Triangle Petroleum is Producing
Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The evolution of some companies is easier to follow than others. Triangle Petroleum (NYSEMKT: TPLM) is one of the more difficult to follow if investor interest is any indication.
The simplified version of Triangle's development is that they are moving from being a non-operating oil and gas E&P company to being an operating one, that is, doing their own drilling now. In the past they had contracted out and taken smaller working interests in wells they held the lease rights to. Being an operator allows Triangle to take a larger stake in the profits of wells.
Triangle's move to an operated business model should be an improvement over non-operated businesses such as Northern Oil and Gas (NYSEMKT: NOG) which has run into snags. Companies with their own rig crews, such as Kodiak Oil and Gas (NYSE: KOG), have proven to be able to expand revenue and improve efficiency rather quickly in the Williston due to the wide shale formations and increased drilling experience.
By the end of 2013, Triangle will be at or near twenty completed wells. Their 83% owned subsidiary, called Rockpile, is responsible for the company's drilling. Rockpile is also soliciting business from non-operators to drill their wells and take a percentage. Any Rockpile outside revenue will be a positive surprise for Triangle as it is not accounted for in analyst reports at this point.
In their recent investor presentation, Triangle showed that they would be increasing capital expenditures to $173 million in fiscal year 2013. A portion of this capital is from a recent investment by Natural Gas Partners, a private equity firm. The balance of Triangle's capex budget is derived from revenue.
The NGP investment is interesting due to the stipulations in the deal. NGP only can see an equity gain if the share price of Triangle exceeds $8 and Triangle can buy back shares that NGP would own at $11. This narrows NGP's window of profit to $3 per share. NGP also agreed not to hedge or short the stock while it owned any. This tells me something very simple, NGP has quite a bit of confidence in Triangle. We will see if it is deserved.
Recent revenue numbers showed $5 million essentially derived from non-operating revenue. With six operated wells now producing and fourteen on the way by year end 2013, in addition to a few more non-operated wells, Triangle stands to see a huge revenue increase.
The five wells detailed in Triangle's recent report averaged about 7,000 BOE/week each which is below max pump rates (I saw many wells in North Dakota that were not actively pumping, rather, were just taking what flowed up naturally). At $80/barrel that would amount to around $30 million per well for the first full year. Year two BOE reduces quickly, but with the addition of more wells, we know growth will be rapid, if not smooth.
Due to the company pouring money into at least another 43 wells in the short-term, large earnings per share are not likely to arrive for two or three more years. This time period is a wonderful time to accumulate shares as emotional investors who will not understand what are likely to be lumpy earnings cause share price volatility. The intermediate and long-term looks very bright as the company will eventually ramp down capex while revenue rises, eventually resulting in earnings growth.
Kirk and clients of Bluemound Asset Management, LLC own common stock shares of Triangle Petroleum and Kodiak Oil & Gas. Neither Kirk nor Bluemound clients plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @GALPinvesting, GALP is Growth At Low Prices, for new columns, important financial news and weekly stock picks. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.