- Opec production cuts extend oil price rally to 20 per cent since March
- Jersey Oil & Gas in exclusive farm-out negotiations with major North Sea Operator
The surprise 1mn-plus barrels of oil per day production cuts from Saudi Arabia and other members of the Opec+ group have come at an opportune time for Jersey Oil & Gas (JOG:277p). The price of Brent crude rose 5 per cent to $84 per barrel on the news, extending the benchmark’s rally to 20 per cent since hitting a 15-month low last month. Analysts expect even higher prices still as the reopening of China’s economy fuels demand – the International Energy Agency predicts that it will help drive up global oil demand by 3.2mn barrels per day by the fourth quarter of 2023.
At the end of last week, the UK North Sea-focused upstream oil and gas company revealed that it is closing in on a farm-out of its Greater Buchan Area (GBA) project, a huge resource holding 172mn barrels of oil equivalent (boe) of discovered P50 recoverable resources (net to Jersey). The company has agreed heads of terms for a farm-out of a material interest in its GBA licences with a “significant UK North Sea operator” and is “working towards finalising a fully termed agreement in the near future”.
Analyst Daniel Slater of brokerage Zeus Capital says that securing a farm-out partner will provide important funding, adds significant technical endorsement and highlights the attractiveness of further development of the Buchan reservoir. Importantly, Jersey is in a strong negotiating position, holding estimated net cash of around £6mn. The GBA fields account for 78 per cent ($295mn, or 668p per share) of Slater’s risked net asset value (NAV) estimate of $378mn (856p), hence why Jersey’s share price has surged 81 per cent since the announcement.
Analyst Jonathan Wright at FinnCap has a risked valuation of $195mn on Buchan (500p per share), accounting for 75 per cent of his group risked NAV of $258mn (660p). This is based on a long-term Brent crude price of $70 per barrel and embedding a 30 per cent commercial chance of success for the project. Wright’s unrisked valuation of Buchan is more than three times higher at $651mn (1,666p), highlighting the scale of the potential share price upside in the event of the GBA project being commercialised. Indeed, I can see the share price of the £90mn market capitalisation company more than doubling if a major farm-out deal is secured.
Trading well above the 195p and 230p levels of my last two buy calls (‘Primed to hit pay dirt’, 28 April 2022 and ‘Poised to hit pay dirt’, 22 September 2022), the shares continue to rate a buy.
Calling time on Parkmead
- Decommissioning costs and windfall taxes lead to hefty first-half loss
- Net cash position falls from £22.3mn to £18.3mn
- Falling European gas prices prompt earnings downgrades for 2023-24
Investors have been underwhelmed by interim results from Parkmead (PMG: 32.5p), a UK and Netherlands-focused energy group. The share price had already been under pressure, dragged down by falling European gas prices from last summer’s record highs, which will impact the future profitability of the group’s unhedged low-cost onshore gas portfolio in the Netherlands.
In the six months to 31 December 2022, the average Dutch Title Transfer Facility (TTF) gas price more than doubled to €153 per Mwh, which trebled group cash profit to £7.9mn on 140 per cent higher revenue. However, Parkmead’s underlying post-tax loss more than trebled to £1.2mn after accounting for a £4mn Dutch windfall tax charge (retrospectively for the whole of 2022) and £4.7mn of taxes. Moreover, after accounting for the £12.7mn impairment charge for decommissioning the Athena field, the reported net loss ballooned from £0.4mn to £14mn. This led to an identical reduction in NAV from £57mn to £43mn (39p).
Although house broker FinnCap expects adjusted post-tax profit and earnings per share (EPS) to treble to £4mn and 3.4p, respectively, in the 12 months to 30 June 2023, the forecasts exclude a further £6.5mn of second-half decommissioning payments to take the total to £19.2mn, which will reduce current net cash by a third to £12mn (11p).
The lack of reported net profits during a period of record high gas prices, and the absence of any farm-out news on the group’s flagship Greater Perth Area (GPA) development project – one of the North Sea's largest undeveloped oil resources – are not the only drag on investor sentiment. European natural gas prices have fallen from over €100 per MWh at the start of the year to €40 per MWh with the forward curve pulling back considerably, too, prompting house broker FinnCap to push through a 61 per cent downgrade in net profit forecasts from £6.5mn to £2.5mn for the 2023-24 financial year.
Post results, Parkmead’s share price fell below the 37p entry point in my 2018 Bargain Shares Portfolio and is now trading around FinnCap’s core NAV of 32p. True, there is potentially significant exploration upside; the GPA licences account for 120p of FinnCap’s risked NAV of 183p. However, with a lack of news on that front and European gas prices softening, the share price lacks a catalyst. Sell.
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