Trillion Energy report from Fundemental Research Corp. Trillion Energy International Inc.
(CSE:TCF/ Frankfurt: 3P2N/ OTC: TCFF)
LOI for Development Financing / Q1-2021Revenue Up 50%
Highlights:
TCF’s shares are up 230% since we initiated coverage in December 2020.
Q1-2021 revenue was up 50%YoY due to higher oil production and prices. At Cendere, two successful recompletions earlier in the year resulted in a 40% increase in production to 150 bopd.
TCF entered into a LOI with an undisclosed U.S. investment fund for $17.5M in financing (royalty + convertible debt) for SASB’s development. Although the LOI is subject to due diligence, and there is no guarantee that the entities will enter into a definitive agreement, we consider this to be a major milestone for TCF.
Subject to this financing, the company is planning two new wells, and one workover in H2-2021. In 2022, the company is planning three new wells, and one workover. This is part of a 17-well program, which, if successful, will result in peak annual production of 11.3 bcf net to TCF ($68M in revenue at $6/mcf gas).
2020 year-end reserve report showed no material YoY change in reserves. As 94% of the current 3P reserves come from gas, TCF’s value is dependent on gas prices in Turkey.
Turkey's natural gas imports increased 48%YoYin March, per Turkey's Energy Market Regulatory Authority. Natural gas prices in Turkey are currently $5.8/mcf, down 6% YoY. We are expecting an economic recovery in H2-2021, which will likely push prices back up to their historic range of $6-$7/mcf. New cases of COVID-19 in Turkey have been on a declining trend since early April. 20% of its population has received at least one dose of vaccine.
Stock Options and Warrants:
The company has 46.50M warrants (weighted average exercise price of $0.10), and 11M options (weighted average exercise price of $0.10) outstanding. All the outstanding options and warrants are in-the-money, implying a potential to raise up to $6M.
Project Updates:
Cendere:
Two successful recompletions earlier in the year resulted in a 40% increase in production to 150 bopd.
SASB:
Despite having negative netbacks, the company continues to produce at SASB to partially offset the fixed costs associated with the project, as well as to maintain continuity of staff and operations in anticipation of the upcoming development program this year.
In April 2021, the company entered into a LOI with an undisclosed U.S. investment fund for $17.5M in financing. The financing includes $4.50M in royalty financing (5% of net production from Cendere, and 3% from SASB; total payments will be capped at$16M), and $13.5M in convertible debt (three-year term/13% p.a./conversion price of $0.28). The convertible debt will be financed in stages. The LOI is subject to due diligence.
Subject to the above financing, the company is planning two new wells and one workover in H2-2021. This is part of a 17-well program, which, if successful, will result in peak annual production of11.3 bcf net to TCF ($68M in revenue at $6 per mcf gas), and average annual production of 4-5 bcf ($24-$30M in annual revenue) over the first 10 years.
The company recently commenced a geophysical assessment to potentially expand its resource-base, as well expand its acreage from 12,385 ha to 200,000 ha, by applying for a Technical Assessment Permit. In 2020, TCF’s partner, Turkey’s state-owned oil and gas company, Trkiye Petrolleri Anonim Ortakl / TPAO,made a major discovery, 150 km north of SASB. This discovery is very encouraging for TCF, as it indicates potential for additional gas reserves at depth on their land. That said, as we mentioned in our initiating report, a possible negative for TCF is that TPAO might assign more resources and capital to the new discovery instead of advancing SASB.
Risks:
We believe the company is exposed to the following key risks (not exhaustive):
Our valuation is highly sensitive to gas prices in Turkey.
SASB is a highly capital-intensive project.
Delay in closing the financing will impact project development timelines.
Potential for share dilution.
Development risks.
Geopolitical and currency risks.
We rate TCF’s shares a risk of 4(Speculative).