Future LNG Pricing And Trinidad Gas Development Will Drive Long-Term Value Potential

Catalysts

About Touchstone Exploration

Touchstone Exploration is a Trinidad focused upstream energy company developing and operating onshore natural gas and oil assets.

What are the underlying business or industry changes driving this perspective?

• Acceleration of development drilling at Cascadura and Central Block, with up to 10 development wells at Cascadura over three years and additional Central Block wells, is set to increase gas throughput through already built facilities. This may drive higher production, revenue growth and operating leverage on fixed costs.
• Improved market access for Trinidad gas into higher value LNG channels, including Central Block volumes transitioning more fully into LNG linked pricing from May 2027 and above 22 million cubic feet per day, provides structural pricing uplift potential that may enhance realized gas prices and expand funds flow and earnings.
• Installation of compression at Cascadura and Central Block, sourced on an accelerated timeline, is expected to stabilize line pressures, reduce downtime and effectively add the equivalent of a new well for more than a decade. This may support flatter production profiles, stronger netbacks and more predictable cash flow.
• Advancement of lower risk Herrera and emerging Cretaceous exploration opportunities at Cipero, Charuma and related prospects within a prolific regional hydrocarbon basin, reinforced by recent major company farm in activity offshore, could add new high impact reserves and materially increase long term production, reserves based lending capacity and net asset value.
• Ongoing efficiency gains and cost rationalization at Central Block, including removal of legacy facilities, internalizing water disposal and eliminating non essential services such as helicopter standby, are expected to structurally lower operating costs per barrel of oil equivalent. This may improve net margins and support faster deleveraging.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Touchstone Exploration's revenue will grow by 82.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.6% today to 18.6% in 3 years time.
• Analysts expect earnings to reach $40.4 million (and earnings per share of $0.19) by about June 2029, up from $8.5 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 1.3x on those 2029 earnings, down from 3.8x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.07%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Central Block and Cascadura integration may take longer and cost more than anticipated, with messy quarters persisting beyond Q3 as one time facility removals, restructuring charges and higher than modeled decommissioning and abandonment levies continue. This would suppress funds flow from operations, delay deleveraging and weigh on earnings growth.
• Reservoir performance and decline rates in the Herrera gas wells could be steeper or less responsive to compression than management expects, or drilling results at Cascadura and Central Block could disappoint relative to the 10 to 12 well development plan. This would limit volume growth, reduce operating leverage on existing infrastructure and constrain revenue and net margin expansion.
• Reliance on future LNG linked pricing and contract improvements from 2027 onward exposes the company to long term commodity price cycles, potential changes in Trinidad gas marketing policy and counterparty behavior. Weaker global LNG and Henry Hub prices or less favorable contract renegotiations would diminish the anticipated structural uplift in realized gas prices, curbing revenue and earnings upside.
• Execution risk around funding needs, including the requirement to raise additional equity under banking covenants and potential reliance on waivers or farm downs, creates the possibility of shareholder dilution, higher financing costs or constrained capital budgets. This could slow the drilling program, limit development of Cipero, Charuma and Rio Claro and ultimately reduce cash flow and earnings per share growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$0.15 for Touchstone Exploration based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $217.2 million, earnings will come to $40.4 million, and it would be trading on a PE ratio of 1.3x, assuming you use a discount rate of 8.1%.
• Given the current share price of CA$0.13, the analyst price target of CA$0.15 is 13.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.