Touchstone Exploration Inc. (TSX: TXP) is an international upstream oil and gas company currently active in the Republic of Trinidad and Tobago. The group is primarily engaged in the exploration, acquisition, development, and production of hydrocarbons in Trinidad. The company holds interests in producing and exploration properties in southern Trinidad, which is approximately 90,000 gross acres of exploration and development rights. 

Key Investment Rationale:

• Solid Mid-term and Long-term Guidance: The management came up with a promising outlook, wherein it would focus on completing the Cascadura production facility which was initially designed for 90 MMcf/day and is expandable up to 200 MMcf/day. This will increase the initial production of more than 9,200 boe/day. The group also continues phase two exploration prospects at Ortoire, which would enhance the company’s operations in the coming days.

• Reported higher Operating Netback: In FY21, and Q4FY21, the company reported realized sales price of USD 60.25/bbl and USD 66.25/bbl, respectively, which grew by 57% and 77%, respectively on y-o-y basis. Operating Netback is calculated by adding of all input costs associated with bringing one unit of oil to the marketplace and deducting from the realization price earned by the company. Hence, higher the operating netback, higher the profitability. Notably, in FY21 and Q4FY21, the company’s operating netback stood at USD 26.55/bbl and USD 29.96/bbl, respectively, as compared to USD 14.49/bbl and USD 13.90/bbl, respectively as compared to pcp.

• Rising Uncertainty may benefit Commodity Prices: Crude oil prices touched record highs during the month of March 2022, due to the ongoing geopolitical tensions which caused supply-chain disruptions coupled with record low oil inventory. Moreover, any added oil sanctions on Russia would impede the Russia’s oil demand, resulting mismatch in supply demand scenario. Hence, these factors might lead to elevated crude oil price in the coming months, which would subsequently benefit the company’s realization price. Notably, daily crude oil sales averaged at 1,382 bbls/day in January 2022 with a realized price of USD 71.68/bbl and improved to an average of 1,384 bbls/day in February 2022 with a realized price of USD 81.30/bbl.

• Consistent Growth in Oil Reserves: The company reported a consistent growth in its reserve base, supported by constant additions of new exploration regions, which is encouraging. Notably, the company has tripled its reserve base in the last three years, which is phenomenal and is expected to support the upcoming operations.

Source: Company Presentation

• Impressive Liquidity profile: In FY21, the company reported its quick ratio and current ratio of 1.32x and 1.33x, respectively, as compared to the industry median of 0.87x and 1.04x, respectively. This indicates that the company has sufficient current assets to meet its current liabilities.

• Industry Beating Margin profile: The company reported higher profitability margins in FY21, supported by impressive cost management. In FY21, the company posted gross margin and operating margin of 66.1% and 79.4%, respectively, as compared to the industry median of 56.5% and 25.9%, respectively. Moreover, the company’s net margin stood higher at 28.1% in FY21, as compared to the industry median of 11.3%.
  

Risks associated with the Investment:

The company’s operations might be impacted due to lower commodity prices, currency volatility, high input costs on account of rising inflation, etc. 

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Reports)

• Higher revenue: In FY21, the company reported its total revenue of USD 20.3 million, as compared to USD 14.2 million in FY20. The company reported higher petroleum sales supported by elevated commodity prices during the period.

• Decline in Total expense: The company witnessed a higher operating expense along with a rise in the general & administration expenses. Meanwhile a lower net finance costs and reversal of impairment charges supported the profitability. Earnings before income taxes stood at USD 14.5 million, as compared to a loss of USD 17.0 million in FY20.

• Net Income: The company reported net earnings of USD 5.71 million, as compared to a net loss of USD 11.03 million in FY20. This was due to higher operating expenses as mentioned above, partially offset by an income tax expenses v/s income tax recovery in FY20.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 30.05% stake, Premier Asset Management Ltd and North Energy Capital AS are the major shareholders in the company with an outstanding position of 7.65% and 6.02%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

 Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

In FY21, the company’s funds from operations grew to USD 4.10 million from USD 0.26 million in FY20, supported by a net profit of USD 5.7 million v/s a net loss of USD 11.0 million in FY20. This is expected to support the company’s upcoming capital investments. We expect the above momentum to continue due to the company’s focus on the multiple exploration opportunities on the gas rich Ortoire block.

We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Leucrotta Exploration Inc, Crew Energy Inc etc. for this purpose. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of TXP at the last closing price of CAD 1.51 on April 26, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 26, 2022). Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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