International Frontier Resources (IFR.V): Surging Mexico oil patch attracting serious players

International Frontier Resources (IFR.V), their story is one of a classic ‘early-mover’, a highly entrepreneurial undertaking. You know what they say about the early bird…

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It all started five years ago when the government of President Enrique Pena Nieto pushed through reforms that ended the seventy-six-year state-run monopoly in Mexico’s energy sector. PEMEX. Pemex’s life-force was dependant upon a massive reservoir of offshore oil – a reservoir that is nearing the end of its life cycle.

Pemex’s very existence is being challenged by plummeting production and paralyzing debt. As a consequence, Mexico was forced to open its borders to competition. Foreign companies that employ the latest E&P (Exploration and Production) technology, like Int Frontier, have been invited to bid on a number of onshore and offshore projects.

This informative report by Equity Guru’s Lucas Kane delves into the Pemex fallen dynasty narrative in much greater detail.

The Auction Arena:

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With Pemex on the ropes, the Mexican government has turned auctioneer in order to revitalize its under-capitalized energy sector. From the ‘Projects’ page on the company website:

Mexico’s historic energy reform announced in 2014 has established a new legal framework for Mexico’s energy industry and is expected to attract the billions of dollars in foreign investment needed to revitalize Mexico’s oil and gas industry. The Secretaria de Energia (SENER) has issued a five-year, four round tender plan (2015-2019) for the denationalization of 914 oil and gas blocks. IFR believes that there are a significant number of under exploited oil & gas fields in Mexico that will be issued in these bidding rounds.

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In August 2014, SENER began the bidding process for assets by announcing that Round One would include: (i) 169 blocks, comprised of 109 exploration blocks and 60 production blocks and (ii) 14 blocks under joint ventures with PEMEX. The tender process commenced in the first quarter of 2015, and license agreements were awarded throughout 2015 and into 2016.

These Mexican assets are highly desirable. The auctions Int Frontier are attending involve mature onshore fields with proven oil reserves and a history of drilling.

In auctioning off these mature onshore blocks, the Mexican government is welcoming bids from oil and gas companies of all sizes, including juniors. Aside from establishing a platform for healthy competition, it creates equitable opportunity across-the-board. This is how it’s done. This is dynamic, innovative, and enlightened thinking. I suspect the country has learned its lesson – the immutable fact that state-run monopolies suck.

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Two types of projects go on the auction block:

The offshore projects on the auction block are good for the super-major – the larger companies with deep, DEEP pockets.

The onshore mature oil field auctions are the ideal arena for a company like Int Frontier. Acquiring a mature field – one with a proven track record – is viewed as a potential building block. Such a block can do wonders for the evolution of a small company. It presents them with the opportunity to gain a foothold in a highly prospective region, without deploying onerous amounts of capital. The potential payoff is a steady stream of revenue.

This is the same business model that was deployed in Canada and Texas during the early innings of their oil and gas sectors. Small companies prospered using this model. They leveraged their assets, acquired addition ground, and expanded their operations. Some grew into large entities. Some grew into giants.

 

Partners, pals – the JV (joint venture):

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Int Frontier is not going it alone in Mexico. The company has formed a joint venture with Grupo IDESA – a right-down-the-center 50/50 joint venture company to bid on prospective projects, and if successful, explore and develop them.

Grupo IDESA, one of the largest petrochemical companies in Mexico, has a proven track record in the oil and gas arena. Together, the joint venture boasts a number of invaluable skillsets: field and technical expertise, finance, Mexican regulatory, engineering and logistics… just to name a few.

This 50/50 joint venture is called Tonalli Energia.

 

 

 A successful auction:

In May of 2016, after a successful auction, Tonalli Energia was awarded Block 24, an onshore field that goes by the name of Tecolutla.

The Tecolutla block lies within the Tampico-Misantla Basin, a prospective onshore ‘Super Basin’ with huge unconventional oil and gas potential.

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 Tonalli Energia obtained the Tecolutla field at a very agreeable royalty rate of 31.22%. This royalty represents the Mexican governments take. In November of that same year, Pemex officially handed over ownership of Block 24 to Tonalli Energia. Done deal.
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It’s important to note that the company, with a goal of growing a rich stable of assets, is not content sitting on this one project alone. Management is in the process of running dd (due diligence) on prospects coming up in the next round of bidding. This next round, scheduled for this summer, will be an onshore conventional auction containing lands that are adjacent to their Tecolutla block. Another auction will take place in September, one which will offer the opportunity for the company to bid on onshore unconventional reserves.

For those unfamiliar with the nomenclature, the distinction between conventional and unconventional is illustrated below.

 

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Regarding the opportunity to gain additional ground via the auction arena. This, from the company’s fact sheet

Opportunity to acquire new assets and adjacent unassigned lands in bid
round 3.2 and the onshore unconventional round 3.3; auctions scheduled to
occur on July 25, 2018 and September 5, 2018, respectively.
These are important dates to keep in mind if you’re an Int Frontier shareholder.
Block 24 aka Tecolutla – the name don’t exactly roll of the tongue, but it’s a goodun:

Tecolutla is a mature onshore field. Four key past producing wells (Tec-2, Tec-6, Tec-7 and Tec-9) were drilled by Pemex between 1956 and 1972. These four wells, which yielded between 256 and 453 bod (barrels of oil per day) collectively produced approximately 1.9 million barrels of oil in their time.

There’s potential for a substantial untapped resource at Tecolutla – Tonalli Energia is gunning for what Pemex left behind.

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The Tecolutla block, due to its significant production potential, could be one of those ‘building blocks’ mentioned earlier… one of those critical steps a small company takes as it clears a path toward bulking up, gaining traction and growth.

 Unlocked Potential via 3D:

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Tonalli Energia’s team of experts believe that Pemex – the previous operator of the project – failed to mobilize Tecolultla’s full potential. Not even close. Their 3D seismic data suggests (reveals) a significantly underdeveloped reservoir. This is where the opportunity lies.

Tonalli Energia’s first well, Tec-10, will be an important first step in tapping and confirming this latent production potential.

From the ‘Projects’ page on the company’s website…

Like many oil and gas fields in Mexico International Frontier’s technical team believes oil production from Tecolutla has not been optimized. The team has re-evaluated the field using existing well control and 3D seismic and believe that horizontal drilling and workovers will yield daily production results that exceed the historical peak production of 900 barrels per day and significantly increase recoverable reserves. To execute the plan our team intends to deploy advanced carbonate drilling, completion, stimulation and recompletion techniques in the Tecolutla Block.

The untapped potential: Tec-10 right in the sweet spot, Tec-11 to pick up what the earlier wells missed…
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Int Frontier’s technical team is not messing around. They’re employing an aggressive approach, a multi-well development program backed by solid geoscience (3D seismic technology) and engineering expertise in order to increase productivity and recovery from the reservoir.
 
After drilling the TEC-10 well and performing workovers on TEC-2, Tonalli Energia will be in a better position to estimate the size of the reservoir. This will be an important piece of news. It will assist the company as they work toward maximizing recoverable reserves and production.
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Here’s the cool part about the business model Int Frontier is following: as the company establishes itself via reserves, production and revenues – as it demonstrates and delivers performance – it should be able to leverage that success. It will gain standing, clout. It will be in a better position to explore new opportunities, seek new partnerships in the country, and become a more assertive bidder in the auction arena.
 

Recent Events:

The joint venture received final authorization from the Mexican government in January to allow the JV to commence drilling at Tocolutla. Drill pad construction began last month. The Tec-10 directional development well spud date is scheduled for mid April. That’s only a week or so away.

 

Int Frontier announced on March 8th that its Mexican joint venture – Tonalli Energia – is mobilizing a drill rig to Tecolutla.
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There’s a certain momentum building under this stock. The share price has been fairly volatile in recent sessions, a sure sign that word is getting out…
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 Friends in lofty places:
 
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EDC (Export Development Canada) is a financial partner to Int Frontier. The company was the very first oil and gas company to be backed by the EDC for work in Mexico.
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The EDC is putting up Int Frontier’s 50% end – some US$882,050.00 – of a performance bond required from Tonalli Energia by the Mexican government. US$880K ain’t chump change.
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What this says to me, as a potential investor, is that Int Frontier is exploring every avenue to maintain a healthy balance sheet, minimizing cash outlay in order to maximize shareholder value. The optics here project a very positive light.
 
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A quick word about management:
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This is a well-seasoned team with a number of overlapping skillsets. After reviewing the individual resumes, the above partnership with EDC should come as no surprise.
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A quick peek under the hood:
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The company currently has approximately Cdn $6.1M in cash in its treasury. No Debt.
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Aside from its reasonably tight cap-structure, management has ample skin in the game. That’s always a major plus – management’s interests are aligned with those of their shareholders.
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On the subject of cash and spending…
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Int Frontier is fully-funded for 2018. The company’s 50% share of Tonalli’s estimated expenditures for the Tecolutla field have been budgeted at approximately Cdn $2.6 million. The company will also have sufficient cash on hand to drill additional wells.
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If the company is the successful bidder during one of the upcoming land auctions, they’ll likely need to raise additional funds. Part of the growth process… ‘building blocks’.
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 Final thoughts:
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I like this company. I like its business plan. I like its early-mover advantage in Mexico’s energy reform process. I like the opportunity it has to grow its asset base via the auction arena. I like management. I like the way they run the company. I like their innovate approach to sourcing funds. In general, I like the company’s long-term focus, its goal of establishing itself as a leading oil and gas company in a country that’s wide open for opportunity.
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Now that the company has a highly prospective project to direct its focus on, the only question that remains is: can they execute? I think yes. We stand to watch.
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END.
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~ ~ Dirk Diggler
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Postscript: here’s a nifty glossary of oil and gas terms, courtesy of the International Frontier website… http://www.internationalfrontier.com/s/Terms.asp
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 FULL DISCLOSURE: International Frontier Resources is an Equity.Guru marketing client. The author does not own shares in Int Frontier.
 
 
 

 

Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.

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