Pharos Energy Plc (LON:PHAR) is the topic of conversation when Auctus Advisors Head of Research Stephane Foucard caught up with DirectorsTalk for an exclusive interview.
Q1: Stephane, could you just remind us of the story of Pharos Energy?
A1: Pharos is really a value story. It pays a 6 % dividend, and it has a buy-back programme in place that really protects the downside. Now, the company has a very important juncture. Various factors that basically clipped its wings for a long period of time have finally been addressed recently and with the new CEO and Chairman that have just been recently announced, the company is now looking at new ways to unlock value and deliver growth.
So, if you look back probably five years ago, when COVID hit in 2020, the company was at that time in the middle of a large development programme, largely funded with debt and with all prices turning negative, everything had to be paid back. It’s only until 2024 that really the focus was entirely on rebuilding the company balance sheet. The company is now debt free, it produces around 6,000 barrels a day and with the recent award of licence extension in Vietnam, it can finally return to growth.
The company has assets in two areas, Vietnam and Egypt. Offshore Vietnam, it produces about 4,500 barrels a day, onshore Egypt, 1 500 barrels a day, and that’s mostly oil. Most of the value is currently in Vietnam, where the barrels are basically very high value.
So, Vietnam, the story is about adding reserves by developing further the existing producing assets and there is also a high-impact exploration asset in deeper water, and there, it’s about securing a farming partner to unlock the value.
In Egypt, the company has quite large potential resources. However, we’re really waiting on further improvements in the business environment and particularly around payment terms in Egypt to really start growing production. We’re also waiting for an imminent restructuring of the licences that would give the company better terms and a longer duration. That would allow the company to go after the large resources upside. We are talking in Egypt of potentially doubling production.
Q2: You said that Vietnam is where the focus is. What are the group looking to do there in the coming months?
A2: Last December, six months ago, the company received licence extensions; five-year extensions on its two licences, and that’s quite key because it allowed them to embark on an ambitious drilling programme with six new wells. Those six new wells would allow not only to boost production but also to add reserves at its licences. They are called CNV and TGT. Two of the wells they plan to drill would be appraisal wells, and that could open new areas on both licences and because the new areas can be drilled from the existing platform, they can be brought into production very quickly.
So, if you look at value, overall, on the producing licences, we talk about potentially doubling the reserves in Vietnam and given that Vietnam is most of where the value is in Pharos, you could talk about potentially doubling the value and the size of the company.
Q3: How would you describe the business environment in Vietnam?
A3: Vietnam is an area where oil projects typically are relatively low OPEX. The oil is typically of high quality; you can sell it at a premium to Brent and the fiscal regimes are quite generous to the contractors. So overall, the economics of Vietnam and the cash flow are pretty good historically on most of the oil projects.
The downside of Vietnam has been the regulatory burden. Things historically take a very long time to get done, development plans take time to be approved and what’s interesting is it looks to start changing.
If you look at the recent five-year extension that the group got in December, it took them only about one year to get that licence, which is far quicker than in the past. If you look at more recent data, they have just got an extension on its exploration licence for two years that was announced this month in June, and that took only a few months to be obtained. At the same time, the company didn’t have to pay an additional bonus or take on extra commitments.
So, this is quite positive, and those changes could be really game-changing for the company and the country in general.
Q4: Now, you talked about exploration, what is the prize there?
A4: So, this is very large. Pharos has interests in two blocks 125 and 126 in the Phu Khanh Basin and this is one of the last remaining frontier basins offshore Vietnam. An independent auditor assessed the potential exploration upside of recoverable resources on those licences at 9 billion barrels net to Pharos Energy. This is a very large number in any term, but particularly when you look at their existing 20 million barrels 2P.
Now, this is in deep water; part of the licence is in more than 1,000 metres of water depth, so it’s really about finding the rig now and finding a farming partner to unlock this potential upside. The company has until November 2027 to do that. So, you can see this exploration asset as a zero-cost option with an extremely large potential value.
What’s also interesting is that exploration has generally been back on the agenda of the super-majors over the last four or five years, they have not done much spending in exploration, so they have four or five years of catch-up to execute. There are not many basins in the world where you can find such material potential resources as you have in Blocks 125 and 126.
So again, it could be absolutely game-changing if they manage to get a partner.
