We delve deeper into Triangle Petroleum (TPLM) and we actually quite like what we find. The obvious positive is that they have found a lot of gas, even if only a fraction of it is deliverable. The risks come from a rather shaky financial situation.
The two negatives are:
- it’s going to take a long time and a lot of money to develop the gas
- this will certainly involve a lot more dilutive financing
So, on balance, it’s difficult to whether this will outweigh the positive news, but we think the amount of gas is so large that it gives them more options. Let us consider the financial situation.
For smallcaps like these, living on finance, this must be the first or second place to look. It’s not even that straightforward to find the number of shares outstanding. We calculated the most recent ownership stake we could find, the 14.9% of Palo Alto Investments reported at the end of March. Converting those to 100%, you arrive at just under 50M (48.63M) shares, which makes it almost a 100M company right now.
If you compare that with the potential value of all that gas they found, it’s very little. However, the gas is in the ground, and a lot of development, drilling, expenses and financing has to arrive before it’s anywhere near a market
Our real fear with this type of company is very dilutive financing. We have seen many a company with good prospects falter over this. The usual culprit is convertible bonds that do not convert at a fixed price. This creates incentives for the holder to try to lower the stock price, the lower the stock price, the more shares they will get for their bonds.
Now, the 07 year-end report provided a nice overview of their outstanding financing arrangements:
- We have $16,100,140 of convertible debentures outstanding as at January 31, 2008.
- As at April 24, 2008, we have $14,625,000 of convertible debentures outstanding.
- The convertible debentures have three separate maturity dates.
- First, $5,000,000 matures on December 8, 2008 which are convertible at the lower of (i) $5.00 or (ii) 90% of the average of the three lowest daily volume weighted average prices of our common stock of the 10 trading days immediately preceding the date of conversion. We anticipate that these convertible debentures will be fully converted prior to the maturity date. Subsequent to January 31, 2008, $375,000 of these convertible debentures were converted.
- Second, $1,100,140 matures on January 17, 2009 which are convertible at the lower of (i) $5.00 or (ii) 90% of the average of the three lowest daily volume weighted average prices of our common stock of the 10 trading days immediately preceding the date of conversion. Subsequent to January 31, 2008, these convertible debentures were fully converted.
- Third, $10,000,000 matures on June 1, 2009 which are convertible at $4.00. Based on the current share price, conversion is not likely and we will either be required repay or refinance these debentures.
What can we make of it? It’s not too bad, actually. It could easily have been a lot worse. That $5M debenture and the $1.1M debenture are potentially bad in the sense that they create perverse incentives for holders to get the price down.
On the other hand, the announcement has given the stock price a big boost. This might be enough to get it out of a potential death spiral. We cannot rule that out, these financing houses are ruthless, but we also think that the announcement (which, remember, was the work of an independent engineering bureau) put this company on the radar screen of higher echelon players.
Not that these are any less ruthless, but they give Triangle more options considering financing. They could sell of parts of the property, or sell drilling rights on it, things like that. They now have potentially extremely interesting assets which, in a time of energy scarcity, give Triangle a lot more leverage to get rid of the nasty brigade that usually finances these little companies.
Triangle does actually have a few wells (or, rather, participation in wells) that produce revenues.
- For the year ended January 31, 2008, we realized $781,697, in revenue from sales of natural gas and natural gas liquids, as compared to $69,428 for the year ended January 31, 2007.
- Production expenses related to this revenue totaled $304,537 and $nil ($15.24/Boe and $nil/Boe) for the years ended January 31, 2008 and 2007, respectively.
So, gross profits were like 475K, only a fraction of expenses, but all little bits help. We couldn’t find any other well that is ready to contribute in the near future.
The are actively pursuing opportunities elsewhere (from 07 year-end):
We continue to actively evaluate various shale packages in Alberta and British Columbia. Our objective is to secure an initial land position prior to the end of 2008 and to commence an exploration program next year.
We expect significant capital expenditures during the next 12 months for drilling programs on our Canadian shale program, overhead and working capital purposes. We are currently seeking joint venture partners and equity financing to fund these expenditures, although we do not have any contracts or commitments for either at this time.
If they stopped doing that, they argue that they would have enough cash to keep going for a while:
By adjusting our operations to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits in the near term.
But this sound hardly reassuring. They will need new funds pretty shortly. They easily burn through 20M a year, so this hardly negligible.
Now, what to do? We think in the end, value will prevail. And all that gas is value, there can be little doubt about it. But there is ample room for management to spoil it, even with these potentially super large quantities of gas.
Finance really is a subject that worries us, especially their rather urgent need, and the already outstanding convertibles could easily get this thing down again, if not played the right way. What they need is a good IR company and partnering with a big brother, or sell part of the prospects.