Shares in recently-listed, US-focused oil and gas junior Northcote Energy (NCT) are packed with growth potential but are only valued at just over a third of proven reserves, which are located in one of America's hottest onshore oil plays - the Mississippi Lime formation in Oklahoma.
- Substantial growth potential
- Hot onshore US oil play
- Low-cost, low-risk development
- Proven oil reserves
- Fewer wells concentrate risk
- Difficult to value
- Limited finances
Many thought Oklahoma's oil and gas had been tapped out by the thousands of vertical wells drilled there over the past 50 years. But technological advancements such as horizontal drilling and fracking have unlocked vast amounts of previously inaccessible hydrocarbons. This has sparked a rush for prospective land there, with China's Sinopec snapping up $1bn (£660m) worth of assets in February alone.
Magnolia Petroleum's (MAGP) stunning 473 per cent share price gain last year provides further evidence that investor interest in the region is heating up. The US oil and gas producer listed its shares on Aim in late 2011 with a similar business model targeting the same regional plays. However, financing issues aside, we think Northcote could prove a better bet as there is much better visibility into its monthly production and revenues. That's because whereas Magnolia typically only has 0.5 to 3 per cent working interests in some 90 wells, Northcote has much larger interests - as high as 50.1 per cent - in a smaller number of wells. True, this concentrates risk, but it could also produce higher rewards. Moreover, Northcote holds plenty of the smaller interest stuff, too, which bulks up its monthly income - including a small royalty on exciting acreage in Woods County, Oklahoma, where the operator plans to drill 12 wells this year.
NORTHCOTE ENERGY (NCT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1.50p | MARKET VALUE: | £14.9m | |
| TOUCH: | 1.45-1.50p | 12-MONTH HIGH: | 2.08p | LOW: 1.15p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 0.02p | NET CASH: | see text | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2011 | nil | -0.11 | -0.1 | nil |
| 2012 | nil | -0.21 | -0.2 | nil |
| % change | - | - | - | - |
Normal market size: 25,000 Market makers: 6 Beta: -0.321 | ||||
Northcote plans to unlock the value in its licences by carrying out an active, fully-funded work programme in 2013 across its entire licence portfolio, which should generate plenty of potential catalysts to move the share price. The company has already increased production by 75 per cent since listing in January, from 28 barrels of oil equivalent per day (boepd) to 49 boepd currently. Now, it plans to boost production to over 100 boepd by the end of the year by fracking up to six existing wells. The first frac has already commenced and, in the meantime, Northcote is carrying out low-cost well workover programmes at its other wells in the main Horizon and Oklahoma Energy (OKE) licences. Chief executive Randy Connally says the company should be cash-flow positive around 60 boepd.
Indeed, the low-cost, low-risk nature of targeting proven reserves in Oklahoma means Northcote doesn't have to raise a lot of cash for its venture. It recently raised £1.5m with a placing on top of £1m raised at float. This isn't a huge buffer and that's a serious risk for investors. But if things go to plan, Northcote should have enough cash to carry it through to being cash-flow positive in 2014.
