Substantially Undervalued, O&G Situation in play

Hi & Welcome to the new thread & my first ever comments on Argo (they were written a week ago, so the figures have changed very slightly since then & advantageously to those below)

Argo might at first sight appear to be a very strange stock to invest in, however dig a little deeper and you’ll find it’s in a very interesting situation over the next 3 months.

The company currently has 131.22M shares in issue, virtually no cash and outstanding debts of @ A$425,000 and a market cap of A$1.84M @ A$0.014. It has also granted to its directors quite a few performance rights at various prices (being 3.5, 5.0, 7.5 & 10 cents).

Yup not very pretty and it’s currently quite illiquid to trade as I’ve discovered while trying to buy stock without chasing the price up (worth noting one of the directors has been buying in the market at 1.5-1.6 cents very recently).

It effectively only has one asset, namely 7 million shares in a UK, AIM listed company called Pantheon Resources (LSEANR) which it bought several years ago for around £0.14 per share ( the A$ to £ exchange rate was much stronger in those days [maybe 0.70/0.75] compared to the current 0.49/0.50 rate).

At the moment PANR is trading around the £0.23-£0.24 price mark, which equates to @ 47 cents a shares. Therefore the company’s 7M shares have a value of @ A$3.3M (£1.61M), deduct the outstanding debt of A$0.425M and you’re left with a net cash value of @ A$2.85M (or net cash of A$0.0218 per share).

You’re probably thinking no great shakes, it’s simply valued on the ASX at A$1M less than its cash backing like quite a number of shell company’s are. Which is exactly true.

However let’s look at Argo in a completely different way, think of it as being part of Pantheon. For every 18.75 Argo’s shares you own, you effectively own 1 Pantheon share (131.2M divided by 7M). So effectively each PANR share is costing you 26.5 cents to buy instead of 47 cents (at A$0.014 & £0.23 – [down from £0.25]) !!!

Pantheon used to be involved in a project way back in 2008/09 with GGP (remember them) and someone else and actually haven’t been involved in drilling a well in over 6 years! So much for being an exploration company!

Anyway last October they raised £20M to fund the purchase of a 50% interest in a number of properties in Tyler & Polk county’s in South East Texas. They were due to start drilling in Q1 but it didn’t happen, surprise surprise. However the drilling rig is due onsite at one of the Polk properties in the very near future & once that well is drilled they will go and drill a second well in Tyler county straight afterwards.

Personally I wish they were doing the drilling the other way round because the Tyler well is effectively a step-out or offset well (1km away) to a vertical one (LP2) that has been pretty productive ($30M of cash-flow) and the chances of success there are very high. However the recent rains in South Texas have made them change their plans and go to Polk first of all as its easier to access the site as its right next to a road.

Those of you who remember Antares Energy’s Yellow Rose project, will understand that this has the same sort of feel to it.

This link to the Texas RRC website, relates to a well very close to where the first well is going to be drilled (about 1 mile SW and produce’s some oil & gas around the same depths)
http://webapps2.rrc.state.tx.us/EWA...86HX5tfrEJiLelOV8lheOTM7TO035TzfjJ1Wqks0fBAAA

Here’s the new well’s actual details
http://webapps.rrc.state.tx.us/DP/drillDownQueryAction.do?fromPublicQuery=Y&name=BLACKSTONE+MINERALS&univDocNo=489323526

This will give you a view of the surrounding area
http://wwwgisp.rrc.state.tx.us/GISViewer2/

Enter Polk as the county and at the right handside do a search on 373-31295 to get the well (you might need to zoom out a little to the 6th or 7th top setting for a better view)
If you look a little further to the north, there are a number of lateral wells that another operator has in production & has recently permitted several more wells there to.

Here is a link to Pantheon website where you can view the recent CEO interviews (from 2nd June 2015) etc (which is worth listening to 15 mins)
http://www.pantheonresources.com/

PANR has 197M shares in issue, so has a market cap of £45M or A$92.5M at £0.23.
I know some are talking on the UK BB’s (like Advfn etc) that success for PANR will see the share price going significantly higher than it is now.
Because of the gearing effect between, AXT, PANR & the currency (AUS-GBP), each 1p rise in the PANR share price raises the cash NAV of AXT by @ 0.1 cents each time.

	Column 1	Column 2	Column 3	Column 4	Column 5
1	£​	A$​	Value A$	NAV A$	Diluted NAV
2	0.230​	0.469​	3,285,714	0.025040​	0.021839​
3	0.250[/FONT][/COLOR][/RIGHT]	0.510​	3,571,429	0.027217​	0.024016​
4	0.300[/FONT][/COLOR][/RIGHT]	0.612​	4,285,714	0.032661​	0.029460​
5	0.400[/FONT][/COLOR][/RIGHT]	0.816​	5,714,286	0.043547​	0.040347​
6	0.470[/FONT][/COLOR][/RIGHT]	0.959​	6,714,286	0.051168​	0.047967​
7	0.500[/FONT][/COLOR][/RIGHT]	1.020​	7,142,857	0.051233​	0.048220​
8	0.510[/FONT][/COLOR][/RIGHT]	1.041​	7,285,714	0.052257​	0.049245​
9	0.600[/FONT][/COLOR][/RIGHT]	1.224​	8,571,429	0.061479​	0.058467​
10	0.750[/FONT][/COLOR][/RIGHT]	1.531​	10,714,286	0.076849​	0.073837​

This table allows for AXT shares to trade at a discount. At the £0.50 for PANR (4.8 cents AXT [allowing for debt dilution]) I’ve taken the view that the 3.5 cents performance share’s will be triggered (ie traded weighted price of 3.5 cents for 5 days occurs), which will mean an extra 8.2M shares in issue, which in turn is a slight drag on the ratio going forward.

If PANR reaches £0.50 which is double the current share price, I’d expect AXT to trade around the 3.3 - 3.7 cent range (provided it still has all it’s PANR holding, given the time they’ve been held & recent director buying, I’d expect them to wait for both drilling results before the selling starts) which is more than double your money and a better performance than direct PANR shareholders would achieve !

Good luck with your own research

LOTM