When we first tipped shares in oil and gas group Parkmead (PMG) a year ago, we acknowledged it would take some time for executive chairman Tom Cross to deliver on his strategy of acquiring unloved assets in the North Sea and turning them into gushing sources of income. We were both right and wrong. Wrong, in that he has moved quicker than we anticipated: Parkmead has made a string of fine acquisitions over the past year, more than quadrupling production and helping the share price rise by a fifth. Yet, we were also right in that Parkmead will need several more years to develop its biggest projects and unlock the most value for shareholders - including himself, as the biggest single shareholder in the company. That's why we think the largest share price gains are still to come.
- Highly rated boss
- Proven hub strategy
- Assets in safe jurisdiction
- Mix of exploration, development and production
- Funding constraints
- Assets are geologically complex
Mr Cross is applying the same strategic model at Parkmead that he used to grow his previous energy company, Dana Petroleum, from scratch into the largest independent oil company in the UK. (Following a hostile bid in 2010, he sold it to Korea's state-owned oil firm for £1.9bn.) Namely, he plans on developing resource 'hubs', whereby his company gains strategic control of particular areas by consolidating acreage and controlling the infrastructure. That way, he can build a stronghold that will warrant a premium to standalone assets and where geological understanding of one field can help the company discover other attractive fields nearby.
So far, Mr Cross has invested several million pounds of his own money into Parkmead. That has allowed the company to acquire a decent base of producing assets in the North Sea and the Netherlands, which broker Charles Stanley estimates will churn out roughly 900 barrels of oil-equivalent a day in 2014, which covers the bulk of Parkmead's general and administrative costs. This, in turn, will enable the company to devote more of its financial resources going forward to its two main 'hub' projects: the Perth sour oil field in the UK North Sea and a collection of gas fields in the Southern North Sea.
PARKMEAD (PMG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 15p | MARKET VALUE: | £155m | |
| TOUCH: | 14.5-15p | 12-MONTH HIGH: | 16p | Low: 11p |
| FWD DIVIDEND YIELD: | nil | FWD PE RATIO: | na | |
| NET ASSET VALUE: | 4p | NET CASH: | £11.3m | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 2.36 | -1.41 | -0.29 | nil |
| 2011 | 3.75 | -3.45 | -0.59 | nil |
| 2012 | 2.95 | -4.92 | -0.78 | nil |
| 2013 | 4.07 | -5.28 | -0.5 | nil |
| 2014* | 14.9 | -6.40 | -0.6 | nil |
| % change | +266 | +21 | +20 | - |
Normal market size: 20,000 Matched bargain trading Beta:0.78 *Charles Stanley forecasts | ||||
The Perth field undoubtedly has the potential to be the most transformative. Because it's a sour oil field - meaning the oil there has high sulphur levels which make it difficult and more expensive to be transported - Parkmead was able to buy a majority interest in the asset on the cheap. There are no existing facilities that allow for production in the area, so Parkmead will have to build its own - and that will be extremely expensive. But if it can raise the money, the upside is enormous: there is estimated to be about 950 million barrels of stranded crude oil already discovered, but undeveloped within a 30 kilometre radius of Perth.
Parkmead's minority interests in its Southern North Sea gas assets could quickly turn out to be just as valuable, however. Drilling at the shallow water Pharos prospect in November resulted in a new discovery just 14km away from the existing Platypus gas discovery, controlled by Dana Petroleum. Although further evaluation of core logs are needed to confirm the discovery, pre-drill estimates suggest the reservoir could hold 300 or even 500 billion cubic feet of gas initially in place - nearly double the amount at Platypus, which is considered commercial as a stand-alone field. The discovery has also derisked the nearby Blackadder prospect, of a similar size to Pharos. Parkmead and its partners plan to drill Blackadder sometime in calendar 2014, subject to rig availability.
Admittedly, fully appraising the Perth field and the gas assets will require a lot money than Parkmead currently has on hand - let alone getting funding to take the projects into production. But there are few executives with better access to capital and debt markets than Mr Cross, and the company is currently in advanced discussions with lenders regarding debt facilities.
