Permex Petroleum seeks $13.5 million IPO

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A quick introduction to Permex Petroleum

According to an S-1/A registration statement, Permex Petroleum Corporation (OILS) has applied to raise $13.5 million in an initial public offering of its common stock and warrants.

The Company operates as an oil and natural gas exploration and production company in the Permian Basin.

Given the company’s tiny revenue base and limited manufacturing history, I’m waiting for OILS to go public.

overview

Based in Dallas, Texas, Permex Petroleum Corporation was formed to acquire royalties and oil and natural gas products from conventional oil formations in the Midland-Central Basin and the Delaware Basin within the Greater Permian Basin of West Texas and the Southeast from New Mexico to explore and produce region of the United States.

Management is led by President and Chief Executive Officer Mehran Ehsan, who has been with the Company since April 2017 and was previously President and CEO of NA Energy Resources and oil and gas finance specialist at Sterling Wealth.

As of June 30, 2022, Permex has booked a fair market value investment of $18.9 million from investors including Empery Asset Master and Ramnarain Jaigobind.

market competition

According to a 2022 GlobalData market research report, the U.S. Permian Basin crude oil and condensate production capacity is estimated at 5 million barrels per day and natural gas capacity is approximately 19.9 million cubic feet per day.

It is the largest oil reservoir in the United States and is located in the West Texas and Southeast New Mexico region.

In June 2019, the US Bureau of Land Management (BLM) estimated that the Permian Basin contained an estimated 46.3 billion barrels of undiscovered engineered oil and 281 trillion cubic feet of undiscovered engineered natural gas.

The Permian Basin is the largest oil deposit in the United States and one of the most active and economically important oil and gas deposits in the world.

The Company aims to acquire assets “at a discount to market value, increase production and cash flow through completion and reentry, secondary recovery and lower risk infill drilling and development.”

Key contestants or other industry participants include:

• rafters

• Exxon Mobile

• Western Petroleum

• ConocoPhillips

• Pioneer of natural resources

• Chesapeake Energy

• Devonian energy

• EOG resources

• Strive for energy resources

• Marathon Oil

• Coterra energy

• Continental Resources

• Laredo Petroleum

• TXO energy partner

financial performance

The company’s recent financial results can be summarized as follows:

• Strongly fluctuating topline sales

• Uneven gross profit but increasing gross margin

• Growing operating losses

• Increasing cash burn in operations

The following are relevant financial results arising from the company’s registration statement:

total revenue
Period	total revenue	% variance vs. before
Nine Mo. Ends June 30, 2022	$625,057	1571.6%
FYE September 30, 2021	$84,625	-87.6%
FYE September 30, 2020	$682,786
gross profit (loss)
Period	gross profit (loss)	% variance vs. before
Nine Mo. Ends June 30, 2022	$292,711	1729.4%
FYE September 30, 2021	$24,954	-80.1%
FYE September 30, 2020	$125,162
gross margin
Period	gross margin
Nine Mo. Ends June 30, 2022	46.83%
FYE September 30, 2021	29.49%
FYE September 30, 2020	18.33%
Operating Profit (Loss)
Period	Operating Profit (Loss)	operating margin
Nine Mo. Ends June 30, 2022	$ (1,978,695)	-316.6%
FYE September 30, 2021	$(577,007)	-681.8%
FYE September 30, 2020	$(418,961)	-61.4%
Overall result (loss)
Period	Overall result (loss)	net margin
Nine Mo. Ends June 30, 2022	$(1,995,134)	-319.2%
FYE September 30, 2021	$(1,102,709)	-176.4%
FYE September 30, 2020	$(1,288,083)	-206.1%
Cash flow from operations
Period	Cash flow from operations
Nine Mo. Ends June 30, 2022	$(1,420,285)
FYE September 30, 2021	$ (705,851)
FYE September 30, 2020	$22,766
(Glossary of terms)

click to enlarge

(Source – SEC)

As of June 30, 2022, Permex had $5.4 million in cash and $2.9 million in total debt.

Free cash flow for the twelve months ended June 30, 2022 was negative ($1.7 million).

IPO details

Permex intends to raise $13.5 million in gross proceeds from an initial public offering of its common stock and warrants and is offering 3.6 million units at an estimated price of $3.74.

Each share entitles the shareholder to purchase one warrant at an exercise price of 125% of the unit’s IPO price.

No existing shareholder has expressed an interest in buying shares at the IPO price.

Assuming a successful IPO, the Company’s enterprise value at IPO would be approximately $3.4 million, excluding the impact of underwriters’ over-allotment options.

The free float to outstanding share ratio (excluding over-allotments by underwriters) will be approximately 65.1%. A number below 10% is generally considered a “low float” stock, which can experience significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds from this offering for ongoing operating expenses and working capital. We believe there may be opportunities from time to time to expand our current business through acquisitions or investments. Although we have no current agreements, commitments or understandings for any specific acquisition or investment, we may use a portion of the net proceeds for these purposes.

(Source – SEC)

Management’s presentation of the company’s roadshow is not available.

With respect to pending lawsuits, management has not described the status of any lawsuits against the Company, if any.

The only listed bookrunner of the IPO is ThinkEquity.

Valuation metrics

Below is a table of relevant cap and valuation numbers for the company:

Measure [TTM]	Crowd
Market capitalization at IPO	$20,691,924
Enterprise value	$3,387,056
price / sale	30.78
EV / Revenue	5.04
EV / EBITDA	-1.56
earnings per share	-$0.47
operating margin	-322.71%
net margin	-428.91%
Ratio of float to shares outstanding	65.07%
Proposed IPO midpoint price per share	$3.74
Net Free Cash Flow	-$1,687,499
Free cash flow yield per share	-8.16%
investment rate	-8.14
sales growth rate	1571.63%
(Glossary of terms)

click to enlarge

(Source – SEC)

Commentary on the Permex IPO

OILS seeks public capital market investment to fund its operating expenses and general unspecified corporate purposes.

The company’s financials show fluctuating revenues from a tiny base, variable gross profit but increasing gross margin, increasing operating losses and higher operating cash burn.

Free cash flow for the twelve months ended June 30, 2022 was negative ($1.7 million).

The company currently plans not to pay dividends and to retain all future profits for reinvestment in the company’s operations.

The market opportunities for E&P companies in the Permian Basin are large and are expected to result in significant growth in the coming years.

ThinkEquity is the sole underwriter and IPOs led by the firm over the past 12 months have generated an average negative return (56.6%) since its listing. This is a lowest performance for any major underwriter over the period.

Key risks to the Company’s prospects as a public company include its small size, small capitalization and vulnerability to significant price volatility in the oil and gas industry.

In terms of valuation, management is asking investors to pay an enterprise value/revenue multiple of around 5.0x.

Given the company’s tiny revenue base and limited manufacturing history, I’m waiting for OILS to go public.