Almost two years to the week that European investors hit the panic button as Covid-19 pandemic swept across Italy, the continent faces a threat of even greater magnitude that has also emerged from the east.
Without doubt the unprecedented sanctions unleashed on Russia by Europe, the UK and the US will have a devastating impact on the country’s economy, companies and people. Deprived of US$635bn (£477bn) of foreign exchange reserves to protect the rouble, around two-thirds of which are held in financial assets in New York, London and other major European capitals, the Russian currency has gone into free fall.
A huge spike in Russia’s domestic inflation is one obvious consequence, another is ballooning liabilities of Russian companies on their overseas borrowings and greater risk of default. In response, president Putin has threatened nuclear retaliation, but it’s far more likely that he will deliver economic pain to Europe by cutting off gas flows to the continent in the knowledge that LNG can be exported to the east rather than to the west. European gas prices could go stratospheric.
Expect retaliatory Russian cyber warfare to be ratcheted up against western national government organisations (NGOs) and companies, too. It’s already happening.
BATM’s cyber offering set to surge
- Cyber security business to “grow substantially” in 2022
- Further large government defence cybersecurity contracts likely to be won
- Growth in diagnostic orders for non-Covid-19 diseases offsets an anticipated slowdown in sales of Covid-19 diagnostic kits
- Closing cash pile of $64.7mn (£48.7mn) net of borrowings equates to a fifth of market capitalisation
BATM Advanced Communications (BVC:53p), a provider of medical laboratory systems, diagnostic kits, cybersecurity and network solutions, has released annual results as I previewed last week (‘Bargain hunting in the tech sector carnage’, 21 February 2022). I will not dwell on last year’s financial performance which was in line with my analysis. The positive outlook has not changed, either; management guidance points to current year underlying cash profit rising from $15.1mn to $18.1mn on 13 per cent higher revenue of $158mn.
Of far more interest right now are prospects for the group’s cybersecurity business, which provides advanced cyber defence capabilities for large volume high-speed network traffic. The unit accounted for 25 per cent of the $20.7mn revenue reported from BATM’s network and cyber division in 2021, so it is relatively small part of the overall group. But the cyber business won an $18mn contract with a long-standing defence department customer last year and expect “many more government defence contract wins this year”, according to chief executive Dr Zvi Marom. The geopolitical backdrop couldn’t be any more favourable.
BATM is also developing a new cyber security solutions product to address a growing market opportunity “beyond the defence industry”. It will be released in the second half, and is likely to be in demand as more organisations look to protect themselves from cybersecurity attacks. For example, UK window replacement firm Safestyle (SFE) reported a 10 per cent hit to first-half revenue today due to interruptions caused to order processing and customer service levels following last month’s Russian cybersecurity attack. Strix (KETL), a global leader in kettle safety controls, has been a target, too. The Isle of Man-based company reports no financial impact, but it highlights the threat of Russian interference nonetheless.
BATM’s closing cash pile of $64.7mn (£48.7mn) net of bank borrowings was better than I had anticipated, some of which will be used on a share buyback programme, subject to shareholder approval. Trading on a modest enterprise valuation to cash profit multiple of 13.5 times, and with further contract wins likely for BATM’s edge computing and network function virtualisation product suite, Edgility, the shares rate a buy.
Profit from the European energy security crisis
- Brent crude hits highest level since 2014
- UK spot gas prices equivalent to $193 per barrel of oil
- Speculation rife that the UK regulator will approve new drilling across six UK fields
- Jersey Oil & Gas in discussions with multiple counterparties including infrastructure funders for development of Greater Buchan Area project
Governments across Europe are belatedly realising that energy security not only means reliable continuity of supply, but at an affordable price point, too. Such has been the laissez faire attitude to embracing cheap overseas energy during the accelerated transition to renewables that consumers and businesses are now massively overexposed to price spikes in fossil fuels. The UK wholesale gas price forward curve is 250p a therm or higher through to next winter, or almost double the level embedded into next month’s new UK energy price cap. Another massive price hike for consumers in the autumn is a racing certainty.
Furthermore, if Russia turns off the gas taps to Europe – the continent brings in 40 per cent of its gas from the country – then the wholesale price will go parabolic. This impacts the UK given that half our domestic gas usage is bought on the international market, mainly from Qatar and Norway. Given this backdrop, speculation is rife that the UK government regulator will approve new drilling across six UK fields (Rosebank, Jacdaw, Marigold, Brodick, Catcher and Tolmount East) to tap into 62mn tonnes of oil equivalent reserves.
With Brent Crude surging though $100 a barrel, then this bodes well for Jersey Oil & Gas (JOG:135p), a UK North Sea-focused upstream oil and gas company that is in the process of farming out its 100 per cent owned Greater Buchan Area (GBA) project, which holds 172mn barrels of oil equivalent (boe) of discovered P50 recoverable resources (net to Jersey). A further 168mn boe of prospective resources have been identified close to the Buchan field, too.
At an oil price of US$65 a barrel, the GBA project is forecast to produce US$840m cash profit in the first full year of production and total pre-tax free cash flow of US$6.4bn over its life. Moreover, with operating costs estimated at US$8-$9 boe during plateau production on the drill-ready exploration targets, the $1bn capital expenditure required to reach first oil would be paid back in less than three years. The spot oil price is $103 a barrel, and the spot gas price equates to an eye-watering $193 a barrel, so the payback could be less than two years at current prices.
Bearing this in mind, Jersey has strengthened its board by appointing the former management team from Ithaca Energy who transformed what was a junior producer by acquiring the Greater Stella Area (GSA) before selling the company for $1.2bn in 2017. GBA is more than five times the size of GSA in terms of expected recovery. Jersey’s board is now chaired by Les Thomas, Ithaca’s former chief executive. Graham Forbes, former finance director of Ithaca, has taken the same role at Jersey and Richard Smith, Ithaca’s former corporate development director, is the company’s new chief commercial officer. It’s quite some coup and shows serious intent from chief executive Andrew Benitz. Farm-out talks with multiple counterparties are ongoing, and although a standalone concept remains the preferred route, Jersey is also in talks with nearby infrastructure owners.
If the directors pull a farm-out off, then expect a dramatic re-rating of Jersey’s equity. To put the current undervaluation into perspective, Arden Partners’ oil and gas analyst Daniel Slater has a risked valuation of $384m (870p a share) after factoring in a long-term natural gas price of 48p a therm (spot price 250p) and $65 a barrel for Brent Crude (spot $103). WH Ireland’s fair value estimate of 622p a share is more than 3.5 times the company’s current share price. The 15 per cent share price drift since I covered the half-year results (‘Bargain shares: Profit from the energy crisis’, 27 September 2021) is not only unwarranted, but offers a potentially highly lucrative entry point. Jersey has net cash of around £9.6mn, so is in a strong position to seal a deal. Buy.
Parkmead set for profit surge
- Dutch TTF prices have surged from €22 per megawatt hour (MWh) to €108 per MWh since 30 June 2021
- Parkmead’s Dutch gas operating assets are unhedged
Parkmead (PMG:42p), a well-capitalised UK and Netherlands focused energy group, looks primed to handsomely outperform analysts profit estimates for the year to 30 June 2022.
That’s because Parkmead owns interests in a low-cost onshore gas portfolio in the Netherlands, which has an average operating cost of $9.9 per boe (€15 per MWh). Dutch TTF prices have surged from €22 per megawatt hour (MWh) at the start of the company’s financial year in June 2021 to a spot price of €108 per MWh, but house broker finnCap is still embedding an average price of €50 per MWh in its £8.6mn full-year group revenue forecast.
The business is unhedged, so it will have captured all the upside from the gas price spike since last summer. To put this into some perspective, Parkmead’s Dutch gas business reported 355 per cent higher revenue of €3mn (£2.5mn) between July and October and the current gas price is now more than double the average for that four-month period.
By my reckoning, Parkmead could be raking in more than €1.7mn per month from its gas operating business and is on course to beat finnCap’s revenue estimate by at least 50 per cent. Moreover, all the incremental revenue earned from higher gas prices drops through to profit. Double finnCap’s pre-tax profit estimate of £3.8mn and that’s closer to what the company is likely to deliver.
Parkmead only has a market capitalisation of £47mn, which is backed up by pro-forma net cash of £20mn after accounting for £3.3mn paid last month for a wind farm in Scotland. The group also owns Pitreadie Farm in Aberdeenshire, worth £6.2mn (5.7p a share) at cost. Effectively, if you attribute nil value to £29.5mn of exploration licenses in the North Sea, which includes licences covering the Perth and Dolphin fields in the Moray Firth, then the highly profitable Dutch gas operating business is being valued at £18mn. The scale of the undervaluation will be for all to see when Parkmead reports bumper half-year results at the end of March.
Admittedly, the shares have endured a volatile ride since I first suggested buying, at 37p, in my 2018 Bargain Shares Portfolio, more than doubling in value within four months. After I last suggested buying at 40p (‘Priced for a slick recovery’, 20 April 2021), the price subsequently surged 60 per cent to 64p by October, before giving back the gains. This looks like another decent trading opportunity. Buy.
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