |
0 |
0 |
0 |
||
Leases |
(43) |
(32) |
(1,068) |
(1,271) |
(1,645) |
||
FV of commodity contracts |
(1,891) |
(1,421) |
(128) |
(128) |
(128) |
||
Long Term Liabilities |
|
|
(17,849) |
(19,835) |
(31,740) |
(36,540) |
(36,540) |
Debt |
(15,866) |
(17,799) |
(29,612) |
(34,412) |
(34,412) |
||
Leases |
0 |
(17) |
(162) |
(162) |
(162) |
||
Other |
(1,983) |
(2,019) |
(1,966) |
(1,966) |
(1,966) |
||
Net Assets |
|
|
133,088 |
150,198 |
173,695 |
195,226 |
220,851 |
Shareholders' equity |
|
|
133,088 |
150,198 |
173,695 |
195,226 |
220,851 |
CASH FLOW |
|||||||
Operating Cash Flow |
71,002 |
16,643 |
19,280 |
20,632 |
24,924 |
||
D&A |
3,594 |
7,581 |
15,009 |
15,774 |
17,011 |
||
Working capital |
551 |
(2,140) |
1,714 |
(7,171) |
(75) |
||
Other |
(68,844) |
(42) |
2,644 |
1,010 |
800 |
||
Net operating cash flow |
|
|
6,303 |
22,042 |
38,647 |
30,244 |
42,659 |
Capex |
(696) |
(37,097) |
(53,173) |
(33,947) |
(34,200) |
||
Lease payments |
(74) |
(54) |
(903) |
(1,000) |
(1,000) |
||
Other |
4,252 |
8,016 |
3,305 |
0 |
0 |
||
Net Cash Flow |
9,785 |
(7,093) |
(12,124) |
(4,703) |
7,459 |
||
Opening net debt/(cash) |
|
|
19,939 |
9,593 |
16,811 |
30,244 |
35,150 |
FX and other |
561 |
(125) |
(1,309) |
(203) |
(375) |
||
Closing net debt/(cash) |
|
|
9,593 |
16,811 |
30,244 |
35,150 |
28,065 |
Source: Kolibri Global Energy accounts, Edison Investment Research
|
|
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