- Commercial discussions ongoing with serious well-funded counterparties
- Interested parties expected to complete technical due diligence in October
Jersey Oil & Gas (JOG:230p), a UK North Sea-focused upstream oil and gas company is closing in on a farm-out of its Greater Buchan Area (GBA) project, which holds 172mn barrels of oil equivalent (boe) of discovered P50 recoverable resources (net to Jersey).
In this week’s interim results, chief executive Andrew Benitz revealed that his company remains actively engaged in commercial discussions with “multiple serious well-funded counterparties”, adding that “interest is strong.” The majority of interested parties are expected to complete their technical due diligence in October 2022, so shareholders shouldn’t have long to wait to discover if a company transformational deal can be done.
The backdrop couldn’t be any more promising. Oil analyst Brendan Long at WH Ireland rightly points out that the coming winter will bring with it a focus on the absolute necessity of securing more oil (and natural gas) supplies. Moreover, he believes with some justification that the gravity of the forthcoming energy crisis is being hugely underestimated by governments and financial markets, so much so that a lack of supplies of high-quality, reliable energy this winter has potential to create systemic shocks.
For instance, US president Biden’s decision to release circa 1mn barrels per day of oil from the US Strategic Petroleum Reserves has “significantly suppressed the price of oil and WH Ireland see significant upward price pressure on crude oil when inevitably those releases stop – currently expected in November 2022.” Furthermore, after a prolonged period of Covid-19 related lockdowns in China, the country’s demand for crude oil “will come back strongly, supported by pro-growth governmental policies.”
Based on these near-term considerations, analysts are of the view that the time is getting very close to securing an optimal farm-out and that timing has become, by far, the most significant factor for the maximisation of shareholder value via Jersey’s farm-out. Furthermore, the best assets will be developed first and Jersey has undoubtedly one of the best underdeveloped assets in the UK North Sea. In fact, it is one of only three pre-Final Investment Decision (FID) projects with resources over 100mn barrels of boe.
WH Ireland value the first phase of Buchan alone at $1.25bn (£1.1bn) based on a long-term Brent Crude price of $100 a barrel and using a 10 per cent discount rate on the post-tax discounted cash flows in their model. Jersey only has a market capitalisation of £75mn, so it doesn’t take a genius to work out that a successful farm-out to a well-funded counterparty could create substantial value for the company’s shareholders. In fact, analysts’ target prices – Arden (700p), WH Ireland (722p) and finnCap (572p) – could be erring on the low-side in the event of a major liquidity event materialising. Importantly, Jersey is debt free and ended the latest half year with net cash of £8.7mn, so is sitting pretty to negotiate the best deal.
The company’s share price is up 18 per cent since I last visited the investment case (‘Primed to hit pay dirt’, 28 April 2022), but could easily double or treble if Jersey hits the big time with its farm-out discussions. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
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