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Phoenix Global Resources: Upstream Argentine promise with political overhang

Publication Date: 15 Aug 2019 - By Samuel Smith By Samuel Smith
Actionable
Differentiated

Equity Fundamental Equity Latin America UK Energy Metals and Mining

Phoenix Global Resources plc (LON:PGR) operates in the upstream oil and gas sector with a concentrated focus on Argentina’s Vaca Muerta shale formation, where it invests in drilling activity to increase resources, reserves, and production.

Vaca Muerta is unique because it is the only production shale formation outside North America and has attracted significant interest from major energy firms such as Total, BP, Chevron, ExxonMobil, Qatar, Petroleum, Petronas, Shell and Equinor. 

Phoenix Global Resources has a large scale operation in the region with 560,000 net Vaca Muerta acres covering approximately 7.5% of the formation. Argentina is viewed as an opportunistic location for this type of investment as political change continues to drive reforms towards a more pro-business agenda but currently appears under threat following recent political reversals for incumbent President Mauricio Macri. 

Nonetheless, economic imbalances are normalising, capital markets are increasingly deregulated, equity markets are growing, and foreign direct investment and portfolio flows are increasing.

A big reason why management views Vaca Muerta as such a promising investment is due to the fact that Argentina has had an established oil and gas industry for almost a full century. This means that there are skilled and trained personnel in the country with a deep understanding of the assets involved in the operation along with a developed oilfield service sector involving international and domestic players.

Additionally, the national government is on board with the industry, actively encouraging investment and deregulating oil prices. Furthermore, local governments have introduced supportive regulations for unconventional oil and gas along with a proactive permitting process.

The company operates 3 main basins in Argentina: Cuyana, Neuquina, and Austral. These combine to account for 1% of Argentina’s total production. The company plans to create shareholder value by executing on four main strategic priorities: (1) Controlling and consolidating operations across all three basins; (2) Exploring and developing the territory; (3) Achieving profitable production; and ultimately (4) Realising value for investors through production, growth, and disciplined capital allocation. 

Phoenix Global Resources continues to strategically add additional acreage with exposure to Vaca Muerta and other unconventional formations and provide scale while consolidating their unconventional acreage position. 

Additionally, their exploration and development activity remains focused on appraising and developing their unconventional acreage as they apply the latest and best U.S. shale technologies and migrate their significant resource base to reserves. 

Conclusion: To improve production profitability, Phoenix Global is focusing on the highest margin production from conventional oil assets while balancing existing conventional production with unconventional developments.

The company is also using growth to drive economies of scale and synergies. Management is also using opportunistic inorganic growth through farm-ins, joint ventures, partnerships, and portfolio rationalisations to realize value for investors. The company’s balance sheet also remains strong, giving management plenty of liquidity to invest in its drilling operations and achieve greater economies of scale and synergies to drive profitability growth.

With the stock price trading at roughly one-third of 2017 highs and operational excellence having improved considerably since then, now may be an opportunistic time to buy with long-term objectives.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Samuel Smith

 

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