(Idea) New Stratus Energy - A Highly Speculative Name, But Worthy Of A Small Allocation
Warning: NSE shares face a significant risk of permanent capital loss. The shares are illiquid, so buyers must have a long-term thesis and endure inevitable bouts of volatility. The shares should occupy only a small percentage of an investment portfolio. Given their significant upside potential, however, even a 1% weighting could materially move the needle for a portfolio’s overall return if the investment pans out.
NSE Overview
New Stratus Energy (NSE:CA) is a Canadian-domiciled E&P with operations in Latin America. The company ended 2023 with little by way of operations and C$33.1 million of cash. On January 2, 2024, it began to deploy that cash into highly prospective projects.
NSE was brought to Wilson’s attention by his fellow Gear Energy (GXE:CA) board member, Greg Bay. Greg put us in touch with the company’s President, Wade Felesky, who provided us with an overview of the company’s assets, strategy, and growth prospects.
Our conversation with Wade gave us confidence about the integrity of NSE’s operation and, most importantly, the people behind it. We believe the company’s strategy is sound and that it has the assets and personnel necessary to execute over the coming years. What it needs to do next is to demonstrate solid execution, and the next few months will be telling on that score.
NSE’s strategy is to use its deep expertise and extensive roster of contacts in the Latin American energy industry to partner with national oil companies in the development of oil and gas resources. Several Latin American nations lurched leftward over the past decade and, as a consequence, have been starved of capital and expertise necessary to produce anywhere near their capacity.
Recently, however, there have been both subtle—Ecuador and perhaps Mexico—and not-so-subtle—Argentina—shifts toward the center/right. If the shift gains momentum, the time could be ripe for a wider liberalization of the Latin American oil and gas sector. If such a political shift comes to pass, New Stratus is well-positioned to strike deals and execute operationally throughout the South American continent.
Let us state at the outset that the company has a checkered past in terms of execution. In 2018, shortly after CEO Jose Francisco Arata assumed his post, NSE invested millions in an oil production project in Colombia. The project was delayed by Covid, and NSE had to wait for Colombia’s National Agency for Environmental Licenses to complete an environmental study before it could proceed with development. In mid-2022, the agency found that nearly all of NSE’s prospective acreage resided in “highly sensitive” areas that would make development unfeasible. The project was abandoned at a total loss.
Next, NSE tried its hand at producing oil in Ecuador. In January 2022, it invested C$7.2 million to acquire Petrolia Ecuador, which held a 35% interest service contracts in Blocks 16 and 67 in Ecuador. On December 5, 2022, the Ecuadorian government under corrupt President Guillermo Lasso informed NSE that it would not uphold its end of the service contracts for the Blocks. Shortly thereafter, NSE transferred its Ecuadorian assets back to the national government.
On November 23, 2023, Daniel Noboa was elected President of Ecuador. Noboa has vowed to clean up Ecuador’s widespread corruption. At present, NSE has continued to perform decommissioning and environmental audits consistent with the service agreement termination process. Noboa’s arrival gives NSE hope that it can win back the concessions it lost under previous President Lasso. However, we don’t assume that NSE receives any benefit from such an outcome in our analysis.
Management should be given credit for surviving these incidents and emerging with enough cash to purse attractive opportunities. We’re confident its current opportunity set will yield better results.
NSE’s Venezuelan Project
On January 2, 2024, NSE signed an agreement to acquire a 50% interest in GoldPillar International Fund SPE Ltd. GoldPillar is jointly owned by NSE and accomplished businessman Franco Favilla.
GoldPillar is a private company organized under the laws of the British Virgin Islands. It owns a 40% interest in Petrolera Vencupet, S.A., which holds the production rights to six onshore oilfields in eastern Venezuela. A subsidiary of Venezuelan national oil company PDVSA owns the remaining 60% of Vencupet.
The deal is NSE’s first foray into Venezuelan oil production. From a purely macro oil perspective, Venezuela offers attractive opportunities, with an immense base of easily produced oil resources. As shown below, Venezuela’s proved reserves are the largest in the world.
Source: EIA.
If circumstances permit, Venezuela can once again become a key producer of the marginal barrels necessary to meet global demand growth. Its oil is of the heavy variety, which reduces its quality relative to lighter barrels. However, Venezuelan oil offers advantages such as accessibility, low production costs, low decline rates, and access to processing capacity in the U.S. Gulf Coast refinery complex.
Venezuela’s oil and gas industry has suffered from more than a decade of neglect after the flight of capital and expertise. At the moment, U.S. sanctions are further restricting production activity.
The nation’s production has declined from more than 2.5 million barrels per day in 2011 to approximately 700,000 bbl/d today as the socialist government exhausted what remained of the wealth inherited from Venezuela’s once thriving market-based economy.
Source: EIA.
Today, PDVSA is under the control of current President Nicholas Maduro and his United Socialist Party of Venezuela. Political influence and endemic corruption have rendered PDVSA incapable of growing production on its own, so the company is forced to partner with smaller, sanctions-exempt operators like GoldPillar to obtain the capital and expertise required to boost production.