TXO: Potential of near-term cash flow combined with significant blue-sky
April 02 2013, 12:23pm 
Freeport sits at the centre of one of the busiest sea routes in the world and is among only a handful of destinations that can handle the super-large vessels that now dominate the seaways.
If you want straightforward then TXO ( LON:TXO ) is probably not the investment for you. But I would hazard a guess that most hardy stock pickers looking for the next pocket rocket on AIM want more than plain vanilla. After all there’s a surfeit of dividend-paying, ex-growth stocks among the ranks of the mid and large caps.
TXO combines the prospect of early and significant cash flow with a blue-sky opportunity that could make a mockery of its current £3.5mln market capitalisation.
The investment company, reconstituted from an early incarnation, has been moulded into its present form over the past two years by chairman Tim Baldwin, a former oil and gas analyst.
TXO has a 30.17% holding in Grand Bahama Group, with the option to increase this to 43.18%, and there is the potentially significant oil and gas opportunity in Tasmania.
In GBG there are two assets – Morgan Oil Marine (MOM) and cash generative oil acreage in Kentucky, held via a subsidiary called MOUSA.
The former provides the prospect of early profits as it is developing a facility in Freeport, Grand Bahama, which will reprocess waste oil and slops created by the region’s seaborne giants.
Tankers and containers criss-cross the Caribbean using the Panama Canal, which is being enlarged to accommodate bigger ships, as their short-cut between the east and west coasts of the Americas, while the area is also a magnet for the holiday liners that set sail with sun and fun seekers from the Florida ports and Southampton.
It means Freeport sits at the centre of one of the busiest sea routes in the world and is among only a handful of destinations that can handle the super-large vessels that now dominate the seaways.
The idea is MOM will re-process the heavy oil and slops from boats using the port, creating potable (drinkable) water and a cut price fuel with a potential local buyer in a nearby power station.
The processes involved are “not rocket science”, says Baldwin. “This is not a technological play; it is a latent opportunity that hasn’t been exploited.
“There is an element of first mover advantage here. It is not a technology play. It is about securing licences and contracts.”
Initially, MOM is planning a 17,000 tonne facility, at a cost of US$2mln, which should, based on internal projections, generate somewhere in the order of US$5mln of underlying earnings (EBITDA), when it is up and running later this year.
There is some interest from Bahamas lenders in funding this capex, although MOM could possibly generate the cash internally.
It has secured Martha, a barge capable of holding 1mln gallons of waste oil, to generate cash flow. Once it is up and running it will be filled monthly and its cargo shipped to the US mainland and sold untreated.
This would provide valuable, early funds ahead of construction.
When up and running, the new facility will process 17,000 tonnes of waste oil. But really this is only the start and is based on the likely business from the nearby shipyard. The group has a contract with a shipping agent and is looking to secure recycling deals with nearby islands.
It has also secured sole distribution rights in the Bahamas for BP Castrol’s marine oil and lubricants, which should provide a fillip to an already healthy income stream.
The second facet to the Grand Bahama Group investment is its Kentucky oil acreage, which is estimated to contain 1.4mln barrels with a net present value in the order of US$28mln.
Current production of 17 barrels a day won’t be giving the majors sleepless nights. However, neighbouring producers in the Illinois Basin have enjoyed great success drilling deeper into the play and horizontally. Interest is such that MOUSA, the GBG subsidiary that holds the asset, has received a number of expressions of interest.
“GBG aren’t pressured to sell it or invest in it,” explains Baldwin.
“If the Bahamas goes the way we expect, it could self-finance this asset from the balance sheet.”
In Australia, the story becomes a little (probably a lot) more complicated. However, as we’ll see, success down under could be utterly transformational.
Here it has 25% in Tasmania Oil & Gas (TOG), with an option via a convertible loan to go to 30%. TOG is a joint venture company set up specifically to acquire Great South Land Minerals out of liquidation. It owns enough GSLM debentures to control when this happens.
The likely cost of negotiating a deal with creditors will be negligible compared with the prize on offer.
There is, however, a wrinkle with this scenario: Mineral Resources Tasmania (the local regulatory authority) is challenging GSLM’s rights to its oil and gas exploration licence, which extends to 2105.
TOG is currently appealing the decision, which will be heard in a local magistrate’s court on April 23.
A positive verdict (or a settlement before that date) opens up a potentially big oil and gas opportunity, for GSLM’s exploration licence covers an area of 3,108 square kilometres prospective for hydrocarbons.
February’s competent person's report points to an estimated total mean recoverable prospective resource of 2.7 trillion cubic feet of gas, or 508mln barrels of oil equivalent.
TOG plans to bring in new management and raise over US$15mln to fund a three-well drilling programme. One is already part drilled, the site is prepared and there is rig availability.
“We believe we have a good case,” says Baldwin referring to the appeal. “But you can’t definitively prove this until you have won.”
