Kistos PLC – Energy in Transition

Introduction

Kistos is an investment company targeting opportunities in the transition energy market. It made its IPO in November 2020, raising £31.75 MM. In April this year, Kistos raised capital again to fund the acquisition of Tulip Oil for €223MM (comprising €140MM plus an €87MM bond refinancing and other adjustments). Currently, Tulip Oil is the unique acquisition that Kistos has made. It was a privately held exploration and production operator (oil & gas) with assets in the Northern sea and Germany (Kistos bought the Northern sea assets)

However, to understand Kistos, it is necessary to talk about Rockrose Energy and Andrew Austin (Kistos’ CEO). RockRose Energy was an energy company that operated in the North Sea. And Andrew was the CEO of Rockrose from 2016 to 2020. During these four years, Austin delivered a 42x return for Rockrose shareholders pursuing a similar strategy that he is trying to do in Kistos, and again in the North Sea

Investment Thesis

Because of Covid and the ESG approach that is being taken by occidental countries, there has been a lack of infrastructure investment in fossil fuels during the last years. The results of that are quite evident now, high oil and gas prices. However, this is not an easy problem to tackle. Big companies have mandates to avoid investing in fossil fuels and the gap created in the supply-demand balance cannot be filled by renewable energy yet. As a consequence of this, we believe that high prices are here to stay for a while (by high we understand Brent $70-80 and TTF €25-30 in the next 2-3 years).

The fact that oil & gas majors need to focus on renewable energy instead of traditional fossil fuels, means that they also need to disinvest in Oil&Gas assets as they are quite capital intensive. It creates good opportunities for small players like Kistos which can acquire interesting assets at a significant discount.

Nevertheless, the major point is Andrew Austin and his team. They have enormous experience doing the same business in the North Sea with unbelievable results. The first months of Kistos have been much better than planned, and Kistos have a lot of liquidity to accelerate its initial business plan thanks to the money obtained with gas prices 5 times higher than usual.

Assets

The acquisition of Tulip Oil brought 2P reserves of 19.7 MMboe plus 2C resources of 99.1 MMboe. Kistos has a 60% Working Interest in the assets acquired. Assets include Q10A, Q10B and Q11B, plus the option to acquire M10A,M10B and Q10A-Vlieland Oil paying an agreed amount (around $75MM for both Ms and around $75MM for the oil – depending on the oil found). At this moment, there is only one producing field (10Q-A). 

As shown in the picture, the first gas from Q10-B and Q11-B will arrive in 2023. Kistos has just finished the appraisal in Vlieland Oil, where it obtained 3’200 bbl/d (higher than expected). The oil is of good quality with an API of 33 degrees. There will be 8 wells and it is estimated to produce around 9000 barrels per day in 2024. A payment of $4.5/barrel is required to complete the acquisition of Vlieland that presumably will take place in the coming months plus $7.5MM. If the appraisal confirms its estimations of 42MM barrels, it will pay around $75MM in total.

Source Sproule
Source Sproule

Economics

Q10-A produced at an average rate of 0.85 MM sm3/d (net), equivalent to 29 MMcf/d or 5.12 kboe/d, in the six months to 30 June 2021. After the drillings (finished in September-2021) Kistos is producing at the Q10-A field over 1.4 MM Nm3/d (net production) (43 MMcf/d) (7.6kboe/d). Equivalent to 1.172MMWh per quarter.

It means that at current power prices (around 80€/MWh), Kistos would be generating €74MM per quarter.

However, we need to take into account a couple of important considerations

  1. Kistos hedged 100’000MWh per month from 1st July 2021 – 31th March 2022 (0.3MMWh)
  2. Prices are usually in the €15-20 range. They are seasonal, increasing in winter and decreasing in summer. We are going through an exceptional situation and we cannot assume that €100/MWh is the standard price. However, due to the energy crunch that Europe /the world is suffering, we also think (base on ICE forecast) that high prices will remain at least for 12-15 months (high means €30-40/MWh)

Business Plan

Kistos plans to develop its undeveloped assets and it will invest $300MM of CAPEX in the coming years to have online Q10-B, Q11-B and Vlieland. Kistos is currently performing the appraisals drilling the appraisals designed to convert 2C resources into 2P reserves.

The good news is that if TTF prices remain as high as they are for the next months, Kistos will be able to pay the CAPEX needed and the payments dues (Vlieland,…) without any equity offering/additional debt. Moreover, Austin has commented that in a normalised TTF price environment, Kistos could sell its natural gas at a premium as it is generated using renewable energy (it is considered green gas)

Once finished the drilling in Vlieland, having a piece of better knowledge about the reserves it has and also depending on the Brent prices, we will be able to determine the potential price of Vlieland in case that Kistos decide to sell it apart to finance other opportunities. We believe that this will be the case as it would be aligned with the purpose of the company “energy transition”, it will take advantage of the oil prices and it will be easier to marketize the company for future deals in these countries (Netherlands, Denmark, Norway…).

Investment Risks

  • Production problems
  • Higher natural gas supply to Europe from Russia / mild winter in Europe which make TTF to go back to normal quick
  • Bad timing hedges (in such a volatile market, good luck is also an important factor with hedges)

Valuation

It has not been easy to evaluate a company with only 1 producing asset, so much optionality and in such a volatile environment for TTF prices. We have assumed the intermediate production case for each field. The following TTF prices

TTF forecast 2022 2023
Moram assumption
  • WACC=10.32%
  • Unit Opex gas 4.3€
  • Debt repayment bullet /not amortising
  • Cost of Equity 13% 
  • GBP/Eur 0.84
  • Brent Price $60 (Developing and producing in the model 5500bbl/d avg 2024-2028 – Conservative approach,It is assumed for production figures to decline after 2028)
  • Unit Opex oil 30€
  • Capex from Operating cash flows (no additional debt)
  • M10A and M11A producing from 2H24
  • EV/EBITDA23 – 4
  • No additional hedges from March 22

Following the discounted cash flow method, we obtain a valuation of 607p. Using the EBITDA multiple, the valuation would be 882p. The range is quite wide as it is uncertain about the earnings in the future. We use this as a proxy to think that Kistos is an interesting option under this macroeconomic environment and energy shortage. We have assumed that the natural gas prices will be high for the next 18 months. Consequently, if the situation changes quickly, the target price will also diminish sharply. On the contrary, if Austin is able to execute his plan and we gain a higher certainty about the future stream of cash flows, we see a further upside.

Conclusion

Kistos is managed by a fantastic CEO. Moreover, it has been lucky with the timing of Tulip’s assets acquisition. When Kistos bought it, TTF was at 18€/MWh and last month TTF prices have been over 80€/MWh. Kistos investment is aligned with our vision that energy problems are not going to be solved in the next 6 months, they will last at least 2-3 years. Consequently, we expect natural gas prices in Europe to remain extremely high during the winter and higher than usual for 2-3 years.

In the picture, you can see the revenue per day that Kistos is making with TTF at these prices. We should remind that Kistos is a €330MM market cap company (It trades in the UK, so conversion has been made). Consequently, every day that TTF remains at these prices, it accelerates the initial plan of the company and makes the company more valuable.

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