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Priced to hit pay dirt

An independent oil and gas development company offers multiple catalysts for share price appreciation
March 19, 2021

The rebound in the oil price is doing wonders for the economic viability of oil producers as I anticipated at the end of last year (‘Reasons to be bullish’, 18 December 2020).

The combination of well depletions (eroding 3 per cent of global supply a year, according to the International Energy Authority), underinvestment (upstream investment in new oil and gas fields collapsed by more than a third in 2020) and an uptick in demand driven by a rebounding global economy has created a benign backdrop for black gold in 2021. A rising oil price – Brent Crude has almost doubled since late October – provides valuable cash flow for oil production companies and reduces default risk on their borrowings, too.

A favourable pricing environment, and an expectation that global oil inventories would be depleted to tighten the market further, was one of my major calls for 2021 and the key reason why I was bullish on oil and gas producers. Share prices in three of my sector plays – Trinity Exploration and Production (TRIN), Chariot Oil & Gas (CHAR), and Jersey Oil & Gas (JOG) – have all doubled or more since late October. There should be more upside to come. The same is true for my 2021 Bargain Share sector pick, San Leon Energy.

Simon Thompson's 2021 Bargain Shares Portfolio Performance
Company nameTIDMMarketOpening offer price 05.02.21Bid price 18.03.21 DividendsPercentage change (%)
San Leon EnergySLEAim27.5p37.1p0.0p34.9%
Duke RoyaltyDUKEAim29p38.0p0.0p31.0%
RamsdensRFXAim 142.8p165p0.0p15.5%
WynnstayWYNAim424p476p0.0p12.3%
Springfield PropertiesSPRAim135.6p145p0.0p6.9%
Arix BioscienceARIXMain177p185p0.0p4.5%
Downing Strategic Micro-Cap Investment TrustDSMMain69p71p0.0p2.9%
VietnamVNHMain201.4p206p0.0p2.3%
Canadian General InvestmentsCGIMain3,611c3,690c0.0p2.2%
AnexoANXAim136.9p138p0.0p0.8%
Average      11.3%
FTSE All-Share Total Return index7,1357,468 4.7%
FTSE Small-Cap Total Return index10,15310,821 6.6%
FTSE Aim All-Share Total Return index1,3841,382 -0.1%
Source: London Stock Exchange. 

 

San Leon’s highlights bumper cash inflow and value creation

  • Loan guarantor confirms US$102.5m of loan repayments to San Leon this year.
  • OML18 Subsea export pipeline on schedule to become operational this year.
  • Providence Resources extends farm-out deadline on its Barryroe oil and gas field.

San Leon Energy (SLE:38p), a Nigeria focused exploration and production company that owns a 10.58 per cent indirect interest in the vast 1,035 sq km Niger Delta licence, OML 18, located 500 km from Lagos has issued a positive trading update.

Eroton led the US$1.1bn equity buyout of OML18 from a Shell operated consortium in 2015 and holds a valuable 27 per cent equity interest. San Leon also purchased US$174.5m of loan notes (17 per cent annual coupon) to enable Eroton to fund its share of the OML18 acquisition, the ultimate guarantor being Midwestern Oil and Gas. Under the loan note agreement, San Leon is due to receive US$98m (15.7p a share) of repayments in three equal instalments between July and December. Importantly, Midwestern has confirmed that these repayments will be made on schedule in addition to settling a US$4.25m outstanding payment. The near doubling of the oil price since last autumn has done wonders for OML18’s cash flow.

In addition, San Leon has confirmed that a new subsea Alternative Crude Oil Evacuation System (ACOES) export pipeline is on schedule to become operational this year. It will cut pipeline downtime, thus driving up deliveries from OML18. San Leon made a US$15m shareholder loan that carries a coupon of 14 per cent and has a four-year maturity in the company which owns the ACOES project.

I also note that Providence Resources (PVR) has extended the deadline to 30 April for the proposed farm-out with Norway-based SpotOn Energy on its undeveloped Barryroe oil and gas field in the Celtic Sea Basin. San Leon holds a 4.5 per cent net profit interest in Barryroe that is held in its accounts at US$4.4m, but analysts value it at US$35m (6p a share) assuming SpotOn Energy secures $166m funding to cover the costs for Barryroe’s early development programme. SpotOn remains confident of raising the funds set out in the farm-out agreement, but needs more time given changes to the financing structure.

The bottom line is that San Leon’s share price discount to the company’s 84p a share portfolio value I detailed when I included the shares, at 27.5p, in my 2021 Bargain Share Portfolio should continue to narrow as the year progresses. The board’s policy of returning half its free cash flow as special dividends means a bumper payout is on the cards, too. 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 £3.25 [UK].

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They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.