Join our community of smart investors

Jersey gushes higher on transformational licensing award

The three blocks the UK North Sea-focused upstream oil and gas company has been awarded in the Oil and Gas Authority’s latest licensing round have major positive implications for the commercialisation of its acreage.

Jersey Oil & Gas (JOG:137p), 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) in the Outer Moray Firth, which contains the Verbier oil discovery, has been awarded three blocks in the UK Oil & Gas Authority’s 31st supplementary offshore licensing round. I anticipated this would happen when I reiterated my buy stance, at 63p, a couple of months ago (Share price catalysts on Jersey’s horizon’, 20 May 2019). Jersey's share price has surged by 86 per cent on today’s licensing awards.

That’s because it is a transformational development for the company and one that has prompted analyst Daniel Slater at house broker Arden Partners to almost double his target price from 230p to 450p based on a risked NAV estimate of 537p a share, using a $65 a barrel long-term oil price. That’s because the acreage awarded to Jersey in the licensing round includes the Buchan oil field that was discovered by BP in the mid-1970s and came onstream in 1981. Production continued until May 2017, when the Buchan Alpha platform was decommissioned by which point a total of 148m barrels had been produced. 

Buchan oil is a light 33.5° API oil with a low gas-oil ratio (GOR) GOR (285 scf/bbl), a term that quantifies the amount of gas dissolved in the oil. Jersey estimates that over 80m barrels of recoverable oil volumes remain to be produced from the field. The field was not developed by previous owner Repsol Sinopec, but is development ready.

In addition, Jersey has been awarded 100 per cent working interests and ownership of Buchan Andrew, an undeveloped discovery above the main Devonian Buchan reservoir, and J2 Sgiath, an undeveloped discovery. These discoveries are estimated to have unrisked gross recoverable mean resources of 20m and 3m barrels, respectively, according to Jersey management and independent work completed by Rockflow Resources on behalf of the company.

And here’s the really smart part of today’s announcement. Jersey has entered into a three-month option agreement under which Equinor, operator of Verbier, has been granted an option over a 50 per cent equity interest in respect of the two blocks containing the Buchan oil field and J2 oil discovery. Should the option be exercised, Jersey will act as licence operator and Equinor will reimburse the company for its 50 per cent share of costs in relation to the licence applications.

The plan is to submit a field-development plan (FDP) to encompass initial redevelopment of Buchan (including new wells), followed by a tie-in with the nearby J2 discovery and Verbier. Subject to funding, first oil is targeted for 2024 and Jersey’s current net cash position of £15m (Arden estimate) should fund it through the field-development plan process depending on any further drilling that may occur on P2170.

2019 Bargain Shares portfolio performance
Company nameTIDMMarket value Opening offer price on 01.02.19Latest bid price on 22.07.19 DividendsPercentage change
Futura MedicalFUM£94m14.85p46p0p209.8%
TMT InvestmentsTMT$99m250¢350¢20c40.0%
Litigation Capital ManagementLIT£106m77.5p97p0.28p25.2%
Mercia TechnologiesMERC£112m29.57p37p0p25.1%
InlandINL£137m57.75p66p0.85p14.3%
Ramsdens HoldingsRFX£57m165p184p0p11.5%
Augmentum FintechAUGM£130m102.4p111p0p8.4%
Bloomsbury PublishingBMY£175m229p234p0p2.2%
Driver GroupDRV£31m74p57p0.5p-22.3%
Jersey Oil & GasJOG£25m205p135p0p-34.1%
Average      28.0%
FTSE All-Share Total Return index6,8527,510 9.6%
FTSE AIM All-Share Total Return index1,0231,034 1.0%

Source: London Stock Exchange

The point being that prior to these three awards, Jersey’s net share of the Verbier discovery was estimated at 4.5m barrels of oil equivalent (boe). Today’s awards add an estimated 105m boe of discovered resources net to Jersey, making this “the most significant event for the company since its inception”, says chief executive Andrew Benitz. I completely agree.

Furthermore, Jersey’s interests in other blocks in the Greater Buchan Area hold in excess of 300m barrels of oil equivalent (boe) mean prospective resources. These include 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.

Importantly, Jersey’s management maintain their view that that Verbier is commercially viable at the lower end of the initial resource estimate of 25m to 130m barrels of oil equivalent (boe). Today’s licensing awards mean that progression of the Buchan development is likely to be highly supportive of the development of Verbier too, a field to which Mr Slater at Arden attributes a risked value of $37m (125p a share) in his aforementioned risked NAV estimate of 537p (unrisked NAV estimate of 1,231p a share).

In other words, although Jersey’s oil price surged on the news, the value in Verbier, Cortina and all the other Buchan oil fields are effectively in the price of just 69p a share given that Jersey’s net cash pile is estimated to be 68p a share.

True, Jersey’s share price has been volatile this year and is still the laggard in my market-beating 2019 Bargain Share portfolio. However, the investment risk looks heavily skewed to the upside given the likelihood of a raft of positive newsflow emerging in the next six months as the company makes progress on commercialising its acreage. That’s because Equinor can be expected to exercise its option on the Buchan blocks before the end of October, thus improving the chances that the fields will be developed; a new competent person’s report should be filed in the fourth quarter this year; and we can expect a decision on the 2020 work programme on the P2170 licence (Blocks 20/5b & 21/1d), Outer Moray Firth, before the year-end, too.

All of these announcements have potential to materially lower Jersey’s unwarranted 74 per cent share price discount to analysts’ risked NAV estimates. Strong buy.

■ Simon Thompson's latest 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.