Into the Land of the Giants

Updated valuation analysis of Pantheon Resources Plc (PANR)

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Value Situations is NOT investment advice and the author is not an investment advisor.

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Updated Valuation Analysis

Following PANR’s recent webinar and presentation to shareholders, I’ve updated my equity valuation for PANR to reflect the Winter 2022 drilling programme results and management’s consequent resource upgrade.

As I outlined my key takeaways from the webinar in Monday’s Weekly Bulletin #12 I won’t repeat them here, but the key point is that following the Winter programme PANR has proven it sits on at least 23.5 billion barrels of oil, a truly giant oil discovery and the largest in North America since Prudhoe Bay was discovered in the 1960’s. I am of the view that PANR’s current ~£0.96 billion ($1.2 billion) market cap does not reflect the fundamental value here, or what a larger player would pay for PANR’s assets, particularly given the greater strategic value these assets now have in a world where energy security and independence is of greater concern.

As I outline in detail below, the principal drivers of this updated appraisal are:

1. The resource upgrade, which reflects an incremental 6.8 billion barrels OIP for the Theta West Lower Basin Floor Fan (LBFF); and

2. Increased probability of success rates reflecting the de-risking and management’s increased confidence in commercialising PANR’s assets following the Winter programme.

Resource Estimate Upgrade

Firstly, it’s worth putting the resource upgrade in context vs. management’s previous estimates as presented in the January AGM update presentation - the table below summarises the position:

Source: Pantheon Resources Plc AGM Presentation, Jan-22; April 2022 Webinar; Value Situations analysis.

Back in January, management presented a resource estimate of 17 billion barrels OIP, which included OIP and recoverable resources estimates for the Kuparuk and Theta West Upper Basin Floor Fan (UBFF), but no estimate for the Slope Fan System (SFS) reservoir at that time.

Rolling forward to April post the Winter programme, management now estimate the SFS has 2.2 billion barrels OIP. Applying management’s very conservative 10% recoverability rate to the SFS ( vs. recovery rates of 40%+ at other oilfields nearby on the Alaskan North Slope) implies 220 million barrels of recoverable oil.

The second and most significant update from the Winter programme is the 6.8 billion barrels OIP upgrade to the Theta West LBFF reservoir, giving it a total OIP estimate of 17.8 billion barrels vs. 11 billion previously estimated (+62%). Management have applied a 10% recovery rate to this, implying 1.78 billion barrels recoverable, a 48% increase on the 1.2 billion barrels previously estimated.

Due to the Winter programme’s focus on testing the Shelf Margin Deltaic (SMD), SFS and Theta West LBFF reservoirs and time constraints, the company did not test the Theta West UBFF or Kuparuk zones and so these are not included in the latest 23.5 billion barrel resource estimate (shown as TBC in the table above for Apr-22). Management previously provided an estimate of 1.4 billion barrels OIP / 341 million barrels recoverable for Kuparuk and 1.1 billion barrels OIP / 210 million barrels recoverable for the UBFF in the January AGM presentation:

Source: Pantheon Resources Plc AGM Presentation.

As stated during the Webinar Q&A and it’s worth emphasising here again, although Kuparuk and the UBFF were not tested during the recent Winter programme, these assets will be tested in due course and so have not gone away. So there is an additional 2.5 billion barrels OIP / 551 million barrels recoverable not included in management’s latest 23.5 billion resource estimate. Adding Kuparuk and Theta West UBFF back indicates a total OIP estimate of 26 billion barrels across all of PANR’s assets, of which it is estimated ~3 billion barrels are recoverable.

Updated Valuation Analysis

For my updated Base Case, which excludes Kuparuk and the UBFF until they are tested, I estimate PANR is worth ~£5.98/share on a fully-diluted and risk-adjusted basis, or ~4.5x its current share price as at the time of writing (and ~10x the share price of £0.60 when I first published the idea back in September last year):

Source: Value Situations analysis; management information.

Updated commentary and key assumptions as follows:

• OIP, recoverable resources and recovery rates as per management’s guidance.

• In estimating unrisked EV for Alkaid and SMD assets, consistent with my previous analysis I’ve valued these at the midpoint of (1) the $3.10/barrel paid by Oil Search in the Pikka/Horsehoe precedent transaction and (2) the respective NPV10 $/barrel for these projects at $90 oil (note WTI currently trades at ~$106/barrel ):

Source: Pantheon Resources Plc April 2022 Webinar Presentation.

• For the SFS and Theta West LBFF, I continue to value these at $3.10/barrel, in line with the Pikka/Horseshoe comparable transaction.

• I’ve updated Probability of Success rates from 65% to 70% for Alkaid and SMD, being the most advanced assets and reflecting increased confidence and de-risking following the success of the Winter testing programme; for the SFS and LBFF assets I assign 60% success rates to these, being the lower end of management’s previously stated 60% - 70% probability of success range.

• In bridging from Risked EV of ~$6.5bn to equity value, I assume the convertible debt balance (~$50m at present) is fully converted to ordinary shares and all corporate cash is deployed to fund subsequent testing and proving up of PANR’s assets to an exit.

• Fully diluted share count reflects convertible bond conversion and exercise of all share options and warrants pre-exit event.

This updated analysis implies a risked value per share of £5.98, indicating that PANR currently trades at just 0.22x its risk-adjusted NAV, and implies 354% upside / 4.5x MOIC vs. the current share price. Looking at it another way, PANR’s current market cap of ~$1.24bn implies a value of just $0.50/barrel for PANR’s ~2.5 billion barrels of recoverable oil, vs. the $3.10 paid by Oil Search for the Pikka/Horsehoe reserves back in 2017 when oil was ~$55/barrel and had a much less positive outlook.

However the above only reflects PANR’s assets that have been most recently tested and proved and ascribes no value to Kuparuk and Theta UBFF, which are expected to be proved in due course. Including these implies a risked value of £6.45/share:

Source: Value Situations analysis; management information.

For Kuparuk and the UBFF assets, I assume a lower 30% probability of success above to reflect their currently less-proven status, and in line with my previous probabilities for the SFS and the LBFF prior to the Winter testing programme.

On this more complete basis, PANR’s equity is worth £6.45/share or almost ~5x the current share price. This is a ~£3/share or +88% increase in equity value on a fully diluted basis vs. my previous analysis last December pre-Winter programme. I believe this is justifiable given that the oil price is higher, and as Justin Hondris, Director of Finance & Corporate Development summarised during the Webinar Q&A:

“… our projects have advanced dramatically, the risk has gone down, the confidence has gone up, and the resource number has gone up.”

In conclusion, I continue to believe PANR is a highly compelling situation that offers very substantial upside, with limited downside given its enormous resource asset-backing. As PANR progresses with putting Alkaid into production in October and the development plans for the other assets, I believe it is simply a matter of time before a sale of other liquidity event occurs to unlock the value of these assets.