TEG Valuation 14 cents now

Independent Investment Research Australia has just completed a huge in depth report on the TEG
It values the TEG at 14cents currently and has completed an Independent Report that is the best yet I have ever read on the TEG.
I will try to post the entire report which is extensive ASAP.
The report is thorough with plenty of graphs and what if scenarios.
Hats off to these guys they have done a very thorough report.
pump

Independent Investment Research, “IIR”, is an independent investment research house based in Australia and the United States. IIR specialises in the analysis of high quality commissioned research forBrokers, Family Offices and Fund Managers. IIR distributes its research in Asia, United States and the Americas. IIR does not participate in any corporate or capital raising activity and therefore it doesnot have any inherent bias that may result from research that is linked to any corporate/ capital raising activity.IIR was established in 2004 under Aegis Equities Research Group of companies to provide investment research to a select group of retail and wholesale clients. Since March 2010, IIR (the Aegis Equitiesbusiness was sold to Morningstar) has operated independently from Aegis by former Aegis senior executives/shareholders to provide clients with unparalleled research that covers listed and unlistedmanaged investments, listed companies, structured products, and IPOs.IIR takes great pride in the quality and independence of our analysis, underpinned by high caliber staff and a transparent, proven and rigorous research methodology.

LEVERAGE TO RECOVERING OIL PRICESTriangle Energy (Global) Limited represents a combination of deep value and explorationleverage, with a rapid and relatively low cost pathway to production given Triangle’s existingproduction assets. Triangle has executed some big moves for a very small company. It has exitedIndonesia with cash, with which it purchased production in West Australia’s Perth Basin, andhas since become operator. It was part of a successful bid for highly prospective Queenslandcoal gas acreage tender, which it spun out as State Gas, a separate listing giving valuationvisibility, and has moved to increase exposure to historically unloved and highly prospective

KEY POINTSSurvivability – The company’s ability to reset its operations to operate close to cash positiveduring a period of collapsed oil prices is to be commended, and demonstrates survivability.
Oil price is recovering – Triangle has very high leverage to rising oil prices. The Brent oil priceis currently around A$39/bbl and consensus forecasts expect the price to move up over thenext two years to A$80/bbl.
Generally, very sudden and severe downturns in price are oftenfollowed by faster than expected upturns, so there is a risk that any recovery will be faster thanexpected.Leverage of existing operations to oil prices
– The NPV of the existing corporation excludingexploration upside and the State Gas shareholding is A$0.018/sh in our base case, at a flat oilprice equivalent of A$73/bbl, and every additional A$10/bbl adds A$0.018/sh.Leverage of State Gas shareholding to oil prices – Triangle holds 0.133 State Gas (ASX:GAS)shares per every Triangle share.
At the current State Gas share price of A$0.51/sh, everyTriangle share is backed by A$0.068/TEG share of State Gas. State Gas’ share price is leveragedto recovering oil prices. Based on history, if the Brent oil price recovers to A$80/bbl as perconsensus forecasts, the GAS share price would recover to A$0.57/sh, or A$0.074/TEG share.This could be more if there is positive operational news flow from State Gas. In our valuation,we conservatively assume the shareholding is sold and capital gains tax is paid, removing 30%of the value. However, there are outcomes where Triangle shareholders would see full value.
Leverage of exploration upside to oil prices – Rising oil prices increase the likelihood thatmajor exploration expenditure will be funded and the Prospective Resources identified by thecompany and documented in its release of 23 April 2020 will be drilled. We have estimatedunrisked valuations of 1C at A$0.24/sh, 2C at A$0.38/sh, and 3C at A$0.55/sh, highlighting thelarge value add to the existing production assets of this exploration is successful. Our valuation includes 20% of the Net Present Value of 2C production.

VALUATION
Our base case valuation of Triangle Energy is A$0.14/sh per share. 50% of that value is drivenby risked exploration upside.
Our risk factor is 20%. The valuation ranges in the table belowassume long term oil prices of A$55/bbl at the low end to A$95/bbl at the high end. Givenhistorical oil prices, this is not an aggressive price range. The direction of the Triangle shareprice will be largely determined by the direction of the global oil price
Triangle is an asset rich company with existing oil production currently operating aroundbreak even.
Our base case valuation is A$0.14/sh (see Table 6). That valuation is heavilyleveraged to the oil price.
The current oil price is at very depressed levels due to a split between OPEC and Russia,and more recently COVID 19’s impact on demand. We use the summary of a number ofglobal oil price forecasters compiled by Consensus Economics, forecasting an increasefrom the current levels of around A$45/bbl to A$80/bbl by the start of 2022, with apositive trend (ie bull market) between now and then

We have valued Triangle’s direct interest in Cliff Head separately from its interest via 50%owned Triangle Energy Operations.
The forecast oil production from 1 July 2019 to end of reserve is 1.8 MMbbl on a 100%of field basis vs the 2P reserves at 30 June 2019 of 1.71 MMbbl.
The assumptions are stated in Table 2. While we model declining oil production and risingoil prices, our valuation is the same as if we assumed oil production at 660bopd and aBrent Price of A$73/bbl. We have estimated unrisked valuations of 1C at A$0.24/sh, 2C at A$0.38/sh, and 3C atA$0.55/sh. Our valuation includes 20% of the Net Present Value of 2C production.
Only Triangle Energy Operations pays PRRT, and neither Triangle (57.5%) nor TriangleEnergy Operations pay income tax. Triangle is currently paying tax at 27.5%, but we usethe higher rate as a conservative measure, when calculating the use of prior losses.
We have not included the A$21M (A$0.058/sh) rehabilitation liability in our valuation,because we believe that ultimately exploration success will push the payment ofthat liability down the road many years, and if Triangle found itself unable to fund theexploration, the operation and the liability would be sold to another company. Given thehistorical Triangle share price, the market appears to have adopted the same view, andignored its valuation impact.

TAX SHIELD LIKELY TO COVER A$56M OF PRRT EARNINGS AND A$17M OFPROFIT Triangle is assessed for the Commonwealth Petroleum Resource Rent Tax and corporateIncome Tax.
The company has significant recognised and unrecognised Deferred Tax Assets ofA$7.8M and A$23.5M respectively, which we estimate will mean that it will not have topay PRRT on the next A$56.12M of assessable income, and on the next A$17.28M ofincome assessable for Income Tax. This is in relation to its 57.5% direct interest in CliffHead only.
TEG also owns 21.25% through Triangle Energy Operations Pty Limited, its 50% ownedassociate company. The accounts of that entity include a $6M recognised Deferred TaxAsset, but we have no detail as to its split between PRRT and Income Tax benefits. Weassume that this entity has to pay PRRT. That means that for the level of earnings we are forecasting in our model, and for therange of sensitivities we have tested, the company will not pay out cash in respect ofthese taxes except for Triangle Energy Operations paying PRRT.
The Profit and Loss is likely to show amounts on the income tax line, relating to themovement of in the various provisions and deferred accounts, but we have chosen not totry to estimate these movements because that does not impact cash flow nor valuation.

A$10.6M VALUATION OF CLIFF HEAD BASED ON 2017 TRANSACTION
Triangle/Royal paid US$3.75m to acquire the ROC 42.5% share in May 2017.
Thepresence of Royal in the transaction provides third party validation of this valuation.On the basis of this transaction, Triangle’s 78.75% share of the Cliff Head/Arrowsmithfacilities is worth US$6.95M or A$10.6M at current exchange rates.
Referring to Table 6, our NPV of the 57.5% direst interest is A$8.6M fully taxed, and the21.25% interest via Triangle Energy Operations is A$3.4M fully taxed, giving a value ofA$12.0M for TEG’s 78.75% total interest. We generate an additional value of A$2.2Mbeing the tax shield on the 57.5% interest. Our A$ oil price assumption is likely to behigher than at the time of the purchase.
The original acquisition of 57.5% on 30 June 2016 was for A$3.214M plus a royalty ofUS$5/bbl on oil price in excess of US$70/bbl. The royalty makes simple metrics difficultto calculate. The cost to develop the field originally was A$327M with historical production of 14.8Mbbls, of which Triangle’s share would be A$258M. The historical cost is irrelevant if the assets are approaching the end of reserve life, as isthe purchase price paid by Royal in 2017. The question is what did Royal and Triangle seein the asset in 2017. Given Triangle had two years to get to understand the asset, it wouldmake little sense for the management to throw good money after bad, and the presenceof Royal appears to support the Triangle analysis.

VALUATION OF TRIANGLE’S HOLDING IN STATE GAS
Triangle owns 47,830,149 shares in State Gas, or 0.133 GAS shares per TEG share. Ourvaluation assumes a value of the shares at the current market price of A$0.51/sh orA$24.2M or A$16.9M net of capital gains tax.
Triangle has some capital losses that couldbe offset, but we have not recognised them.
The State Gas share price is sensitive to both the oil price and project delivery. Wehave not recognised any value upside for project delivery, but in Table 7 we attemptto estimate what would happen to the State Gas share price if the oil price were tocontinue to rise, based on recent history, as shown in Fig 4 below)
The share price of State Gas has fallen with the rest of the oil and gas sector in responseto the lower oil and energy prices, but the company is in a strong position with therecent Australian Federal Government energy plan emphasising gas as the short tomedium preferred energy source, positive exploration success, and capital marketsremaining open for funding.
If the stake was sold, the company would have to pay capital gains tax of 30% onthe profits. Triangle’s book value was A$1.8M in June 2017, so our valuation of theshareholding is based on the conservative after tax cash from sale at market. However,there may be alternative structures that eliminate the need to pay tax, includingremerging with State Gas, or distribution GAS shares to shareholders, which wouldincrease the value of the holding.
If someone wanted to bid for State Gas, Triangle would be a discounted entry, and giventhe buyer would not be planning to sell the State Gas holding, the issue of paying taxwould not arise, and so Triangle would represent a way of gaining a potentially controllingstake in State Gas at a 30% discount to the current State Gas share price.
On 4 February 2019, GAS announced that it had appointed an advisor “to help it respondto potentially interested parties”, and the possibility of a take-out and cash realization forTriangle may have been the driver of the price jump from A$0.08/sh to A$0.17/sh at thattime. Since then, the Triangle share price has fallen below the implied value of its GASshareholding.FINANCIAL POSITION At 31 March 2020,
Triangle had cash of $4.17M of which A$1.66M was in escrow (thePase Receivable), and the company had no external debt.
The ASX quarterly reporting has changed and companies no longer report outgoings.This has been replaced by “Estimated Cash from future operating activities” which inTriangles case for the June 2020 quarter is a positive cash flow of A$0.375M, whichwould be a very good outcome, relative to what the market would have expected atcurrent oil prices.