RE:Update PTA on Seeking AlphaPetroamerica Oil - Update And Comments On Q1 Results May 26, 2015 10:01 AM ET | About: Petroamerica Oil Corp (PTAXF) Disclosure: The author is long PTAXF. (More...) Summary •I discuss Q4 2014 and Q1 2015 results. •The production reduction was a net plus. •Management executed well, with the company having a significantly reduced cost base. •Their net cash position will be used to develop existing reserves, with significant exploration gains unlikely in the midterm. Since my last two articles on Petroamerica Oil (OTCPK:PTAXF) here and here, the company reported Q4 2014 and Q1 2015 results. While a lot of the comments focused on their reduced production guidance for Q1, down from 5,400 boepd to 4,200, I find this news to be rather trivial. More noteworthy is their cost base on a per barrel basis, which went from horrible in Q4 2014 to pretty good in Q1 2015. Overall, the interim news shouldn't have changed your opinion that much, if you were a bull on this company to begin with. Having bought into this stock at an average price 5% above the current level, I continue to believe that there are few scenarios constituting further downside with plenty of upside cases. However, I'm not as optimistic as some other Seeking Alpha members. My first article factored in no significant exploration upside (meaning net adds to their reserve base) and I'm increasingly leaning toward this scenario, as their guidance and current cash situation leaves little room for any real kind of exploration capex. Their Langur-1x test well, while showing good flow during testing, has yet to be declared commercial. Their current capex is focused on bringing undeveloped existing reserves online, a wise decision in the current environment. The company published their end-of-year 2014 results in the middle of April. While commentary focused on their reduced production guidance, I felt rather neutral about this news. In their MD&A discussion, they noted the following: “ The Company estimates that 75% of this shortfall is a result of the revised drilling plan... That implies that most of the reduction was intentional, limiting production from their most expensive wells to conserve cash flow. The company is not free cash flow positive at current oil levels anyway, so why waste your asset base? The more important question is: Did this measure actually result in a lower cost base as management claimed? The Q4 cost numbers were rather dismal, with their G&A costs as high as $13.35 per barrel and production costs of $17 per barrel, significantly higher than their full-year figure of $10 per barrel. An E&P's G&A cost base at similar heights to production or transportation metrics is a red flag. I was hoping that the figures included some one-off charges related to their Suroco acquisition. However, management's explanation was not very granular, merely stating that staff costs were higher. But such measures should have a lagged effect, and the Q1 figures were, in fact, more encouraging. Production costs on a per-barrel basis dropped to $10.78 and G&A costs dropped to $4.44, resulting in an overall cash netback of $9.35 per barrel on an average selling price of $46.88. (click to enlarge) Source: Company Q1 2015 MD&A Bottom line, their reduced production costs more than made up for the reduced production, as hypothetical production costs of $17 (the Q4 2014 figure) would have reduced their netback to ~$3. According to their latest update, the company paid back their Canadian debenture and had a net cash position of about $26M. They are sticking to their capex guidance of about $13M for H1, focusing on developing undeveloped reserves, $2.5M of which has been spent in Q1. Summary Management did a good job of reducing the cost base, and reducing production clearly paid off in Q1. If current Brent prices prevail, Q2 realized oil price would be slightly above $60 and a $20 cash netback is not out of the realm of possibility. (Note that the price appreciation would not drop down to netback directly as royalties would also appreciate.) With Q2 production of 3,800 boepd (Q1 was ~4,600 and guidance for H1 stands at 4,200) and a cash netback of $20, the company would realize about $7M in cash netback. That could fund the majority of the planned capex and result in minimal cash burn. Nevertheless, the past year took a massive toll on their cash position, which will severely inhibit their future prospects for making significant discoveries in the near- to mid-term future, and I wouldn't factor in any significant 2P adds anytime soon. One should remember that most of the company's current reserve base stems from their 2014 Suroco acquisition, for which they paid ~$20 per 2P barrel (note that a barrel of 2P needs additional investment to reclassify it to 1P undeveloped and 1P developed until it is actually producing). Source: Company reserve report February 2014 If the company had good exploration assets with prospects of per- barrel capex near or below that price, they wouldn't have bought Suroco in the first place. I think management knows this as well, which is why they are attempting to capitalize as much as possible on their current reserves. If the cost figures stay close to current levels, Q2 could well act as a turning point for the market's perceived outlook on this company. Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.