Ideas Elsewhere: Otto Energy (OEL:AX)

Expected Company Sale


Jeremy Raper has recently highlighted an interesting setup at Otto Energy which holds a number of minority interests in producing oil and gas wells across the Gulf Coast. The company launched a strategic review in March after a 48% shareholder said it wants out. Management seems highly focused on the company sale. In June, the CEO was replaced with a caretaker, who will oversee the sale and will receive a A$300k bonus if the transaction gets completed by Mar’24. OEL has also issued an update saying there has been significant interest in the company and its assets. In a sale scenario the potential upside could be considerable as the company currently trades close to 1x FCF – i.e. EV=US$27m on assets that should be generating around US$23m of annual FCF. Half of the market cap is in cash. The company has also quite an elevated US$5m G&A expense, which could be easily eliminated by a strategic buyer. With 6 months into the strategic review process already, the resolutions is expected before the year-end.

Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring attention of SSI subscribers. I do not intend to actively follow the developments of these ideas, so you should expect limited updates or follow-ups in the comments section.

13 Comments

13 thoughts on “Ideas Elsewhere: Otto Energy (OEL:AX)”

  1. This seems to be a gem in the making. It’s basically $FAR with a better valuation and a more imminent liquidation event. FCF math is a little questionable though. Probably underestimating extraction costs and overestimating revenues closer to asset end life. Nevertheless, current crude price jump gives short-term cash flows upside from your figure. Let’s see if that translates. I’ve invested a modest amount here and will look to ramp up on any pullback.

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    • The impairment is related to cost overruns and lower than expected performance of OEL’s Green Canyon 21 asset. The company performed recompletion for several zones of a GC 21 well, however, despite recompletion one of the zones was not contributing to well production. The impairment was recorded to account for the lower net present value of the cash flows expected to be generated by the asset during its remaining life.

      While this is clearly not a positive, the impact on the valuation/FCF is minimal. Green Canyon’s production stood at 32k BOE in FY23 compared to OEL’s total production of 843k BOE. Assuming no further production from GC 21 (which is overly punitive as the asset is still producing), the company would still trade below 1.5x EV/FCF based on Jeremy’s previous FCF calculations.

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      • Thank you. I don’t know anything about energy but conducted a similar analysis. I basically looked at the BOE lost from GC 21 relative to proved and probable reserves and estimated a 7% reduction in BEO for the firm. Overall a negative but nothing that torpedoed the thesis.

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  2. Below is my baseline analysis for OEL.lse

    As company financial report lags, I downloaded the current production data for their wells (BOEM, TXRRC, LADNR), as this data only lags a few months, I derived current decline rates from this data and ran a DCF on each field. The assumptions used for product pricing were forward oil and natural gas futures. I took the middle point of company data for lifting cost ($17.50/bbl). I ran the DCF at PV-15%. For the upside potential in the Lightning field, I ran the upside of three new wells at NPV-30% with 75% of the production of the current Lightning well. Also assumed was the elimination of the G&A in an asset sale scenario.

    Below are my results:

    OEL.lse
    Est. value per share
    PV-15% ($MM)

    SM71 $9,581,396
    Oyster $3,399,716
    GC21 $6,559,418
    Mosquito Bay $2,633,802
    Lightning $9,670,884

    Lightning Upside (PV30) $12,368,730

    Total Reserves Valuation $44,213,946

    PANR stock $ 1,200,000
    Cash $25,000,000

    Total Valuation $70,413,946

    Shares 4,795,000,000
    Perf. Rights 23,900,000
    Options 72,500,000

    Fully diluted shares 4,891,400,000

    Share Value $0.0144

    Projected Free Cash Flow (FCF)

    SM71 Oyster CG21 Lightning Mosq. Bay Totals
    2024 $5,825,981 $1,641,441 $2,753,905 $3,342,864 $1,333,991 $14,898,181
    2025 $2,896,743 $1,200,025 $2,016,943 $2,900,863 $1,136,368 $10,150,942
    2026 $1,495,457 $623,086 $1,495,800 $2,189,672 $934,657 $6,738,672
    2027 $753,522 $311,083 $1,084,098 $1,587,940 $- $3,736,643

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    • Awesome, thanks for bringing your intelligence and experience to the comments, much appreciated.

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  3. Failed to provide FX conversion in my analysis – .015 usd = 2.25 aud

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  4. RETURN OF CAPITAL TO SHAREHOLDERS
    UP TO A$40 MILLION IN EARLY 2024
    Otto Energy Limited (ASX: OEL) (Otto or the Company) is pleased to announce that the
    Board of Directors has resolved to return up to A$40.0 million, or A$0.008 per share, to
    shareholders in early 2024, the first step of the formal review process to maximise
    shareholder value announced 29 March 2023. The capital return will be subject to
    shareholder approval as an ordinary resolution at the Company’s upcoming Annual
    General Meeting on 30 November 2023.
    It is intended that the Company will use existing cash reserves on Otto’s balance sheet for
    the purposes of the capital return.
    The ongoing review process also includes an assessment of a potential partial or full sale
    of the Company and/or its assets. The Company will inform the market and its
    shareholders regarding any developments in this process when available.
    The strategic review was initiated due to the Board of Director’s belief that Otto’s shares
    have consistently traded at a discount relative to the intrinsic value of the underlying
    assets.

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  5. Are we aware of any tax implications or would this likely get an ATO ruling similar to FAR’s earlier capital return?

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  6. This one tanked today and seems to be trading around net cash value.

    Any insight into what might be going on? As it stands 67% (at 0.012) of the market cap (0.008) will be coming back the of May….

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  7. I think its around the time the CEO needed to sell the co for his bonus.

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  8. Thought that incentive ended 31-Mar-24 for the person they brought in rather than the CEO but I might be misremembering.

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