View from the top: TomCo Energy interview

AIM-listed TomCo Energy has five blocks in the Utah's Green River Formation, which is known to have the largest oil shale deposits in the world.

Thanks to its partnership with private company Red Leaf Resources, it is using new technology to access the oil shale in one of these areas, the Holliday Block. The Mahogany zone lies within this 1,200 acre block, which is the richest oil shale layer in the formation, with a JORC Measured Reserve of 126 million barrels of oil.

Chief executive Paul Rankine has 30 years of experience in the mining industry, with half spent managing mining companies and the other half as a fund manager at JPMorgan Investment Management and CitiGroup Investment Management.

Over the last 12 months, TomCo's share price has gone from lows of 0.95p to highs of 1.775p. Valuing the company at £24.1 million, TomCo was down over 2% at 1.288p on Wednesday, with a spread of 0.24p.

Rankine spoke to Interactive Investor about how oil shale differs from conventional oils, the new extraction technology it is using and why it could soon be taken over by energy major Total.

What do you hold in your portfolio?

Paul Rankine: In the Green River Formation there is 1.5 trillion barrels of oil and only one licence that has been issued. The latest BP survey of global oil calculates conventional oil at 1.7 trillion barrels. As soon as this [the Green River Formation] is commercialised it doubles the amount of known oil and it will really shift the dynamics in the US.

We have got one major asset in the Green River formation, the Holliday Block with 126 million barrels in it. It is only 64 foot deep, so it is pretty much at surface. The Holliday Block is the interesting one, the other blocks have the land rights but TomCo probably won’t do too much in terms of developing them.

What is oil shale and how is it different from shale oil?

PR: Most conventional oils are 65 million years old, but our oil shale is an immature oil that is only 23 million years old. As it's shallow it needs to be mined to provide temperature, pressure, or both, to extract the oil.

Compared to oil shale, shale oil and shale gas is in tight formations and needs fracking to liberate it, whereas we need to heat it to be able to liberate the oil. The big advantage is that it doesn't have any of the heavy fractions of oil, any of the tars etc. When you compare it to normal WTI [West Texas Intermediate benchmark], it is 32 - 34 API, so a very light, sweet crude. The only other difference is that instead of having sulphur, it has nitrogen, so you have an ammonia stripper in the oil processing plant.

Is extracting oil shale more expensive than conventional oil?

PR: Not really, the technology we are using has a low capex (capital expenditure) cost for the 10,000 barrels per day operation. It costs $263 million ]£156 million] and we will have an operating cost of $37.4 per barrel. As long as oil prices are relatively high, this is perfectly acceptable and you get a very nice margin. We produce a WTI equivalent so with WTI currently at $100 a barrel, we will be making a very nice margin. And cash flow break-even is $50 when we have paid all the royalties etc.

Why are you using Red Leaf's EcoShale technology for extraction?

PR: We are the only oil shale developer that has ever been licenced to produce oil shale as Red Leaf is a private company funded by Total [80% of the first $400 million spent to commercially develop Red Leaf's Utah assets for a 50% interest].

Oil shale has been developed and used for producing oil since the late 1800s by using giant cement kilns to heat up the oil shale to sweat out the oil. Being in the middle of a desert [in Utah], you can't get sufficient water to do the quenching; hence the conventional techniques aren't available.

Red Leaf has the cost of proving the technology, they give us the final design of everything and we come into production a lot cheaper. Effectively it is costing them 100 times more than us over that period. We don't pay Red Leaf a penny until we are in production, so they have got a serious incentive to get us there.

How does the technology work?

PR: You deposit the shale into a play lined capsule, put material on top of play and build it up as you build the capsule. Pipes are put into the oil shale which blows hot air into the bottom, warming up the oil shale to sweat out the oil. The capsule is used once and you rehabilitate on top of the capsule. Each one is about six football pitches, so effectively we could build 120 of these capsules. By firing three capsules at any one period of time, we have got 10,000 barrels per day right through our 19 year life.

EcoShale has been developed by Red Leaf, Total saw how valuable it was and is providing 80% of the cash for development. We will be paying Red Leaf a royalty of 6%.

Our net present value (NPV) at 10% is $452 million. If a major like Total were to buy us out and paid NPV 10% that is 10 times our current share price.

Would you be open to a take-over and is one on the cards?

PR: If the shareholders are offered 10 times the entrance into the company as an exit, it is very unlikely that my shareholders would say "no we want to produce it our self". When Total invested in Red Leaf it was 80% of its research and development budget. Once Total commits to a final investment decision to go fully commercial, it moves from being a research and development project to exploration and production (E&P). So it moves from being a big fish in a small pond, to being a minnow in an ocean.

Total has stated its objective of getting at least 50,000 barrels a day out of EcoShale technology when it becomes part of their E&P. Currently they would have 5,000; half of Red Leaf and they would need to buy the other half. We would be the only other player in town with all the permits. So the likelihood they would knock on our door saying we want to take you out is very high.

When do you expect to get permit approval?

PS: We have two permits, the Large Mine Operation Permit, from the Utah Department of Oil, Gas and Mining and our Ground Water Discharge Permit from the Utah Division of Water Quality. We expect both of those to be issued for public comment mid-way through this year, with both permits in issued form half way through the autumn of this year.

What are the strengths of your company?

PR: We have the ability to raise sufficient cash to see us through to the final investment decision by Total. We will have all the permits in place so we would really be a turn-key project for a major like Total. We have $5 million of Red Leaf stock [strategically invested by TomCo as part of Red Leaf's $100 million finance], which is non-core so we fully intend to liquidate that facility to provide the $2.2 million [burn rate] we need.

What challenges do you see over the next 12 months?

PR: The biggest challenge is making sure we have sufficient cash to tide us through and liquidate Red Leafs' shareholding. Because it is a private company I can't say "sell a million dollars of Red Leaf today please". It is raising sufficient cash to have all the permits in place and be in a stable position to be taken out. Apart from $5 million, we have a liquidity facility from our broker so we don't dilute our current shareholders. Those two means would see us through Total's final decision. We would not need to raise the $263 million because a major is almost certain to be doing that investment.

Your share price was down 2% at the time of speaking. Why do you think this is?

PR: Our share price fluctuates like crazy, anywhere from 1.70p down to 1.30p, it is very liquid.

What news flow should investors expect from you?

PR: The main news flow will be the issuing of our permits for public consultation and the final approval of the permits. From Red Leaf it will be the commencement of the construction of the commercial scale capsule in July, the completion of the construction, the firing of the capsule and the production of their first oil. So the first oil is going to be produced in the last two quarters of next year.

Do you have a message for shareholders and prospective shareholders?

PR: There is a big de-risking over the next 18 months, so for that time horizon you have got a chance of getting a 10-fold increase in the share price and is definitely a stock to look at.