Touchstone Exploration Inc. (TSX: TXP) is an international upstream oil and gas company currently active in the Republic of Trinidad and Tobago. It is primarily engaged in the exploration and the acquisition, development, and production of hydrocarbons in onshore reservoirs in Trinidad.

Key Highlights:

• Increased total and average daily production: During Q1FY22, the company reported an increase in total crude oil production of 125,625 bbls (barrels) as compared to the total production of 116,730 bbls in pcp. Further, the average daily production also increased to 1,396 bbls/d (barrels/ day) in Q1FY22 vs 1,297 bbls/d in Q1FY21. The increase in the average daily production was primarily because of the additional production for the three wells drilled in the Q4FY21 which contributed to aggregate field estimated crude oil production of 149 bbls/d in the reported period (Q1FY22)

Source: Company presentation

• Increased revenue: The company witnessed a surge in the total revenue to USD 6.91 million in Q1FY22 against the total revenue of USD 4.30 million in Q1FY21. The sales from the petroleum segment went to USD 10.49 million in the Q1FY22 against the sales of USD 6.12 million in the pcp. The royalties payments increased to USD 3.58 million in the same period (Q1FY22) when measured against USD 1.84 million in Q1FY21.

 

• Improving profitability margins: In Q1FY22, the company reported an increase in the production which was clubbed by the higher commodity average realized prices, resulting in the improved profitability margins when compared to Q1FY21.

Source: Refinitiv, Analysis by Kalkine Group

• Strong liquidity profile: During Q1FY22, the company's quick ratio stood at a higher level of 1.23x, as compared to the industry median of 0.92x. Further, the company’s current ratio was stated at 1.23x for Q1FY22, against the industry median of 1.01x. The higher quick ratio and current ratio is an indication that the company is capable to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The company is vulnerable to any unfavorable sustained movement in the commodity prices especially of energy, along with currency risk, economic slowdown, etc can overall hamper the company’s financial health.  

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing

• During Q1FY22, the group reported an increase in the total revenue to USD 6.91 million against USD 4.27 million during Q1FY21. The increased sales from the petroleum segment were slightly offset by the higher royalties payment which impacted rise in the overall revenue in Q1FY22.

 

• The total expenses rose to USD 6.29 million in Q1FY22 when compared to the total expense of USD 4.41 million in Q1FY21. The operating and general & administrative expenses increased which majorly resulted in the surge in total expenses in Q1FY22.

 

• The group narrowed down its net losses to USD 236 million during Q1FY22 as compared to the net losses of USD 460 million in Q1FY21.

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group reported an increase in the total revenue to USD 6.91 million in Q1FY22 as compared to the total revenue of USD 4.30 million in Q1FY21, which was supported by the increase in the total and average daily production along with the higher commodity realized prices. Also, the company saw an uptick in the funds flow from operations to USD 1.42 million in the Q1FY22 as compared to USD 0.53 million in the Q1FY21. During Q1FY22, the company generated an operating netback of USD 37.83/ bbl, which is almost 72% higher than USD 21.98 in Q1FY21, which is a key positive.  On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is currently trading at 2.5x as compared to the industry (energy) mean of 4.1x, suggesting the stock is still undervalued. We have considered  Crew Energy Inc., Surge Energy Inc., etc as the peer group for the comparison.

 

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock of TXP at the last closing price of CAD 1.50 on June 6, 2022. Additionally, the 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 of June 6, 2022). Analysis by Kalkine Group

Note: The reference data has been partly sourced from REFINITV

Technical Analysis Summary

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