Permex Petroleum Seeks $13.5 Million U.S. IPO

A Quick Take On Permex Petroleum

Permex Petroleum Corporation (OILS) has filed to raise $13.5 million in an IPO of its units of common stock and warrants, according to an S-1/A registration statement.

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

Given the firm’s tiny revenue base and limited production history, I’m on Hold for the OILS IPO.

Overview

Dallas, Texas-based Permex Petroleum Corporation was founded to acquire royalty interests and to explore and produce oil & natural gas products from conventional oil formations in the Midland-Central Basin and the Delaware Basin within the greater Permian Basin in West Texas and Southeast New Mexico region of the United States.

Management is headed by president and Chief Executive Officer Mehran Ehsan, who has been with the firm since April 2017 and was previously president and CEO of N.A. Energy Resources and an oil & gas Financial Specialist with Sterling Wealth.

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

Market & Competition

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

It is the largest oil-producing basin in the U.S. and is located in the region of West Texas and Southeast New Mexico.

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

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

The company seeks to acquire assets ‘at a discount to market, increasing production and cash-flow through recompletion and re-entries, secondary recovery and lower risk infill drilling and development.’

Major competitive or other industry participants include:

• Chevron

• Exxon Mobil

• Occidental Petroleum

• ConocoPhillips

• Pioneer Natural Resources

• Chesapeake Energy

• Devon Energy

• EOG Resources

• Endeavor Energy Resources

• Marathon Oil

• Coterra Energy

• Continental Resources

• Laredo Petroleum

• TXO Energy Partners

Financial Performance

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

• Highly variable topline revenue

• Uneven gross profit but increasing gross margin

• Growing operating losses

• Increasing cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Nine Mos. Ended 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. Prior
Nine Mos. Ended 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 Mos. Ended 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 Mos. Ended June 30, 2022	$ (1,978,695)	-316.6%
FYE September 30, 2021	$ (577,007)	-681.8%
FYE September 30, 2020	$ (418,961)	-61.4%
Comprehensive Income (Loss)
Period	Comprehensive Income (Loss)	Net Margin
Nine Mos. Ended 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 Mos. Ended 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 liabilities.

Free cash flow during 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 IPO of its units of common stock and warrants, offering 3.6 million units at an estimated price of $3.74.

Each share of stock will entitle the shareholder to purchase one warrant at an exercise price of 125% of the price of the IPO price of the unit.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $3.4 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 65.1%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

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

We intend to use the Net Proceeds of this offering for continuing operating expenses and working capital. We believe opportunities may exist from time to time to expand our current business through acquisitions or investments. While we have no current agreements, commitments or understandings for any specific acquisitions or investments, we may use a portion of the Net Proceeds for these purposes.

(Source – SEC)

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

Regarding outstanding legal proceedings, management did not characterize the status of legal proceedings against the firm, if any.

The sole listed bookrunner of the IPO is ThinkEquity.

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Market Capitalization at IPO	$20,691,924
Enterprise Value	$3,387,056
Price / Sales	30.78
EV / Revenue	5.04
EV / EBITDA	-1.56
Earnings Per Share	-$0.47
Operating Margin	-322.71%
Net Margin	-428.91%
Float To Outstanding Shares Ratio	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%
CapEx Ratio	-8.14
Revenue Growth Rate	1571.63%
(Glossary Of Terms)

Click to enlarge

(Source – SEC)

Commentary About Permex’s IPO

OILS is seeking public capital market investment to pay for its operating expenses and general, unspecified corporate purposes.

The firm’s financials have shown fluctuating topline revenue from a tiny base, variable gross profit but increasing gross margin, increasing operating losses and higher cash used in operations.

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

The firm currently plans to pay no dividends and to retain any future earnings for reinvestment back into the firm’s operations.

The market opportunity for E&P companies in the Permian Basin is large and expected to produce significant growth over the coming years.

ThinkEquity is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (56.6%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

The primary risks to the company’s outlook as a public company include its tiny size, thin capitalization and exposure to significant price fluctuations in the oil & gas industry.

As for valuation, management is asking investors to pay an Enterprise Value/Revenue multiple of approximately 5.0x.

Given the firm’s tiny revenue base and limited production history, I’m on Hold for the OILS IPO.