Investors are starting to warm to the investment case for Parkmead Group (PMG:41p), a small-cap oil and gas exploration and development company led by 19 per cent shareholder Tom Cross, the founder and former chief executive of Dana Petroleum. The share price has risen by 10 per cent since I included the shares in my 2018 Bargain Shares Portfolio, and recent developments only reinforce my positive stance.
For starters, the company’s market capitalisation of £40.5m is still 38 per cent below IFRS net asset value (NAV) of £65.2m, even though Parkmead holds £24.4m in cash and has oil and gas interests spanning 26 exploration and production blocks in the North Sea. It also owns a £4.7m stake in Faroe Petroleum (FPM:121.5p), another oil explorer I am keen on.
Indeed, Faroe’s share price gushed up 15 per cent after I published my article a fortnight ago (‘Profit from corporate activity’, 26 Mar 2018) on news of stakebuilding by DNO ASA, the Norwegian oil and gas operator, and significant discoveries in both the Hades and Iris prospects in licence PL 644 B, located in the Norwegian Sea and in which Faroe has a 20 per cent equity interest. There could be more exploration upside as drilling on the Rungne (Faroe-operated), Cassidy and Pabow wells are all planned for later this year, offering catalysts to narrow Faroe’s share price gap to analysts’ risked NAV forecasts of 141p.
Interestingly, DNO holds interests in 19 exploration licences offshore Norway and the UK, and is pursuing strategic investments and partnerships with established North Sea players. Last week, DNO snapped up a 27.3 per cent stake in Faroe at 125p a share, attracted by a combination of Faroe’s daily production, which averaged 14,300 barrels of oil equivalent (boe) last year, and the value of its stated 2P reserves of 97.7m boe and 2C resources of 78.6m boe.
DNO’s interest in Faroe is clearly good news for the value of Parkmead’s shareholding in more ways than one. That’s because Parkmead has established a key position in the UK Central North Sea following a series of licensing round successes and strategic acquisitions. The company has interests in eight licences there, of which Faroe is invested in seven of them, including some in the Perth and Dolphin fields in the Moray Firth area, which contains very large oil fields including Piper, Claymore and Tartan. Perth and Dolphin are two substantial Upper Jurassic Claymore sandstone accumulations that have tested 32°-38° API oil at production rates of up to 6,000 barrels of oil per day (bopd) per well.
Perth and Dolphin fields
Bearing this in mind, Parkmead has increased its interests in licences P218, P588 and P2154 in the Moray Firth, which contain the Perth and Dolphin fields, from 60.5 per cent to 100 per cent to boost its 2P reserves by 17.9m barrels of oil. The company also signed an agreement with Nexen Petroleum, a subsidiary of the China National Offshore Oil Corporation, to begin a detailed engineering study for the potential commercialisation of Perth and Dolphin by way of a sub-sea development tie-back via Nexen’s Scott platform that’s located 10km away.
Interestingly, initial work indicates that the required modifications to Scott could be relatively limited, thus offering potential to significantly reduce capital expenditure to bring the project on stream as well as lowering operating costs. True, Parkmead’s Greater Perth Area (GPA) fields have high levels of sulphur, but so does the Buzzard field in the Outer Moray Firth where Nexen is operator and has a 42 per cent interest, so the company has experience of dealing with this issue.
Moreover, Parkmead has also commissioned a new reservoir study that could potentially lead to a substantial increase in the recovery factor of oil volumes at the Perth field, which currently stand at 197m barrels of oil for core Perth and 498m barrels including the northern areas of the field. It goes without saying that the Perth and Dolphin fields are a valuable asset, representing around 60 per cent of Panmure Gordon’s valuation of all the fields in Parkmead’s portfolio.
My take on the aforementioned developments is that they clearly improve the chance of the GPA fields being commercialised, a factor that’s not being reflected in Parkmead’s share price, which is half of Panmure Gordon’s risked NAV estimate of 85p a share.
I would also highlight some positive news from the Diever West gas field in the Netherlands in which Parkmead holds a 7.5 per cent interest. The field came on stream in November 2015 and averaged 5,340 barrels of oil equivalent per day (boepd) in the first six months, and has been exceeding expectations since then. In fact, in February this year the field averaged 7,833 boepd and new dynamic monitoring suggests it has around 18.6m barrels of oil equivalent of gross gas-in-place, or 108bn cubic feet. That’s more than double the original estimate.
In addition, Parkmead's low-cost onshore gas portfolio includes three other fields in the Netherlands that have an average operating cost of just $10 (£7.1) per barrel of oil equivalent. The profitable gas production from Diever West, and Parkmead's wider portfolio of gas fields in the Netherlands, provide important cash flow to reduce cash burn while the company makes progress with its licences in the North Sea, any one of which has potential to create substantial investment upside for shareholders. Buy.
Bowleven stake building ahead of drilling news
Bowleven (BLVN:34.6p), the Africa-focused oil and gas exploration group, made it into both my 2016 and 2017 Bargain Shares Portfolios (at 18.9p and 28.9p, respectively), and its share price has rallied by a further 10 per cent since I updated my portfolio two months ago (‘How the 2017 Bargain Shares Portfolio fared’, 2 Feb 2018). There have been two specific catalysts.
Firstly, the appraisal drilling campaign on the Etinde offshore prospect, Cameroon, in which Bowleven holds a 20 per cent equity interest, is finally under way after partner New Age entered into a contract with Vantage Drilling to perform drilling services over a 150-day period on the joint venture's proposed appraisal wells. Expect the first well to spud during the second quarter.
Secondly, activist shareholder Crown Ocean Capital raised its stake last month and now controls 29.03 per cent of the issued share capital. It’s easy to see why it has been doing so. That’s because Bowleven’s net funds of $83.3m (£59.5m) equate to more than half of its market value of £113m, and cash burn is not a major issue as monthly running costs have been cut to $350,000, and the board is investing some of the company’s low-yielding cash deposits in corporate debt funds to generate a higher investment return. Also, the company has a $39.6m (£28.3m) net drilling and testing carry to cover its share of two appraisal wells on Etinde, meaning effectively all its costs are covered, and is entitled to a $25m (£17.8m) payment on achieving the final investment decision at the project. Based on analysts’ risked value of around 47p a share for the Etinde prospect alone, the current share price implies just a one-in-three chance of success.
Admittedly, a potential farm-out agreement with Victoria Oil & Gas (VOG:33p) for Bowleven’s Bomono permit in Cameroon has failed to materialise, albeit informal discussions between the parties are ongoing. Bowleven is now exploring alternative arrangements, but in any case this asset is the price for free.
The bottom line is that Bowleven offers scope to deliver short-term upside on positive drilling news from Etinde, albeit the investment risk is higher now given the share price is 83 per cent above my original entry point. In the circumstances, I feel it’s prudent to top-slice half your holdings and run profits on the remainder ahead of drilling news.
CareTech on the hunt for acquisitions
I have been taking a look at specialist social care home operator CareTech (CTH:389p) ahead of its half-year trading update at the end of this month. The shares have drifted since I rated them a buy at 433p last autumn (‘A trio of small-cap buys’, 31 Oct 2017), albeit the holding has still produced an 81 per cent total return including dividends per share of 27.55p since I initiated coverage at 230p ('Time to take care', 16 Mar 2015).
Importantly, care home fee rate discussions with local authorities have been positive, and the company continues to create value by repositioning its net capacity of 2,534 places to enhance fees and margins. A stable occupancy rate of 93 per cent in its mature homes is indicative of the strong demand for its specialist social care services.
There is an acquisitive angle here, too, as CareTech raised £37m net cash in an oversubscribed placing, at 355p, about 12 months ago, and has used two-thirds of the proceeds to make bolt-on purchases in both specialist adult and children care home services. Taking into account the contribution from acquisitions, and organic growth from the existing care homes, analyst John Cummins at brokerage WH Ireland predicts CareTech’s pre-tax profits will rise by 11 per cent to £32.4m to deliver EPS of almost 35p in the 12 months to the end of September 2018. Other earnings-enhancing acquisitions are being actively considered, and the board has the firepower to make them as net borrowings of £147m equate to only 45 per cent of the £329m freehold valuation of CareTech’s estate.
Rated on 11 times forward earnings and offering a 2.6 per cent prospective dividend yield based on the payout per share being raised to 9.9p, I feel the half-year trading update should provide a tailwind for CareTech’s share price. Buy.
Watkin Jones trading opportunity
Watkin Jones (WJG:190p), a construction company specialising in purpose-built student and private rented sector (PRS) accommodation, has issued a robust pre-close trading update ahead of its half-year results on Tuesday 22 May 2018.
The company has a pipeline in excess of 9,800 student beds, of which 88 per cent have planning consent. All 3,415 beds scheduled for delivery in the 12 months to the end of September 2018 have been forward sold, which underpins Peel Hunt’s forecast that revenues will rise by 15 per cent to £345m and boost pre-tax profit by 9 per cent to £47.8m in the period. On that basis, expect EPS of 15.2p and a 10 per cent hike in the dividend per share to 7.3p.
Importantly, the pipeline is equally robust as Watkin Jones has already forward sold all 2,675 beds at five of the seven schemes in development for delivery ahead of the start of the 2019 academic year. It’s also actively marketing a number of schemes to institutional investors for delivery ahead of the 2020 and 2021 academic years, and reports strong demand, adding weight to analysts’ forecasts of a further ramp up in revenue to £413m in 2019 and £478m in 2020. The company is developing five build-to-rent residential sites, too, another lucrative source of income. On that basis, analysts at Equity Development and Peel Hunt expect EPS and dividends per share to increase to around 16p and 8p, respectively, in the 2019 financial year, rising to 17.6p and 8.6p the year after.
True, the shares have drifted slightly since I last advised buying at 207.5p ('Six small-cap plays', 22 Jan 2018), having first recommended buying at 103p when the company floated on Aim ('A profitable education', 3 Apr 2016). One reason for the pullback is because chief executive Mark Watkin Jones sold 1.5 per cent of the shares in issue at 195p in early March and is stepping down from his position, as I flagged up in January. However, the share sale was only made to facilitate the financial settlement of his divorce and the Watkin Jones Family still retain a hefty 27.6 per cent stake, aligning their interests with those of outside shareholders.
Moreover, the shares offer a prospective dividend yield of 4.3 per cent for the 2019 financial year and are only rated on 10 times cash-adjusted forward earnings after stripping out a burgeoning cash pile that could be worth 25p a share by September. A trading buy.
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