Later this year, the arid coastline of north-west Peru will set the scene for the start of an ethanol production project that could transform the profitability of its AIM-listed operator. For integrated energy group Maple Energy (LON:MPLE), several years of major engineering work will come to an end and ethanol will begin flowing from what promises to be one of the lowest cost production operations of its type in the world.
Maple came to AIM in July 2007 with a portfolio of Peruvian oil and gas exploration, production and processing assets, together with plans to develop its new ethanol project. Since then, the $254m project has risen in stature and is now fully funded to completion in the second half of this year. The economics of the new facility are impressive, not least because Peru’s coastline offers ideal conditions to grow the most efficient feedstock for ethanol production – sugar cane. Starting on just over half of a land bank totaling 13,500 hectares, Maple has designed an environmentally conscious operation that is expected to produce up to 35m gallons of ethanol per year for export, together with 37 MW of electricity from a co-generation power plant.
In the six months to June 30, 2010, Maple delivered revenues of US$35.0m, up from US$28.3m year-on-year, with pre-tax profits coming in at US$0.1m against a loss of US$15.5m. Ebitda rose to US$5.3m from US$2.4m. Over the last 12 months, the Maple Energy share price on AIM (they also trade in Lima) has fallen from a high of 84.75 in January 2010 to a low of 41p last August and are currently trading at 69.5p. Maple’s peers include AIM-listed Gold Oil (LON:GOO) and Toronto listed Petrominerales (TSX: PMG), both of which have oil assets in Peru. Meanwhile, AIM groups Gtl Resources (LON:GTL) and Clean Energy Brazil (LON:CEB) have ethanol interests in California and Brazil respectively.
Production will mark a major turning point for Maple, which last year sold its 14.3% stake in its first major project in the country – the Aguaytia gas and electric power project – for $28m to Duke Energy. That deal streamlined its portfolio down to a modest oil production arm, a refining and marketing business based from the Pucallpa refinery and a chance shale gas discovery on the Santa Rosa prospect in Block 31-E (the company had originally be drilling for oil). For now, all eyes are on the start of ethanol production – something that Maple’s chief executive, Rex Canon believes will have a major impact on the company’s future.
Rex, you have been with Maple Energy since the late 1980s. Tell me about the business and your strategy in Peru?
We are essentially an independent energy company focused on Peru. We’ve got several things going on, we’ve got a couple of different business units, one is an ethanol business unit and the other one is in the hydrocarbon space. The biggest project we’re doing at the moment is our ethanol project up on the north coast of Peru.
Before we were in Peru we had a predecessor company, which was in the US and which was also under the Maple name, and we were in the oil and gas production business, we operated at one time over 500 wells. We were also in what is called the natural gas gathering and processing business, which means we were building and operating natural gas pipeline systems and gathering systems as well as processing plants which extracted gas liquids from gas production. We actually came down to Peru in the mid 1990s to look at opportunities. The political landscape was changing quite a bit in Peru at the time and they were just starting to discuss the privatization of the oil and gas sector and the electricity sector. So we really came down here early on and the bottom line is we ended up signing some agreements with the government which got us into both the oil and gas business here in Peru and also into the power business. Our first big project at that time was to develop a $273m fully integrated natural gas and electric power business, which included developing the first gas field to be commercialized in Peru ever – that was Aguaytia.
What triggered the move from Aguaytia into the ethanol space?
Aguaytia was a project conceived by Maple and it was our team that was responsible for developing it, constructing it and putting it into operation. That was our first big project in Peru. We have since done other things in the oil and gas sector and really got interested in ethanol in the last few years. What got us interested is that we have a production, refining and marketing business in the central jungle of Peru and so we were following ethanol because there are mandates all over the world to mix ethanol with motor gasoline. So we were following that and just by being on the ground here in Peru we already knew the best feed stock for producing fuel grade ethanol was sugar cane, in terms of cost efficiency and energy efficiency. We also knew that Peru was arguably the best place in the world to grow sugar cane in terms of yields. So that is what started getting us focused on that opportunity and we now actually have a project that is under construction, that is fully integrated and we expect it to go into commercial operation in the second half of this year.
This is a very substantial project in terms of the infrastructure and the engineering project management work. How challenging is it to put something like this together?
Well it is challenging but in terms of doing large scale greenfield projects in Peru, we’ve already done that before with the Aguaytia project. The types of issues you face are similar in other greenfield projects you might do here, particularly vertically integrated projects. In our particular case I think a lot of the challenges have been overcome in the sense that we have got all the key permitting in place and we have got the financing in place. In terms of construction we are substantially into the construction and a very significant part of the work that remains to be done is being done under contracts that, in most cases, are fixed price and they’re very solid project financed style contracts. So there were certainly a lot of challenges but we have overcome most of those and we are in position to be in commercial operation in the second half of next year.
How complex has it been to negotiate this project with the Peruvian authorities?
Well it’s easy from the standpoint that, as far as the concept goes, it is a new industry really for Peru. There’s actually one other project that’s recently gone into operation, we’ll be the second one, but essentially this is a new industry as far as ethanol is concerned. Peru has been in the business of producing sugar cane for a long time but as far as the concept of producing fuel grade ethanol this is something that is really more recent. So it is essentially a new industry and if you look at our project specifically, it is a greenfield project and we’re creating jobs. During the operation phase we’ll have in the range of 500 to 600 permanent employees, but if you look at the indirect employment created through other service providers, it is several multiples of that number. So we’re creating jobs, it’s a new industry and it is something that we have had a lot of support for, not just from the federal government and regional government but also from the local communities.
What are your views on the market potential for ethanol and biofuel, both domestically in Peru and around the world? Will you be exporting the ethanol or processing it through your own refinery?
We are not really intending to produce this for our refinery, this is principally an export driven business. There is a mandate for ethanol in Peru; the requirement here is that 7.8% of motor gasoline is to be ethanol. Now that particular mandate is being rolled out right now so it is already in effect in some parts of Peru but it is going to take another year or so to roll that out nationwide. But even once that is rolled out nationally the demand in Peru is something in the range of around 25 million gallons or so per year. Our production is expected to exceed that and, as I said, there’s another project already in operation in Peru and I expect that there’ll be other projects. So the reality is that while we may be selling some in the local market this is principally an export driven business.
What is somewhat unique about what we are doing is that we will be producing a very high quality product in terms of technical specifications but we’ll also be meeting all the sustainability requirements, let’s say, for the European market. If you look at what we’re doing, we are using the most efficient feed stock, sugar cane, we are essentially converting arid lands to production; there is nothing that has been cultivated on a commercial basis out there before. If you’ve seen the coast of Peru it is really an arid coast, and we are using ‘drip irrigation’ so there is no issue about competition for water. I would argue that it is about as green as you can get in terms of the environment.
Once production is under way what are your longer-term plans for that side of the business?
I think the first step for us is that we actually own 13,500 hectares and we also have a substantial amount of water rights. Our plan in the first phase is to develop 7,800 hectares of cane plantation, and that is underway right now, and in the next phase we will increase that total plantation up to about 10,000 hectares. Then we are actively looking for other opportunities in both the river basin area we are in as well as other areas in Peru for other potential projects in the sector. So obviously this is a business in which our intention is to expand, at least for the moment, in Peru.
What sort of impact will this project have on your financial performance in the years to come?
Well it is substantial if you think about our business. We do have a production, refining and marketing business that is producing revenues and it is a nice business for us because it has got a stable source of cash flow. But once we go into operation on our ethanol project the top line revenues from that business are expected to exceed what we are doing in terms of the oil and gas business.
On the oil and gas side, tell me about what’s going on there. What are your plans for that side of the business?
Well on that side of the business our current oil production is in the range of about 500 barrels a day, which is high quality crude oil that we’re producing from fields that we operate and have 100% interest in. We do continue to do some work in those fields. We own some of our own drilling rigs and work-over equipment out there and so we have an ongoing program to maximise and optimise what we can get out of those fields. In addition to that we purchase natural gasolines from Aguaytia Energy, which was the business that we developed but later sold, on a long term basis and that feed stock goes into our refining operation.
I think the short story is that integrated business of production, refining and marketing is really just something that we are not spending much capital on at the moment, we are just trying to optimise what we can out of the existing business. There is an opportunity in the hydrocarbon business, which is separate, and that is the shale gas opportunity. That is something that requires some further evaluation to determine what happens next. As you may know we were drilling an oil prospect in the area and while we didn’t find oil we did drill into a fairly significant deposit of shale gas. At this stage it needs further evaluation and further work to determine what the possibilities are with that.
Finally, you brought Maple Energy to London’s AIM market in July 2007. Tell me why you think the company should be a stock worth watching for retail investors?
I think the key here is to look at what you think the company may be worth and what it should be worth. The big events coming up, I think this year certainly, will be going into commercial operation on the ethanol business. The key on the ethanol business is that we expect to be among the low cost producers worldwide in terms of ethanol. We expect our direct production cost to be in the range of 75 cents per gallon. If you consider the administrative cost on top of that of about 14 cents a gallon and then you consider our transportation, storage and marketing estimates, you get to an all in projected cost of about $1.28 per gallon. That is really a delivered cost at Rotterdam, which is currently what we are expecting our target market point to be. If you look at the prices of ethanol in that market right now they are in the range of $3 to $3.25 per gallon. Obviously ethanol is a commodity and the price varies every day but it is in that kind of range so you can see there is quite a bit of spread there. If you just worked the numbers, and considering our expected production, you can see there is a lot of cash flow that we expect to come out of that business once we go into commercial operation. So I think the big changing point is going to be when we do go into commercial operation and I think right now that is why there is an opportunity.
Thank you very much for your time.
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