The ongoing energy crisis that is wreaking havoc across Europe brings into sharp focus the political debate about national energy security. Gazprom’s decision to reduce gas supplies through the Nordstream pipeline may have been a key catalyst for the spike in natural gas prices, but it’s not the long-term cause.
Both governments and consumers are waking up to the unpalatable truth that green energy may save the planet, but it comes at a price if the switch from fossil fuels is badly managed. In the UK, lowering our reliance on coal for electricity generation (from 22.3 per cent to 1.6 per cent since 2015), coupled with the two-thirds decline in domestic natural gas production since 2000, has left the country badly exposed to fluctuations in international energy markets. Moreover, even though half of our gas consumption is now reliant on imports, the country's strategic storage capacity is miniscule. The same is true of battery storage capacity which needs to be dramatically ramped up if intermittent wind power is to be relied upon securely.
In the meantime, the surge in energy prices could be game-changing for Jersey Oil & Gas, a constituent of my market beating 2019 Bargain Shares portfolio.
Jersey’s farm-out potential materially undervalued
- Farm-out process ongoing for Greater Buchan Area development project.
- March 2021 placing raises £16.6m at 165p a share.
- Net cash of £17m at 30 June 2021.
UK North Sea-focused upstream oil and gas company Jersey Oil & Gas (JOG:160p) is ideally placed to successfully farm-out its Greater Buchan Area (GBA) project.
The company holds 100 per cent interests in the Buchan oil field, and the nearby Verbier and J2 oil discoveries in the Outer Moray Firth. In total, these license areas hold 172m barrel of oil equivalent (boe) of discovered P50 recoverable resources (net to Jersey) of which 126m boe are attributable to Buchan. A further 168m boe of prospective resources have been identified close to Buchan.
At an oil price of US$65 a barrel, Jersey’s directors believe that the GBA project can deliver US$840m cash profit in the first full year of production and generate total pre-tax free cash flow of US$6.4bn. Moreover, with operating costs estimated at US$8-9 boe during plateau production on the drill-ready exploration targets, the pay-back period (US$1bn capital expenditure required to first oil) is under three years. Based on these assumptions, the GBA project area has a post-tax net present value of US$1.1bn (£800m) and could produce an internal rate of return greater than 25 per cent, an attractive return for a funding partner given the relatively short pay-back period.
Rising oil and gas prices coupled with the escalating energy crisis have not only changed the political landscape, but significantly improved the odds of a successful farm-out – the price of Brent Crude has risen by 90 per cent to US$79.50 a barrel and natural gas prices have spiked 400 per cent to 184p a therm in the past 12 months. Talks with industry parties and potential infrastructure funders are ongoing. Powering the development by electricity from shore to reduce carbon emissions to less than 1kg/boe (against an industry average of 22kg/boe) highlights improved carbon credentials, too.
|Simon Thompson's 2019 Bargain Shares portfolio performance|
|Company name||TIDM||Opening offer price 01.02.19||Bid price 27.09.21 or exit price||Dividends||Percentage change|
|TMT Investments (note one)||TMT||250¢||1,010¢||20¢||662.3%|
|Futura Medical (note two)||FUM||14.85p||34p||0p||129.0%|
|Litigation Capital Management||LIT||77.5p||107p||0.71p||39.0%|
|Mercia Asset Management (note three)||MERC||29.57p||27.5p||0p||-7.0%|
|Jersey Oil & Gas||JOG||205p||158p||0p||-23.0%|
|FTSE All-Share Total Return index||6,852||8,035||17.3%|
|FTSE AIM All-Share Total Return index||1,023||1,465||43.2%|
Note 1: Simon advised taking profits on TMT Investments at 580c a share to bank 140 per cent gain including dividend of 20c ('Takeovers, tender offers and taking profits', 9 September 2019), and subsequently advised buying back the shares at 318c ('On the hunt for recovery buys', 6 July 2020).
Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 October 2019). The selling price is used in the performance table. Current share price 40p.
Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 December 2019). The selling price is used in the performance table.
Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and latest bid prices or when Simon advised exiting the holding.
Bearing this in mind, Arden Partners’ oil and gas analyst Daniel Slater has a risked valuation of US$384m (870p a share) which factors in a long-term natural gas price of 48p a therm and US$65 a barrel for Brent Crude, both of which are materially below current spot prices. WH Ireland’s fair value estimate of 622p a share is four times the company’s current share price and analyst Brendan Long views “Jersey as a highly opportunistic investment given the potential of securing a farm-out near term.” This is simply not in the price as net of cash on the balance sheet the £51m market capitalisation company’s enterprise valuation equates to only 15 per cent of Arden’s US$300m risked valuation (680p a share) for the Buchan field alone.
Jersey’s share price rallied 160 per cent from 103p to 268p after I last highlighted the investment case (‘A quartet of value opportunities’, 30 November 2020), before succumbing to profit taking. Any positive news on the farm-out process could put a rocket under the price again. Buy.
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