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Share price catalysts on Jersey’s horizon

Positive news flow on multiple fronts could lead to a sharp re-rating of the UK North Sea-focused upstream oil and gas company
May 20, 2019

Jersey Oil & Gas (JOG:63p), a UK North Sea-focused upstream oil and gas company that owns an 18 per cent interest in the P2170 licence (Blocks 20/5b & 21/1d), Outer Moray Firth, is the laggard in my 2019 Bargain Share Portfolio, a reflection of last month’s disappointing results from the company’s appraisal drilling programme on its flagship Verbier discovery in Block 20/5b (‘Jersey’s drilling disappoints’, 3 April 2019). As a result the shares are trading on a massive discount to house broker Arden Partners’ risked net asset value (NAV) per share estimate of 233p (833p on an unrisked basis) using a long-term Brent crude price of $65 a barrel, or 10 per cent below the current market price.

Annual results for 2018 released today reveal that Jersey had net cash of £19.8m at the end of 2018, a sum worth 90p a share, of which £4m to £5m will be utilised in the first six months of 2019, largely to settle its share of the Verbier appraisal well results. This implies a minimum net cash position of £14.8m at the end of June 2019, a sum worth 68p a share, so effectively nil value is being attributed to the company’s exploration assets.

This is incredibly harsh given that that Jersey’s management still believe that Verbier is commercially viable at the lower end of the initial resource estimate of 25m and 130m barrels of oil equivalent (boe). House broker Arden Partners places a risked value of $37m (125p a share) on Verbier on this basis, or double Jersey’s current share price. Importantly, there are catalysts on the horizon to narrow the huge share price discount to risked NAV.

Firstly, results of new 3D seismic data will be delivered by the end of next month which will be integrated with the Verbier appraisal well result to better understand the reservoir distribution of the primary target. They will also be used to assess the prospectivity of deeper targets and other identified exploration opportunities, including Jersey’s nearby Cortina prospect on the P2170 licence which has a minimum resource of 39m boe and a risked NAV of $25m (85p a share) based on Arden’s analysis. Expect updated resource estimates for the project to be released in due course, and perhaps better than the market is anticipating.

Secondly, Equinor, the operator, remains committed to the project. Potential options for the co-venture partners include: drilling exploration well on the Cortina prospect with a view to combining it with Verbier; drilling a new appraisal well at Verbier to explore a new prospective horizon that has been identified below Verbier to create a stacked prospect; or Verbier could be tied back to existing production infrastructure. Expect news on this front late this year, or early in 2020.

Thirdly, chief executive Andrew Benitz expects the Oil & Gas Authority’s 31st Supplementary Offshore Licensing Round (which includes acreage in the Greater Buchanan area and various potential production asset acquisition opportunities) to be “highly beneficial to the Verbier discovery, with the potential to enhance its commercial viability.” He has reason to think this way as “it is anticipated that plans for an area hub development will be catalysed by licence awards in the licensing round.”

Fourthly, the directors are still actively looking at acquisition opportunities within the UK North Sea sector, and specifically at acquiring cash generative production assets. I believe any deal would be viewed favourably by the market as it would rebalance the company’s portfolio.

The bottom line is that at the current depressed valuation the investment risk is heavily skewed to the upside. Indeed, positive news flow on multiple fronts has potential to spark a sharp re-rating. Buy.

■ Simon Thompson's new book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.