By Steven Ralston, CFA
READ THE FULL PQEFF RESEARCH REPORT
Petroteq Energy (PQEFF) (PQE.V) is an upstream exploration and production (E&P) company focused on advancing its proprietary Clean Oil Recovery Technology (CORT). Currently, the company is ramping up bitumen oil production at its newly commissioned 1,000 bpd facility at Asphalt Ridge in Utah.
Petroteq Reports First Revenues from Bitumen Oil Production in Second Quarter of Fiscal 2019
On April 29, 2019, Petroteq reported results for the second fiscal quarter ending February 28, 2019. During the quarter, the oil extraction facility began producing bitumen oil in a test phase. Revenues of $21,248 were generated during the quarter from the sale of hydrocarbon products to local refineries to determine the commercial quality of our hydrocarbon products. The oil extraction facility continues to operate in a test phase as production is being increased to a commercial level of production of roughly 1,000 barrels per day. Management anticipates achieving commercial production sometime during the fourth fiscal quarter.
Production-related expenses are muddled as labor & maintenance-related expenditures and some other costs are being capitalized until the extraction production plant attains the commercial production stage. In addition, the capital raising fee (related to a letter of credit) of $1,276,980 reported in the prior quarter was reversed and reclassified as a prepaid expense, which is being amortized over one year. Therefore, the interest expense line item of $1,325,970 is comprised of $88,059 in interest expense, $666,076 related to the amortization of the discount of the convertible notes and $571,835 related to the amortization of the capital raising fee.
Petroteq reported a loss of US $2,682,250 (or 0.03 per diluted share) versus a loss of US $1,732,532 (or 0.03 per diluted share) in the comparable fiscal quarter last year. Average shares outstanding increased 70.3% to 96,363,698 shares. As of February 28, 2019, shares outstanding were 106,184,849 shares.
View Exhibit I
Petroteq Acquires 50% of Six Federal Mineral Leases and Plans to Acquire the Remaining 50%
On January 29, 2019, Petroteq Energy executed a definitive agreement with Momentum Asset Partners I, LLC for the acquisition of 50% of the operating rights of six U.S. Federal Oil & Gas Leases: one located in P.R. Springs (encompassing approximately 8,480 gross acres) and five located in the Tar Sands Triangle. Total consideration for the transaction is US$10.8 million comprised of US$1.8 million in cash (paid on January 18th) and US$9.0 million payable in Petroteq Energy shares (15 million common shares), which were issued on April 3, 2019 to Momentum Asset Partners I.
The P.R. Springs lease is estimated to contain gross contingent resources of 45 million barrels of mineable oil/bitumen in place and 20.38 million barrels of mineable oil/bitumen in place on a net basis (discounted by risk and royalty), according Chapman Petroleum Engineering’s Evaluation of Contingent Resources report dated December 31, 2018.
On April 16, 2019, Petroteq Energy announced the signing of a definitive agreement with Petrollo LP Corp. for the acquisition of the remaining 50% interest to oil sands under U.S. Federal Oil & Gas Leases encompassing approximately 8,480 gross acres in Utah, which would give Petroteq 100% of the operating rights for oil sands development under the leases. The total consideration would be US$13 million comprised of US$1 million in cash and US$12 million payable in Petroteq Energy shares (30 million common shares).
The Tar Sands Triangle leases are estimated to contain gross contingent resources of 41.3 million barrels of in situ oil/bitumen in place and 20.7 million barrels of in situ mineable oil/bitumen in place on a net basis (discounted by risk and royalty), according to the Chapman Report.
View Exhibit II
The company is expected to issue a Resource Development Plan that will outline the company’s long-term strategy of developing its capability of producing bitumen oil.
Management’s primary goal is to become a significant bitumen oil producer in Utah by advancing its proprietary, patented, closed loop, environmentally-friendly Extraction Technology. In 2015, the company constructed and operated a 250 bpd pilot plant that produced almost 10,000 barrels of bitumen oil. Concurrently, the company acquired the lease on the resource providing the oil sands feedstock to the pilot plant. The components of the pilot plant were relocated, upgraded and expanded to a 1,000 bpd facility. Management plans to scale up production to nameplate capacity over the next few weeks.
View Exhibit III
Management plans to continue upgrading the processing facilities at Temple Mountain Mine:
• Phase 1: the construction and commissioning of a 1,000 bpd plant (completed)
• Phase 2 the expansion of production capacity to 4,000 bpd by 2020
• Phase 3 increase capacity to 8,000 bpd by early 2022
In Phase 3, management intends to further increase heavy oil production by constructing additional process trains in the 2022 timeframe, bringing total production capacity at Asphalt Ridge to 8,000 bpd. It is anticipated that several process trains will share the feed conveyor system, providing economies of scale.
The capital expenditures required to ramp up production capacity to 5,000 bpd are estimated to be approximately $45 million. Production costs are estimated to be in the $18-to-$25 per bpd range, and the netback margin1 is anticipated to be between $16.75 and $24.75 per bpd, depending on the economies of scale achieved.
View Exhibit IV
Based on comparative valuation analysis of Price-to-Sales (P/S) ratios with comparable oil recovery companies and a discounted cash flow (DCF) model of the Asphalt Ridge Project, our blended valuation process indicates a share price target of $1.34.
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1. The netback margin is the gross dollar profit per barrel after taking into account all the costs associated with bringing that barrel of oil to the marketplace and all the revenues generated in the process.
By Steven Ralston, CFA