Oilex updated investors with its December 2018 quarterly report yesterday which set out the clear progress made over the last three months. The key element to us was news that the company has well-advanced plans for the 2019-20 (April 2019 – March 2020) work programme and budget (WP&B) which involve the drilling of up to two vertical wells at a cost of $3m per well and, most importantly, setting expectations for an imminent resolution to the long running GSPC payment dispute.

Once the WP&B has been approved, and of course subject to securing the necessary funding, Oilex plans to order the long lead time items. The priority will be to test the drilling and stimulation recommendations from a recent Baker-Hughes-GE study in the EP-IV zone. This study seems to have identified the problems in the old wells and now provides a blueprint for future success. It is possible that the first well could be drilled as early as Q3 2019 given that a lot of the preparatory work has already been completed. Dilution to equity holders should be de minimis, with a new JV partner expected to farm into the asset with Oilex retaining what we estimate to be a 30% to 45% stake in the vast and well-regarded Cambay block. Given success, a horizontal well would probably be drilled subsequently.

Currently, investors’ attention is really focused on the expected shape of a settlement with the Gujarat State Petroleum Corporation (GSPC). Oilex’s major asset is of course the Cambay Field project, located onshore in the state of Gujarat, which historically has been one of India’s most prolific hydrocarbon provinces as well as being a leading centre of industrialisation. The company has a 45% stake in this project and is the operator, with the remaining 55% interest held by joint venture partner GSPC. The well known problems have arisen principally due to the JV partner not meeting its share of costs.

2018 saw the team making a lot of headway in resolving a trying situation with its JV partner GSPC which owes the company just shy of US$3 million for past project expenditures. Progress has been such that by late-November 2018 Oilex was able to announce that GSPC and the company had entered into commercial negations to avoid the matter going to arbitration.  At present, discussions are continuing which are aimed at a potential commercial settlement in the next few weeks. This would set the scene for a drilling programme to proceed and the potential for a material re-rating in the equity.

Oilex has made an offer to GSPC, which is very typical for the industry, where the company would spend the money on drilling the wells and GSPC would have so called “back in” rights. If, GSPC does not contribute, a farmout deal is triggered. Following discussions with CEO Joe Solomon, we are expecting a resolution to this long running saga in February 2019. It is worth pointing out that Oilex still has the option to go back to the government to seek assistance in the resolution of this issue too should GSPC continue to drag this out (highly unlikely in our opinion).

There thus seems to be two likely outcomes regarding settling the GSPC matter, both of which we believe will be highly positive.

We have revisited our financial model to see the effect on valuations that these scenarios might create. In our blog comment of early November 2018, we attempted to place a valuation on Oilex based on these two scenarios. We have re-run that analysis using all the same assumptions but with a flat price now for Brent crude of US$65 per barrel (down from US$72 used in our earlier analysis) to remain conservative. Risked valuations are shown in the table below.

Scenario One is the receipt of US$3 million and the current 45% interest. Over the coming months we believe that the problems within the ownership of the Cambay Field PSC could be resolved followed by the emergence of a new joint venture partner emerging to provide the funding for the planned drilled program, a move which is likely to involve a farm-in deal. We have estimated that as a result, Oilex’s interest in the PSC could be reduced from 45% to 30%.

Scenario Two is gaining a 100% interest in the project. Once again, we believe that the stage is being set for the ushering of a new joint venture partner emerge which will likely provide the funding for the planned drill program through a farm-in deal. We have estimated that as a result, Oilex’s interest in the PSC may be reduced from 100% to say 70%.

Scenario One – Valuation

Scenario One – Per share valuations

Scenario Two – Valuation

Scenario Two – Per share valuations

As we can see, by any yardstick, the shares are inexpensive at the current price of 0.3p. Our own expectation is that a variant of Scenario’s (1) & (2) will occur with likely a waiving of the dollar sum owed and increasing the company’s stake to a majority position (and thus control). We initiated coverage on Oilex in November 2017 with a target price of 1.60p and a Conviction Buy stance. Our stance has not changed and arguably the upside could well be higher than we originally suggested post a resolution with GSPC and in the event of successful drilling. Buy.

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