- Gas prices more than treble from 2020 lows.
- Land sales boost net cash.
- Platypus and GPA projects offer scope for positive news flow.
Shares in Parkmead (PMG:40p), a small-cap oil and gas exploration and development company, have endured a roller-coaster ride since I first suggested buying them, at 37p, in my 2018 Bargain Shares portfolio. At the time of annual results (‘Bagging a value stock hat trick’, 23 November 2020), I noted the investment risk, at 34p, was skewed to the upside. It still is.
The value case has never been in doubt: net cash of £21.1m equated to half the company’s market capitalisation of £43.8m at the end of the company’s first half (31 December 2020) and that sum has since been boosted to £24.4m (22.2p a share) following last month’s disposal of surplus land in Aberdeenshire.
Parkmead still retains Pitreadie Farm – worth £6.2m (5.7p a share) at cost – and has identified a 1,236-acre segment of the site which has potential for a 20 MW wind farm. The land is adjacent to the Mid Hill Wind Farm which operates 33 Siemens wind turbines with a total generating capacity of 75MW. Analyst Jonathan Wright at FinnCap believes that the windfarm could be worth £30m at start-up (£1.52m per MW) and supports an unleveraged net present value (NPV) of £9m (8.6p a share) to Parkmead.
In addition, Parkmead owns interests in a low-cost onshore gas portfolio in the Netherlands, which has an average operating cost of $9.9 per barrel of oil equivalent, or less than a sixth of the current spot price. The gas price plunged to historic lows of €5 per megawatt hour (MWh) in the company’s first half, but has since rebounded to between €16 and €18 per MWh in the first quarter this year. Wright values the gas portfolio at £15.5m (14.3p a share).
Effectively, the combined value of cash in the bank, the Netherlands’ gas portfolio and Pitreadie Farm are worth more than Parkmead’s own market capitalisation even without developing a windfarm.
A free carry on projects for value creation
It also means nil value is being attributed to all of the company’s North Sea licenses, which include a 15 per cent working interest in the Platypus gas field in the UK Southern North Sea, located 10 miles north-west of the West Sole gas field. Discovered in 2010, Platypus was successfully appraised with a horizontal well in 2012 (flow tested at a rate of 27m cubic feet of gas per day).
Berkshire Hathaway backed CalEnergy owns a 26 per cent interest in the license and both Parkmead and CalEnergy are familiar with each other from their Skerryvore area partnership. Bearing this in mind, Parkmead is taking over as operator from China National Offshore Oil Corporation (CNOC)-owned Dana Petroleum which owned a 59 per cent interest. With the license expected to expire in July, expect imminent news on both a license extension and change of ownership.
The Field Development Plan, submitted in October 2019, is based on a two-well subsea tie-back to route gas through a 23km pipeline to Perenco’s Cleeton platform and onwards to the Dimlington gas terminal for processing platform, thus reducing capital expenditure and operating costs. Platypus is estimated to contain recoverable reserves of 103bn cubic ft and a potential satellite field, Platypus East, could add a further 50 per cent to that figure. It is a valuable strategic asset. FinnCap has a combined risked NPV of 5.1p a share on both fields.
Greater Perth Area project progress
Ultimately, the reason why the shares have been volatile is due to the drawn-out process of developing Parkmead’s Greater Perth Area (GPA) oil hub which has potential to deliver 75m to 130m barrels of oil equivalent (boe). GPA includes licences covering the Perth and Dolphin fields in the Moray Firth area.
Clearly, last year’s collapse in the oil and gas price impacted all operators, but equally the rapid bounce back means that the economics of the GPA project have improved dramatically since last autumn. Parkmead’s directors estimate that every $10 per barrel increase in the oil price adds £130m to the P50 post-tax net present value of the GPA project.
Moreover, the board is currently considering a draft commercial offer from the Scott field partnership, led by CNOC, to explore terms of a sub-sea tie-back via the Scott platform located six miles away from Parkmead’s GPA oil hub. Parkmead is also in discussions with other operators in the area. FinnCap have placed a £112m NPV (103p a share) on Parkmead’s interest in the GPA project, so it forms a material proportion of the brokerage’s total risked NPV of 161p a share.
Share price catalysts for a re-rating
The catalyst for narrowing the gap between Parkmead’s reported net asset value of £68.9m (63p a share) and its £43.8m market capitalisation is likely news flow from GPA, Platypus or development of the Aberdeenshire wind farm. Progress on any one of these fronts has potential to spark a sharp re-rating.
From a technical perspective, a move above the January 2020 high (50p) would be a strong signal that a base formation has completed since last year’s stock market crash. 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].
Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 with free postage and packaging.
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.
