Tethys Oil AB [‘TETY’] (STO Ticker: TETY; Price: SEK 47.50/share)
TETY is a Swedish oil exploration company operating in Oman. Its producing field is a 30% interest in ‘Blocks 3&4’, which it doesn’t operate. It also has interests in Blocks 49, 56, and 58, which are in the exploration phase.
Exploration licences are granted for three-year periods and when commercial, production licences are granted for 15-30 years.
It owns 2P (‘proven and probable’) reserves of 23.9mn barrels with a replacement ratio of 37% and produces roughly 9-10,000 barrels/day. At current production rates, existing reserves should last ~11 years and TETY has a licence to operate Blocks 3&4 until 2040.
It sells all its oil to Mitsui, a large Japanese conglomerate, which is also a partner in Blocks 3&4.
Crude oil prices have fallen sharply over the last year due to rising interest rates and fears of an economic recession. Moreover, TETY’s operating costs have gone up to ~$17/barrel in the most recent quarter due to higher power generation (diesel) and equipment rental costs.
TETY reported TTM revenues of $150mn (FY21: $114mn), ebitda of $97mn (FY21: $61mn), and net profits of $56mn (FY21: $17mn).
Average EBITDA and cash from operations over the cycle are ~$75mn. Capital expenditures have significantly exceeded depletion rates; and taxes are taken out of the government’s share of revenues. Average net profits are ~$35mn.
(Note that $5 moves in the oil price swings earnings by ~$8mn.)
TETY reported net cash as at March 31st 2023 of $40mn and no borrowings.
Tangible equity was $291mn largely composed of oil and gas properties of $255mn at cost - of which the non-producing blocks accounted for $49mn.
The stock trades for $140mn, which is 1.33x ebitda (net of cash), 4x earnings, and 48% of tangible equity.
Management returns most of the profits in dividends and repurchases. TTM returns aggregated $33mn, which is ~23% of market cap.
Management intends to incur capital expenditures for drilling 47 wells in 2023, “more than in any of the last ten years” – mostly focused on Blocks 3&4. This could lead to lower free cash flows in the near future, and the risk that wells may not be commercially viable.
Nevertheless, the current price has a built-in margin of safety in earning power and property values to warrant an investment purchase.
