Wentworth Resources (WRL) ticks almost every box we look for in a junior oil and gas company. It has experienced directors who are buying shares near the current price. It has a busy exploration programme planned for the next 12 months with huge blue-sky upside. It has a large cash pile and should be fully funded until cash flows from production start to arrive in less than 15 months. And, most importantly, its shares are mouth-wateringly cheap.
- Busy frontier exploration programme in Africa
- Gas project coming on-line in early 2015
- Fully funded
- Directors buying shares
- Thinly traded
- Political risk
Trading on just two times forecast earnings for 2015, Wentworth's shares clearly offer value, assuming the company can get its Mnazi Bay gas project in Tanzania into production on time and within budget. This hinges on a Chinese state-owned corporation building a gas pipeline to Dar es Salaam by the end of 2014. Encouragingly, managing director Geoff Bury told the Investors Chronicle that the pipeline construction "is well under way and is certainly on schedule, maybe even ahead".
Add to this an exciting exploration programme in Mozambique and Tanzania, and you can see why a number of institutional investors plonked down most of the $46m raised in a November private placement and subsequent offering priced at 40p a share. Four executives and directors participated in the placing by acquiring shares worth more than £800,000 in total, too, ensuring their interests are closely aligned with shareholders.
The financing means Wentworth should be cashed up until the first quarter of 2015 when the Mnazi Bay gas project is expected to come on-line. In the meantime, all Wentworth and its partner, Maurel et Prom (FRANCE: MAU), must complete are the final negotiations of a gas sales agreement with the Tanzanian government as well as tying in existing wells to the Chinese pipeline. We expect Wentworth's share price to re-rate to a mid to high-mid single-digits earnings multiple as the gas development project is de-risked.
WENTWORTH RESOURCES (WRL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 48p | MARKET VALUE: | £73.9m | |
| TOUCH: | 45-48p | 12-MONTH HIGH/LOW: | 65p | 37p |
| FWD DIVIDEND YIELD: | nil | FWD PE RATIO: | 2.2 | |
| NET ASSET VALUE: | 58¢ | NET CASH: | See text | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2011 | 0.74 | -6.25 | -7.0 | nil |
| 2012 | 0.82 | 24.9 | 28.0 | nil |
| 2013** | 0.80 | -10.4 | -11.0 | nil |
| 2014** | 0.80 | -14.7 | -15.5 | nil |
| 2015** | 28.0 | 33.9 | 35.9 | nil |
| % change | +3400 | - | - | - |
Normal market size: 5,000 Market makers:6 Beta: 1.10 £1=$1.63 **Investec forecasts | ||||
Yet several other important catalysts could dramatically boost Wentworth's share price before then. The company expects to spud up to four exploration wells before end-2014 across its licences in the prolific East African Rovuma basin. These will target oil and gas prospects potentially hosting up to 1.3bn gross barrels of oil equivalent.
The most exciting prospect has to be Tembo, a 259 million barrel, potentially oil-bearing target onshore Mozambique that will be drilled in the second quarter of 2014 by Anadarko (NYSE: APC), a leading explorer in Africa. Wentworth holds an 11.6 per cent interest in the block, and broker Investec estimates an oil discovery there could be worth up to 86p a share fully unrisked - or roughly double the company's current share price.
Anadarko has committed to two firm wells on the licence in 2014, with an optional third well, while Wentworth will also participate in a fourth exploration well with Maurel et Prom at Mnazi Bay in the second half of 2014.
What could go wrong? Well, there's the possibility that gas sales at Mnazi Bay will be delayed or that Wentworth will receive a lower-than-expected gas price. While oil and gas prices there are fairly strong, there are extra political and logistical risks to consider in Tanzania and Mozambique. Another possibility is that exploration could be wholly unsuccessful; the geological chance of success for most of the wells is just one is six.
Another issue is that Wentworth's shares are thinly traded on London's Alternative Investment Market (Aim). Investors might do well to bide their time and build a position slowly, taking advantage of market dips - many of the key catalysts aren't expected until the second of quarter 2014, after all. Alternatively, Wentworth has a dual listing in Oslo where the shares are much more liquid.
