$133 Million in Reserves and a $6 Million Valuation? Trillion Energy is a Case of Bad Math June 24, 2020 - Baystreet.ca In recent years – and particularly in 2020 – it has been tough sledding for most energy companies because of persistent problems of an oil supply glut and low prices for both oil and natural gas. “Most” doesn’t mean all, and it would be a mistake to pigeonhole every energy company into the same group. Some are in better positions for outsized growth; the markets just haven’t caught on yet. Point-in-case Trillion Energy (CSE: TCF)(OTCPK: TCFF), which is seeing shares rally on Tuesday following news of a tremendous increase in petroleum reserves at its asset in the Black Sea, offshore Turkey. Trillion is similar from a 30,000-foot view to higher-valued comparables like TransAtlantic Petroleum (TSX: TNP)(NYSE American: TAT) and Valeura Energy (TSX: VLE) insomuch that all are focused on oil and gas in Turkey. However, TransAtlantic and Valeura have had difficulty in proving economics with onshore O&G projects that require fracking, which has dramatically eroded their value. Trillion, however, has focused its growth offshore, where it benefits from more than $600 million in capex and producing wells, which have paved the way for what Trillion CEO Arthur Halleran sees as a simple path forward. Judging by the spike in reserves, Halleran, who has an uncanny ability to spot underdeveloped assets and unlock their value, looks to be charting the right course at its South Ackajoca Sub- Basin (SASB) gas field. As promising as SASB is to be a company maker on its own, Trillion doesn’t have all its eggs in one basket. It also owns a 19.6% (except three wells with 9.8%) interest in the Cendere oil field in Turkey currently producing 115 bopd; a 100% interest in 42,833 hectares oil exploration block covering the northern extension of the prolific Iraq/ Zagros Basin; and in Bulgaria, the Vranino 1-11 block, a prospective unconventional natural gas property. Current production generates about $4.0 million in annual revenue for Trillion. A Treasure Trove in the Black Sea The Black Sea is warming into a hot spot for natural gas activity. For instance, in 2015, private equity giant The Carlyle Group (NASDAQ: CG) paid $42.5 million for four early-stage license blocks from struggling Sterling Resources in the Romania Black Sea containing net 2c (best estimate of contingent resources) of 51 million barrels of oil equivalent (mmboe) and net prospective resources of 375 mmboe. Last year, Black Sea Oil & Gas, a company controlled by Carlyle moved forward with the $400 million Midas Gas Development Project – a JV with Italian producer Gas Plus International B.V. and investment group Petro Ventures Europe – roughly 120 kilometers offshore in the Black Sea. High Romanian taxes and royalties had threatened to halt the project, but apparently the favorable economics of natural gas sales in the region tipped the scale to green-light the build-out, with infrastructure expected to be completed in 2021. Ranging between $6.00 - $7.80 per MCF, natural gas fetches significantly higher prices in the region than in other areas of the world (i.e. North America and Europe) where sub-$2/MCF is common. In the same energy patch, state-owned Romanian gas producer Romgaz has reportedly teamed up with OMV Petrom and Poland’s PGNiG to make an offer for ExxonMobil’s (NYSE: XOM) 50% stake in the Neptun Deep project in the Black Sea. Exxon has invested over $700 million in the project. For its Black Sea efforts, Trillion is working offshore Turkey, a country that is far more friendly with respect to taxes and royalties than Romania. The Vancouver-based company acquired two producing oil and gas fields in SASB in 2017, subsequently boosting its interest from 36.75% to 49% in January 2018 through its wholly owned subsidiary Park Place Energy Turkey Limited (PPETL). Phases 1 and 2 of SASB, the Black Sea’s first and largest shallow commercial natural gas development project, were completed between 2008 – 2012 at a total cost of $608 million by the project partners at the time. From 2008 forward, the SASB gas field has produced approximately 41 billion cubic feet (BCF) of natural gas. Same Infrastructure, New Gas…And A Lot More of It Despite to potential, the project was barely advanced until Trillion’s investment. The natural gas produced currently is coming from four gas fields, which is only part of the story. There are four more discoveries that Trillion intends to bring into production, with at least four more after that possible. As Halleran put it in a phone conversation with Baystreet,ca: “There isn’t really any mystery here with the first four new fields because they are essentially identical to the four fields that are producing today.” He made the analogy that it is like if you have eight of the same car and you’ve only been driving a couple of them. “Shy of a mechanical failure, you know pretty much what to expect from the others when you decide to put them to use,” he explained. All of the infrastructure is in place for Trillion to execute a relatively simple model to bring new wells online. According to the Trillion chief executive, everything is already defined; no seismic work or anything needs to be done other than drilling. To that point, the rigs can be positioned on the existing platform to drill new wells and once a hole is completed, the well can immediately go into production from the bore hole. “There is a little more to it, but essentially move the rig and turn it on,” as Halleran puts it. Furthermore, there is still gas behind the pipe in the producing wells. With a few minor modifications to refurbish, production is expected to increase 20-25%. The company has plenty of reason to believe that the days of producing just to cover off-cost will soon be over. Evidence of this came via an independent petroleum reserve evaluation that was recently prepared by GLJ Petroleum Consultants analyzing the SASB gas field. The report showed Total Petroleum Initially In Place of 183.8 BCF of natural gas (excluding the past production).Trillion’s 3P (Proven, Probable and Possible) reserves jumped 1,433% from an original estimate of 342,000 BOE to 4.9 mmboe. Notably, this includes the addition of 27.5 BCF of natural gas. This P3 estimate translates to $132.8 million (CDN$180.0 million). All the production (future and present) is already sold or easily sold, as countries look to lessen their dependence on Russian natural gas. The company expects the cost for the re-work and to bring the first four holes online to be low, approximately $21 million. The Simple Math Shows a Disconnect A common valuation metric for reserves is NPV10 (net present value discounted 10%). Based upon GLJ’s report and the current outstanding share structure of Trillion, with no consideration for future discoveries, the P3 estimate of $132.8 million equates to $1.29 per share. The P2 (only Proven and Probable reserves, 3.21 mmboe) imputes a value of $0.77 per share, while P1 (only Proven reserves, 1.68 mmboe) translates to $0.38 per share. U.S.-listed shares closed Monday at 6.9 cents for a market capitalization of $6.0 million. CSE-listed shares are essentially aligned, adjusted for foreign exchange, closing at 9 cents on Monday (CDN$7.9 million MC). Shares are up sharply for both Monday morning, as the spike in reserves has apparently caught the attention of investors that are seeing that Trillion could grow long legs to quickly make up the large gap between its valuation and that of others in the space. Legal Disclaimer/Disclosure: While all information is believed to be reliable, it is not guaranteed by us to be accurate. Individuals should assume that all information contained in our article is not trustworthy unless verified by their own independent research. Also, because events and circumstances frequently do not occur as expected, there will likely be differences between any predictions and actual results. Always consult a licensed investment professional before making any investment decision. 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