Bargain Shares: Primed to hit pay dirt

Jersey Oil & Gas (JOG:195p), a UK North Sea-focused upstream oil and gas company is closing in on a farm-out of 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) including 126m boe attributable to Buchan. A further 168m boe of prospective resources have been identified close to Buchan, too.

Chief executive Andrew Benitz notes “strong interest in developing the GBA project and we are actively engaged with multiple counterparties of scale, with ongoing due diligence involving two-way collaborative workstreams.” Work is progressing to assess various development concepts that can facilitate the farm-out, including using existing third-party host infrastructure and facilities to enhance overall development economics through synergies and cost savings.

The timing couldn’t be any better as the geopolitical turmoil in Europe serves as a salutary reminder that security of energy supply is of vital importance. Maximising the production of indigenous, low-carbon UK resources is crucial for security of supply and represents the optimum path for the UK economy to navigate the energy transition to renewables. At the same time, the sharp rise in commodity prices have bolstered the cash positions of producers, serving to improve sector confidence and provide a benign backdrop to the on-going GBA farm-out process.

At current spot prices, the $1bn capital expenditure required to reach first oil could be paid back within three years. Bearing this in mind, GBA is ‘development ready’ and one of only three pre-Final Investment Decision (FID) projects with resources over 100mn boe. Analysts at brokerage finnCap note that the other two – Cambo and Rosebank – were a key driver behind Ithaca Energy’s recent $1.5bn acquisition of Siccar Point. FinnCap’s risked net asset value (NAV) of £186mn (572p a share) is based on a long-term oil price of $60 per barrel, which given the current forward curve remains “very cautious”. WH Ireland’s 660p target price factors in a $75 per barrel oil price for the project.

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 price is 32p.

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. The current price is 33.75p.

Note 4: Simon advised selling Drver Group shares at 27p a shares ('On the results beat', 29 March 2022). The selling price is used in the performance table. The current price is 27p.

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.

Importantly, net cash of £13mn (40p a share) provides the balance sheet strength for Jersey to optimise value for its own shareholders in its negotiations. Assuming a farm-out deal is done later this year, then the gap between Jersey’s share price (190p) and analysts’ fair value estimates (571p to 660p) is set to narrow dramatically.

Jersey’s share price has risen 44 per cent since my last buy call (‘On a war footing’, 28 February 2022), although it’s only fair to point out that it has been highly volatile since I first suggested buying the shares, at 205p, in my 2019 Bargain Share Portfolio. The bottom line is that the price could easily double or more if a farm-out deal is completed, as seems likely to happen this year. Buy.

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