Flying into clearer skies?

While I’ve added a number of firms to my portfolio, including Rolls-Royce and Cineworld, I bought International Consolidated Airlines Group (LSE:IAG) shares in the middle of the pandemic.

It was, and still is, my belief that the airline conglomerate is oversold and that a recovery is due at some point as international restrictions are relaxed. While this has come true to some extent, there are still problems.

Since I bought the shares, I’m down over 15%. This comes amid surging jet fuel costs and inflation. There are also fears of a recession, which could further dent travel demand.

However, the business recently bought 37 new Airbus narrowbody aircraft and converted a loan into a 20% stake in Spanish airline Air Europa. 

Furthermore, for the six months to 30 June, operating profit was €293m, up from a €967m operating loss the previous year.

With an improved cash balance of €9.2bn, IAG should be able to navigate short-term storms and emerge as a leaner, more profitable company in the long term. As such, I’m really not that worried about the fact that I’m down over 15%.

Drilling for oil

Another investment that excites me is Pantheon Resources (LSE:PANR). The firm – an oil exploration company in Alaska – is one of my higher-risk investments.

In a fragile and volatile market, my initial investment is up around 25%. Like many other businesses, it’s currently suffering from supply chain issues and inflation pressures. These both have an impact on the firm’s ability to carry out exploration activities.

While the business isn’t yet at the production stage, it estimates that it has oil-in-place equivalent to 23.5bn barrels of oil. 

Even at a conservative recovery rate of 10%, this may equate to nearly 2.5bn barrels of oil going into production. This can only be good news for the company.

It also recently finished exploratory drilling at the Alkaid 2 well, reporting a significant improvement in reservoir quality. Alkaid 2 may add to the initial estimates of the amount of oil present in Pantheon’s zone of exploration.

Overall, while my Stocks and Shares ISA is down heavily, I’m cautiously optimistic going forward. These two companies, in particular, present exciting growth opportunities for my portfolio. To that end, I’ll continue to monitor these businesses and consider adding to my holdings on any significant share price dips.

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This week’s statement

The Pantheon Resources (LSE:PANR) share price has been volatile over the past year. In that time, it’s up 158%. At the time of writing, it’s trading at 134p.

The Alaska-based oil exploration firm has licenses to search for oil on over 153,000 acres of land on Alaska’s North Slope.

The big news this week was an operational update from drilling at the Alkaid #2 well. The business stated that it had completed drilling to a depth of 14,300 ft. 

This was a major step forward, because it will now progress to the next stage of operations. This entails swapping rigs to prepare for completion and the possibility of commencing oil production. 

However, the company did add that inflation and supply chain problems may cause issues in the future. Much of what Pantheon Resources does relies on effective supplies of equipment. As a current shareholder, I hope the firm manages this potential issue carefully for the smooth progression of its operations.

23.5bn barrels of oil?

This week’s statement was preceded by another drilling update for Alkaid #2, on 29 July. This announcement stated that the business had found multiple oil-bearing reservoirs during the drilling operation. In addition, the quality of these reservoirs was much better than anticipated. 

The market responded very favourably to this news, and the shares climbed nearly 25% in one day. 

More broadly, the firm estimates it has oil-in-place of 23.5bn barrels. Of this, a conservative estimate is that it could recover 10%. With oil prices at historically high levels, if Pantheon Resources can recover this amount of oil it could bode extremely well for future balance sheets.

The leadership within the company added that these developments at Alkaid could mark the transition from a business focused on exploration to one set on production. As an investor, this is something that excites me greatly.

Aside from exploration developments, the company also has a strong balance sheet. It has a manageable debt pile of $39.74m and total cash of $92.67m. What this means is that there is the potential for the business to expand its exploration capabilities even further, given its solid financial state.

Overall, the recent share price performance of this company has been explosive. Looking deeper, however, it’s clear to see that the oil exploration is going smoothly. There is also the real possibility that it begins production sometime this year. With that in mind, I’ll be adding to my current holding soon to gain greater exposure to what I believe is a quality business.

Why did the PANR share price fall?

Investment firm Peel Hunt initiated coverage of the business yesterday and immediately placed a ‘sell’ rating on the stock.

What’s more, it issued a price target of 50p. This is far below the current PANR share price and may be a reason for the large fall today and yesterday.

In the coverage, it cited recent flow rates and other, more historical factors. This includes the decision by a large oil firm to farm-in, that is to enter an agreement, with competitor 88 Energy in 2017, as opposed to Pantheon. 

It’s worth noting that 88 Energy has acreage and operations right next to Pantheon, in Alaska.

In terms of financial results, Pantheon did report widening losses of $4.4m for the six months to 31 December. However, its cash position has improved massively to $92.7m, up from $29.8m one year earlier.

I don’t think these financial results as a reason for the recent price fall.

Large oil discoveries and near-term production

When investing in oil exploration companies, however, I like to look beyond financial results and analyse the extent of their discoveries. Recently, investment bank Canaccord Genuity raised its target price to 280p. 

This followed the announcement by Pantheon that it may have 23.5bn barrels of oil in place. Even with a conservative estimate of 10% recoverability rates, this potentially amounts to well over 2bn barrels of oil for production. 

With this production set to commence in October, revenue from these discoveries may come sooner rather than later.

In addition, the firm had a successful winter drilling programme at its Talitha and Theta West wells, although bad weather halted operations on a few occasions. 

Summer drilling programme

The company announced this week that it had concluded a rig contract to drill at the Alkaid #2 well. Spudding, the initial drilling, will commence in July. 

Through complex analysis, the business believes that the oil zone in this well is “substantially thicker” than previously thought. 

It’s possible that this well could have 2.6bn barrels of oil in place. It’s estimated that about 400m barrels could be recoverable. If recovered, this may be very good news for the PANR share price, as more oil enters into production.    

It should be noted, however, that the nature of exploration can mean that recovery rates may be lower than estimated.

Overall, this correction to the PANR share price may seem like a big move down in the short term. However, given the substantial amounts of oil that may be in place, I think the company could soon flourish as oil production begins later in the year. I see this recent price movement as a good opportunity to add to my portfolio and I will be purchasing more shares soon. 

Positive news boosting the share price

Over the past year, there have been several positive signs that have supported the PANR share price heading higher. Primarily, this focuses on the successful winter season at the Arctic projects, ranging from Talitha #A to Theta West #1. In the latest report, it spoke of the past winter being “one of tremendous achievement for Pantheon, with high-quality, light oil being confirmed in all targeted horizons”.

In an April update on progress, further good news came out, with estimates of the oil potential upgraded. The summer season will offer more information and hopefully allow the business to proceed to the next stage.

Indeed, I think that most of the move higher in the PANR share price has been from speculative investors hoping for success in the projects. These have been rewarded following the winter results. This has allowed the share price to snowball in momentum, as more now pile in hoping for a smooth and profitable transition from exploration to production.

Breathing space on the financials

The discoveries from Pantheon are more promising than most oil exploration stocks that pop up on my radar. Another difference I note is the financials. The company managed to raise $96m at the end of last year in order to help finance drilling for the Theta West and Alkaid projects. This should enable the company to operate for many years ahead, despite the losses currently.

Usually, the oil exploration stocks I see have enough funds to last a couple of years. If they don’t strike gold in that period, it’s game over, both for them and their investors. Pantheon lost just under $6m in H2 2021. This contrasts to the loss of $4m in the same period in 2020. So even if the business struggles to commercialise and generate revenue over the next year or so, the financing gives plenty of breathing space. This is a positive point for the PANR share price.

Points to be aware of

However, I do have some concerns about the business that could halt the strong rally in the shares. For example, the weather in the Arctic is very unpredictable, and could prevent or stall progress this year.

Also, with a market capitalisation of £1.02bn, will I be buying the shares at an overpriced level? If I assume the market is efficient, then the price should accurately reflect the value of the business as we stand. So without any further increases in output, I could argue that there isn’t really much more upside to be had.

Personally, I think investors who’ve bought in over the past year have achieved some fantastic returns. But as an outsider looking in, I struggle to justify investing now, given the good news already factored in to the current share price. On that basis, I won’t be investing.

Recent activities

The company has been working for an extended period to advance its drilling operations at its Talitha and Theta West wells.

Yesterday, the leadership team hosted a webinar to update investors on winter drilling activity in the area. It contained a number of interesting revelations. Although the winter operations were disrupted on a few occasions because of weather-related shutdowns, successful drilling activities have resulted in meaningful increases to previous resource estimates, roughly twofold growth.

Resource estimates and the PANR share price

The ‘resources estimates of proven reservoirs’ figure tells us that there are around 23.5bn barrels of oil in place.

Even with a 10% recoverability rate, which is probably conservative, the firm will likely extract around 2.3bn barrels of oil. In fact, this number could be two or three times higher.

As a current shareholder, this fills me with confidence and excitement, because it will provide revenue for the business to grow.

It is also possible that oil production could begin in October, meaning that physical sales could commence quickly.

This positive activity led broker Canaccord to increase its target price for the company from 250p to 280p. At current levels, this would mean the PANR share price doubling. Given the large amount of oil potential going into production, I think this share price movement could materialise. 

It is always worth noting, however, that actual oil reserves may differ from estimates and recoverability may not be in line with expectations when the time comes to produce. This is in the nature of any exploration endeavour.

Recent financial results

Elsewhere, the firm reported a loss of $4.4m for the six months ended 31 December 2021. This was larger than for the same period in 2020, when losses were $3m. 

Widening losses aren’t particularly surprising for an exploration company, especially given the fact that the areas of exploration look prosperous.

The company also has a strong cash position. At the end of the period, it had a balance of $92.7m. This was an increase from $29.8m the previous year.

Overall, the recent increases in estimates are very exciting and, if recovered efficiently, could provide vast oil resources to sell into the market. I think the Pantheon Resources share price could soar on the back of these developments and I will be buying more shares soon.

I think this firm could be a good addition to my long-term portfolio as a speculative buy. Why might I purchase at the current PANR share price? Let’s take a closer look.

Recent results

The business was established in 2005 and for the years ended June, between 2020 and 2021, losses widened from $3.77m to $8.24m. Furthermore, losses-per-share increased from ¢0.56 to ¢1.17. 

During this time, the company failed to generate revenue. The firm had produced small revenues of $1.01m and $0.72m in 2018 and 2019. Given that this is an exploration business, I’m not particularly surprised or concerned about inconsistent revenues.

In December 2021, it successfully raised $96m. This will bolster Pantheon’s balance sheet and allow it to continue its operations in the remote areas of Alaska. 

The popularity of this fundraise is indicative of the positive investor sentiment towards this company. 

Exploration activities and the PANR share price

Looking beyond the financial history to exploration activities and reports also gives a good indication of whether the current PANR share price is attractive. 

The firm received approval for drilling at Theta West and Talitha, two wells in Pantheon’s area of operation, in December 2021. 

In January 2021, the company commenced spudding, the initial drilling of the well, at Theta West 1. This involved navigating the extreme cold and working around weather-related shutdowns. The big news from this venture revealed an estimated amount of 1.2bn barrels of oil on the basin floor. Given the nature of exploration, however, it is always worth noting that actual yields may be less than estimates.

The firm also announced in February 2022 that it completed flow testing at the Talitha A well. The result was that the well averaged 45 barrels of oil per day for three days. The PANR share price surged 20% in one day on this news. It currently trades at 118.2p, up 202% in the past year. As a potential investor, it is encouraging to read about these consistent flow rates.  

Just this month the business carried out further testing at Theta West. The result was a further strong indication that the 1.2bn barrels of oil amount is there and that the actual amount will “likely exceed” this estimate. The flow rate during this investigation peaked at 100 barrels over 2.5 days, levelling off at 59. 

Overall, Pantheon is very active in its exploration. It seems highly likely that there is a vast amount of oil at the Theta West and Talitha wells. If drilled and extracted, this could send the PANR share price significantly higher. I will be buying shares soon.  

As a reminder, this site is expected to contain up to 1.2 billion barrels of oil. And it’s been responsible for a lot of the volatility in the PANR share price seen in 2021. So what was in this update that has investors so excited? Or is this just a short-term boost that’s likely to collapse again in the near future? Let’s explore.

Unexpected positive results

On 7 February, management announced the completion of drilling tests on the Lower Basin Floor Fan of its Talitha #A project in Alaska. The objective was to verify the quality and presence of light oil. This was successful. However, that doesn’t appear to be behind the surging PANR share price.

These tests were performed around 10 miles away from the optimal development location. Yet despite this, the company achieved an average flow rate of 73 barrels per day over three days. And on the last day of testing, the rate had stabilised at 40 barrels.

This is exceptionally encouraging news and beats all of management’s expectations, especially since the drilling test site is in a sub-optimal location. In other words, this is a strong indicator that flow rates at the selected ideal development site could be many times higher.

Considering there were fears that the entire project could be unviable last year following disappointing earlier tests, I’m not surprised to see the stock surge on this news. But are investors getting ahead of themselves? Maybe. Let’s take a step back.

The risks surrounding the Pantheon Resources (PANR) share price

As encouraging as these results are, it’s important to remember that any form of commercial production has yet to begin. Although this might change later in the year depending on the drilling results of its Alkaid 2 well this summer.

Looking specifically at these latest results, they indicate the possibility of a high flow rate at the selected development site. But, in the words of CEO Jay Cheatham, “it does not guarantee success”. The company is performing further tests, gathering more data to verify its findings and confirm the potential viability of this project.

Let’s assume these future tests all deliver positive results, and Pantheon Resources begins production soon. Will the PANR share price climb further? I certainly think it’s possible. But as with any oil company, the group is ultimately at the mercy of fluctuating oil prices.

Currently, the value of the commodity is climbing rapidly, but that inevitably won’t always be the case. Should oil prices collapse in the future, as they have done in the past, then the stock could be in for quite a beating.

Time to buy?

Personally, it’s too soon for me to invest in this business. For now, I’m going to wait for the results of the next set of tests before deciding whether or not to add this company to my portfolio. But I will admit, following this latest update, I am cautiously optimistic about the PANR share price.

What happened? And is this a potential opportunity to buy the shares at half price for my portfolio?

The Pantheon Resources (PANR) share price crash

Pantheon is a US oil exploration business. After receiving approval from the Alaska Department of Natural Resources, the firm began developing its Talitha #A project. It is expected to contain a volume of up to 1 billion barrels. Needless to say, that’s quite an opportunity.

Over the next few months, encouraging early indicators continued to be received. In fact, the management team was so confident in the project that Pantheon acquired 100% of the share capital to be the sole beneficiary.

Last week, after some delay due to poor weather conditions, the firm successfully completed its reservoir test for Kuparuk — the deepest and most promising point in the well. But despite early indicators, the results were quite disappointing. While Pantheon did find high-quality light oil, the flow rate was far too low due to unexpected levels of pressure, making extraction potentially unviable.

Given the high level of shareholder expectations surrounding these results, the collapsing PANR share price is not that surprising to me.

Is it all bad news?

This discovery is undoubtedly disappointing for both Pantheon and its investors. However, there are some reasons to be optimistic.

While Kuparuk was the company’s core focus, there are another four independent reservoirs that have yet to be extensively explored. The firm actually performed some initial tests on the shallower zones and discovered light oil at a much higher quality than expected. A more detailed investigation is set to commence at the start of next winter. And in the meantime, Pantheon has begun analysing the geological data acquired in the most recent testing.

It seems to me that the problems encountered, while frustrating, are ultimately a speed bump rather than a concrete wall. And so the Talitha #A project could still be the opportunity investors thought it was. Assuming that it is, then the PANR share price could very well recover over the long term.

The bottom line

Oil exploration companies are inherently risky. Complications and disappointing results can be pretty common and lead to significant share price volatility, as seen with Pantheon. However, I do believe the recent sell-off might be a bit of an overreaction by shareholders. Talitha #A could still very much be a viable project. And the potential extraction of 1 billion barrels worth of oil could push the PANR share price higher.

Having said that, there remain a lot of unknowns at this time. Therefore I’m keeping Pantheon on my watchlist for now. When there is more information available, I’ll certainly be taking another look.

Operationally, Hurricane is exploring its Rona Ridge assets, west of Shetland. It’s split into the Greater Lancaster Area (GLA) and Greater Warwick area (GWA). GLA produced an average of 14,100 barrels of oil (bbl) per day between June and September and Hurricane has sold over 1.6m bbl to date. The group confirmed it will take at least six months of steady-state production before it can accurately evaluate the validity of its reservoir model.

It’s drilling three wells at GWA in partnership with Spirit Energy and confirmed the presence of light oil, but its ‘Warwick Deep’ well, was abandoned as it did not flow at commercial rates, producing a mixture of drilling brine, water, oil and gas. 

As it’s still early days, the usual benchmarks such as price-to-earnings ratio, earnings per share and dividend yield are non-existent, but the Hurricane Energy share price is around 44p and the market cap is £875m. Brokers have put a target share price of 95p on it, for its undeveloped resource potential. It’s reassuring that this first phase has gone well and is exceeding expectations. 

Bargain or gamble?

AIM-quoted oil and gas exploration company Pantheon Resources (LSE:PANR) operates in the US and onshore North Slope of Alaska. It has a market cap of £87.5m, as it’s still in the non-cash-generating phase, it doesn’t offer a dividend, earnings per share are negative and investment in the Pantheon Resources share price is very much speculative.

This type of investment brings share price volatility at any hint of news. Recent announcements include the appointment of Jeremy Brest as non-executive director of Pantheon, an ex derivatives trader from Goldman Sachs. 

A second announcement declared Pantheon increased its ownership in its Alaska project from 75% to 100%, buying the additional 25% from Halliburton. Pantheon will be responsible for all future lease obligations.

I’m not sure this is really a great announcement and am sceptical as to why Halliburton was happy to relinquish the rights if it’s really such a great asset to own. Halliburton is not doing so well itself, so some shareholders wonder if it’s selling non-core activities to focus on its main business.

The Alaska project contains about 900m bbl of oil along with additional oil from adjacent acreage.  Once this deal goes through, Pantheon intends to farm out its Alaska assets to another company to drill and I think that whether the share price heads north or south really depends on which company comes on board.

Oil drilling in Alaska is controversial, particularly with climate change on everyone’s minds. This far-flung location may not be financially viable, it could decimate natural habitats and contamination is always a risk. 

Hurricane Energy’s share price is more than double Pantheon Resources price of 17p. Hurricane is the slightly more established company, but oil and gas is a volatile and expensive business, so investing at an early stage will always carry risk. Personally, I’m avoiding such speculative investments.

The company released 2018 results on Thursday and for me, the financial aspects are all about cash.

Hurricane burned through $205m in cash in developing its Lancaster field during the year, and with operating expenses of $12.7m, 2018 saw its cash position dwindle from $326.6m to just $83m. Investors really need to see some actual oil production soon.

High hopes

On that score, Hurricane says Lancaster is on budget and on schedule for first oil in the first half of 2019, with chief executive Dr Robert Trice saying that “initial production is planned to be 17,000 barrels of oil per day,” generating “over $200 million in operating cash flow on a full-year run-rate basis at a $60/bbl Brent oil price.”

It seems things are going to go down to the wire, and judging by the essentially flat share price of the past few months, I think investors want to see the colour of the oil. Or rather, they want to see evidence of actual flow rates and support for the half a billion barrels of gross reserves that the company thinks are down there.

If the oil does flow at the rates, and in the timescale, expected, I can see the Hurricane Energy share price taking off.

But many oil explorers before it have had their hopes stymied at the last moment as reality hasn’t lived up to expectations, and I think Hurricane could still go either way.

Disappointment

We had first-half results from Pantheon Resources (LSE: PANR) the same day, and again we’re looking at an oil explorer in the cash-burn stage and which has yet to show any profit.

A little over a year ago, I suggested that Pantheon’s shares could be set to soar based on hopes of a breakthrough to profit in the year to June 2018.

To put it mildly, they didn’t. In fact, the share price fell off a cliff in April after fracking tests at its VOBM wells in East Texas failed to produce the expected oil. That, once again, highlights the risks still faced even in the lead-up to expected commercial production.

First profit for Pantheon is now not expected before 2020, and even then it’s forecast to be modest with earnings per share of just 0.08p on the cards.

Interim

Results just in for the six months to 31 December 2018 show some actual revenues, thought they amount to a modest $356,598. The firm lost $1.27m in the period, with cash and equivalents at the end of the period standing at $4m.

Since then, the acquisition of Great Bear Petroleum in January 2019, funded by a placing in December 2018, has somewhat stolen the limelight. But I can’t help feeling a little nervous over chief executive Jay Cheatham’s report that “it’s been an incredible period for Pantheon,” and his claim that “the Great Bear merger … has been a huge success.”

I generally prefer a little less exuberance from loss-making oil explorers. Would I buy? No, it’s still way too risky for me.