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AIM listed penny dreadful oil producer Sefton Resources (LSE:SER) has released November output numbers which it seems to think are good but as ever the reality is rather different. The bottom line is that this company should be issuing a profits (or lack of them) warning. And of course that it will be out of cash ( and with debt still to clear) by very early next year. My target price for the shares remains 0.01p – the stock closed at a share price of 1.18p today.
The company states that output (before adjustments) was 119 bopd in November. At one level I have to commend Sefton for increased disclosure. Yes I am being complimentary. Thus it now concedes that while this is a preliminary number the actual number will see shrinkage as it does every month. Thus the 119 bopd will fall by up to 4.5% ( if recent months are anything to go by).
The actual numbers for the past few months have been: July c116, August 96, September 103 and October 112.
Chairman Jim Ellerton comments: “The results of cyclic steaming and juggling the wells are showing a steady increase in oil production over the past four months which is a good sign ahead of resolving the water disposal limitations.”
Well okay Jim that is in a sense true but it is also a bit of a misleading statement for those of us who are not Seftonologists on a number of matters which I list below.
1. You use August as your base point . Of course you do. It was the low point. Use July and you will see that after a mammoth $1.5-2 million capex programme since the half year shrink adjusted output in November will in fact still be below that in July.
2. When presenting half year results on September 11th you told us all that the massive capex programme would see second half output ( and thus, I guess, profits) improve on the first half. Well first half shrink adjusted output averaged 120 bopd. Your second half average is now c108 bopd. So unless you have a quite stunning December ( you would need to do a shrink adjusted 181 bopd) second half output will actually be lower than first half output. When do you propose fessing up to that with a profits warning?
3. We both know that the nature of old fields like Tapia is that you can by spending a stack on capex stimulate these old wells into higher output. But it is s short term measure. Output soon starts to tail off again. If anyone doubts that go back to DOGGR’s website and see how after a Sefton capex splurge output jumps, then falls back. The problem is that, as with an addict taking heroin, you need ever stronger doses of capex to achieve the same uplift in output. So I am sure output may go up a bit. But then without another fix of capex it will slip back to where it was before and lower.
And that, Jimbob brings us back to cash. Or lack of it.
My analysis of how close you are to the edge is explained in detail HERE
However you and your spin-gopher Doctor Doolittle play it, Sefton is running out of money. What derisory profits you make from your (lower) H2 output in California will be swallowed up by your bloated PLC overhead and the heavy capex you have had to make in order to spoof us all that output might increase.
And then there is the £200,000 you are paying for those clapped out old abandoned wells in Kansas – we both know that the ROI here will be pitiful as I explain here
Pipeline revenues (if there are any) will not flow until the end of Q1 2013 at the earliest.
By my calculations, you will be down to as little as £250,000 by the end of January. Which means that unless you secure additional funding that means lights out by March 1st. That means that you do a placing with investors sharpish. But at what price could you get one away and how much might you raise. If you can raise anything it will be small beer and have to be at a mammoth discount.
Or you try and tap into the Darwin Death spiral. But that means a) an effective rolling short on the stock and b) mammoth dilution because on current trading volumes and at this price any Darwin drawdown will be in small chunks and highly protracted.
So we have three options here:
1. Lights out in March.
2. A placing which might raise enough to give you (perhaps) another 6-9 months but would be massively dilutive and will see the shares crater. Lights out postponed.
3. A Darwin Death Spiral gets underway. In which case mammoth dilution and a tumbling share price is on the cards. Pretty soon this facility will become unworkable. Lights out postponed. But not for long.
Shareholders really should not wait. This stock is heading south rapidly.
But Jimbob and gopher Doolittle you have another duty. On September 11th Sefton announced via an RNS plans to boost production in the second half. It is now abundantly clear that H2 output will be lower than in H1 from California. On September 11th you promised Kansas oil output in H2. That has not happened has it?
Your duty is clear. Issue a profits warning now. While you are at it perhaps you might update us all on the current cash (net of trade payables and debt repayments due within three months) position. We await your statement.
Jimbob & Doc Doolittle I know this will be a grim statement to write but if you need a laugh you can always watch my hilarious Sefton Downfall video here
Investors should not wait for the statement – Sell.
Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
