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Jersey outlines development prospects

The company is looking to create the largest new area hub in the UK Central North Sea since the discovery of Golden Eagle in 2007
October 17, 2019

This month’s markdown in the share price of Jersey Oil & Gas (JOG:173p), 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, is completely at odds with the news actually reported.

Last summer, the company was awarded a 100 per cent working interest and ownership of Block 21/2a that includes the Glenn oil discovery in the UK Oil & Gas Authority’s (OGA) 31st supplementary offshore licensing round, having been awarded the P2498 licence over the Buchan oil fields in July’s OGA licensing round (‘Jersey gushes higher on transformational licensing award’, 22 July 2019).

Jersey also entered into a three-month option agreement with Equinor, operator of Verbier, over a 50 per cent equity interest in respect of the two blocks containing Buchan and the nearby J2 oil discovery. The acreage has a combined 2C recoverable resource of 94.7m boe, according to a Competent Person’s Report carried out by Rockflow Resources that was published a fortnight ago. Rockflow also calculates that including Jersey’s 4.5m boe share of Verbier’s minimum recoverable resources of 25boe, the net present value (NPV) of both licenses is worth US$639m net attributable to Jersey based on a US$50 a barrel oil price. NPV rises to almost US$1bn based on a $62.50 a barrel oil price. The current spot rate is US$59.40 a barrel.

Equinor has decided not to exercise the option which means that Jersey still has to find a funding partner for its Greater Buchan Area (GBA) project. But what it also means is that Jersey’s management has the flexibility to strike a more advantageous deal once development planning is further progressed which is likely to leave the company with a higher equity stake and an element of carry of its costs. I would stress that although I can envisage Jersey entering into a farm out agreement with a partner within the next 12 months, there is no financial pressure on the company to rush into signing one as its funding requirements are light at this stage. Indeed, Jersey is forecast to have net cash of £11.1m by the end of 2019, and should still retain a cash balance of £4.5m at the end of 2020 after factoring in all development spend.

Bearing this in mind, last week Jersey awarded contracts to Rockflow Resources for the provision of subsurface evaluation support, and Petrofac Facilities Management to provide facilities and well support for the concept selection phase of the GBA development project. Jersey has developed a close working relationship with both Rockflow and Petrofac during the last two years and both companies were instrumental in supporting Jersey in its successful application in the OGA’s 31st supplementary offshore licensing round that resulted in the award of the GBA development opportunity.

Buchan’s low risk, low cost development opportunity

I maintain the view that the GBA development is likely to prove attractive to larger peers looking for a low risk, low cost way to boost their production growth, and one that has potential to be the largest new area hub in the UK Central North Sea since the discovery of Golden Eagle in 2007. The Buchan oil field was first discovered by BP in the mid-1970s, came onstream in 1981 and production continued until May 2017, when the Buchan Alpha platform was decommissioned prematurely due to safety concerns with its aging facilities, by which point a total of 148m barrels had been produced entirely through natural depletion. It still has over 80m boe to recover, so has potential to be producing for another 20 years assuming a funding partner can be found.

Importantly, the field is development ready. Bearing this in mind, Jersey’s management point out that recovery rates can improve by using new technology that was unavailable when Buchan was first developed in the 1980s. Analyst Daniel Slater at house broker Arden Partners notes this could involve drilling horizontal wells alongside secondary recovery (water/gas injection) and enhanced recovery (chemicals) techniques. 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.

In terms of the time line of likely future news flow, Mr Slater is looking for “confirmation of the 2020 work programme on the P2170 license in the coming months, which may include further drilling (taking full account of the data from the Verbier appraisal well and new 3D seismic survey, and potentially being exploration of Cortina or Verbier Deep and/or Verbier North)”. Beyond this, there is the GBA concept selection report that is “due to be delivered to the OGA in July 2021, followed by a formal development plan submission in 2022”. There is also the ongoing potential for new production acquisitions, too. I would add that the proximity of Verbier (25m boe minimum recoverable resource) to the Buchan fields means there is potential for a tie-back development of Verbier which can only increase the commercial attraction to a future farm-in partner of Jersey’s new GBA development hub.

So, with the shares trading on a hefty discount to Arden’s upgraded risked net asset value (NAV) of 729p (unrisked NAV of 1,631p a share) based on a US$65 a barrel long-term oil price, then any progress on development work and/or an emergence of an industry partner to commercialise Jersey’s valuable acreage would undoubtedly see the share price discount to NAV narrow sharply. Please note that Arden has allowed for a US$30m carry for Jersey on Buchan to reflect a notional farm out of the assets at some point and has used a 70 per cent interest in Buchan, J2 and Glenn when making its forecasts.

The shares have dipped below the 205p entry price in my market-beating 2019 Bargain Shares Portfolio, and I see this month’s share price pull-back as a buying opportunity. Buy.

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