Nostra Terra Oil & Gas (LON:NTOG) announced last week that the company became cash flow positive in February 2018, and that the expectation was that the company would remain cash flow positive for the remainder of the year. The company is hoping to achieve profitability for the full year. At the current market capitalization of around £5 million, can NTOG be considered a cheap share?
NTOG is an oil & gas company whose stated aim is to generate maximum return for its shareholders via investment into oil and gas assets. NTOG has 3 main sites in the USA and Egypt at the moment; 2 sites in Texas and one site in East Ghazalat – Western Desert. Let’s have a quick overview of each of the 3 sites:
Pine Mills
This site was acquired in Nov 2016 and is located in East Texas, US. The site is 100% owned by NTOG and is currently revenue generating. The site in April 2017 had reserves of $3.53m of oil. Since then, the company reported a 38% increase in reserves (an additional $1.34m in reserves). The company also reported $53k net operating income per month for this site in April 2017 (i.e the site is profitable). The company has also reported vast amounts of ‘possible reserves’ at the Woodbine-Wagoner oil “skirt” (possibly 1.39 million barrels of oil)
Permian Basin
This site is located in West Texas and was also acquired in Nov 2016. This site is 100% operated by affiliates although NTOG has a 53.25% working interest in the site. The company has recently started drilling at its ‘Twin Well’ location at this site and numbers have been very positive in Feb 2018. It was on the back of this drilling, that the company announced that it had become cashflow positive. The company also announced that there are 2 additional drill ready locations at the Twin Well location, one of which is already permitted for drilling.
East Ghazalat, Egypt
The company increased its ownership from 25% to 50% in 2017. However, there are several legacy issues caused by a former partner, that the company is now looking to have resolved. They have indicated that the situation is complex and they are hoping to reach a resolution to the issues before the year. However, my view is a pessimistic one for this site, I’m not expecting any production at the site in the near future
Now for a couple of stats on the company
- 313% increase in revenue to £549,000 for H1 2017 (vs £282,000 for FY2016)
- Market cap of £5 million
- Cash flow positive from Feb 2018
- NPV10 $5.07 m valuation assigned to US assets
In the company’s interim report in Sep 2017, an NPV10 valuation was assigned to the company’s assets in Texas of US $5.07 million; the breakdown for this valuation was $4.03m for the Pine Mills site, $1.04 million for Permian Basin. Since then, reserves have increased at the Pine Mills site, and production at Permian Basin has begun, with the site currently producing over 50 barrels of oil per day. In addition, the company has indicated that there are 24 drill locations at the Permian Basin site.
On the funding side, confidence in the company’s progress has been evidenced by it’s ability to secure a US $5m loan facility from Washington Federal Bank, with an initial borrowing base of US $1.2m. This facility will ensure that funding of the company is not an issue for the foreseeable future. The company also has some outstanding warrants (about 12 million remaining vs a total share pool of ~132 million) that are still to be exercised. Although the exercising of the warrants may have some minor dilution to shareholders, execution of the warrants will provide the company with further cash for operating.
Summary
To me, NTOG is at a fair valuation at the moment. A massive positive is the fact that the company has now become cash flow positive and is expecting to be profitable for the FY. The company has only now begun to exploit its Permian Basin location, and with several more potential drill ready locations at the site (24 drill ready locations), along with oil prices being at decent levels (higher prices are also expected this year), revenue could be ramped up significantly and there could be significant upside for the patient investor.
As always though, please do your own research before buying/selling this share; the opinions above are only my personal views.
