In the shallower waters of the UK's North Sea, the decision to explore for oil and gas increasingly depends on scale. The larger hydrocarbon deposits are in decline, so what remains rarely provides sufficient volumes to warrant the attention of major oil companies. But advances in exploration techniques, helped by persistently high oil prices, are improving the commercial viability of hitherto marginal offshore assets, a trend that North Sea specialist Trap Oil aims to exploit.
- Cut-price exploration model
- Busy drilling programme
- Revenues likely to come through shortly
- Shares trade far below estimated value
- Disappointing Orchid test
- Share price likely to be volatile
The company is managed by a team of oil-and-gas professionals headed by Mark Groves Gidney. He is a 30-year industry veteran who established Exploration Geosciences, an industry consultancy employed by Trap as one of a number of quid pro quo arrangements that mean it can explore for oil as cheaply as possible.
For example, Trap has reciprocal commercial relationships with Norwegian oil & gas independent Noreco and with Suncor Energy, a £28bn integrated energy giant whose shares are listed on the Toronto Stock Exchange. In wells that Trap is exploring with either of these two, it sells its North Sea expertise in exchange for an annual retainer, for success payments for any drilling prospects identified and the bigger companies agree to take an extra share of development costs.
Trap has also developed a relationship with CGGVeritas, a market leader in geophysical services. In addition to providing CGG with technical advice, Trap agreed a phased payment of £4m, contingent on the successful application of CGG's 3D seismic data in identifying North Sea drilling prospects. This seismic data set covers some 25,000 square kilometres and would normally cost about £45m. City analysts reckon that Trap couldn't secure such deals without the North Sea expertise of Mr Groves Gidney and his team.
| TRAP OIL (TRAP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 27p | MARKET VALUE: | £55.5m | |
| TOUCH: | 26-27p | 12M HIGH / LOW: | 44p | 20p |
| DIVIDEND YIELD: | NIL | PE RATIO: | 2 | |
| NET ASSET VALUE: | 30p | NET CASH: | £32m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profits (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.3 | -0.35 | -0.8 | nil |
| 2011 | 0.8 | -4.53 | -2.7 | nil |
| 2012* | 39.2 | 18.51 | 9.0 | nil |
| 2013* | 76.4 | 35.71 | 9.5 | nil |
| % change | +95 | +93 | +6 | – |
Normal market size: 4,000 Matched bargain trading Beta: -0.1 * N+1 Brewin forecasts | ||||
The CCG agreement allows Trap to use the latest generation 3D seismic technology. This provides a low-cost advantage for the company as it develops its 21 licences. Trap's current interests consist mainly of exploration and appraisal assets, but it should be generating production revenues shortly. In March, it agreed to pay Dyas UK £34.5m for a 15 per cent stake in the Athena oilfield. That stake equates to proven and probable reserves of 2.2m barrels of oil equivalent and to 1,720 barrels per day of the oil and gas production that is expected to kick in during the current quarter.
The Athena acquisition should provide Trap with cash flow to complement its exploration programme, thus fulfilling two aims that it defined when its shares were floated on Aim a year ago. This year alone the company plans to drill seven wells - a busy schedule for a small player.
The first of these - Orchid - was drilled earlier this month, but the company's share price faltered after initial results indicated a low average level of oil saturation within the primary drilling zone. Nevertheless, Trap's bosses maintain that the results still point to commercially viable reserves, although a second wellbore will be required to provide conclusive evidence. Trap did, however, sweeten the pill a day after the Orchid result when it announced that production had started at the Lybster field situated on Block 11/24, in which it has a 35 per cent interest.
