- Discussions ongoing on second farm-out of GBA project
- Small first-half pre-tax loss of £2.9mn
- Net cash of £5.6mn at half-year end
- $9.4mn deferred cash payment due on acquisition of FPSO vessel
- Consensus fair value estimates four times higher than share price
Saudi Arabia and Russia’s decision to extend their oil production cuts to the end of the year has not only taken 1.3mn barrels per day out of the global market, but it is adding even more fuel to the ongoing rally in the price of Brent Crude. Since late June, the benchmark oil price has gushed up 30 per cent to $93.50 a barrel, the highest level since last autumn.
It’s an incredibly favourable backdrop for energy companies, not that the share price of Jersey Oil & Gas (JOG:173.5p) is yet to reflect it. In fact, the average price target of broking houses Zeus Capital (702p), Cavendish (755p) and WH Ireland (684p) is more than four times Jersey’s current share price. That’s an anomalous rating given the progress the £56mn market capitalisation North Sea-focused upstream oil and gas company has been making.
On course for a full carry on GBA
In the summer, Jersey completed a 50 per cent farm-out of its Greater Buchan Area (GBA) project, handing over operatorship to its new partner, NEO Energy.
Jersey retains a 50 per cent interest and is now fully carried on 12.5 per cent of gross project development capital expenditure to Buchan first oil (this element of the farm-out is worth $125mn, or £98mn), and has a 100 per cent carry on its share of front-end engineering and design (FEED) expenditure to final investment decision (worth up to $12.5mn). NEO will also pay Jersey the next deferred cash payment of $9.4mn on finalisation of the GBA project solution, possibly before the year-end when the acquisition of a floating, production, storage and offloading (FPSO) vessel is expected to complete.
So, having ended the first half with net cash of £5.6mn, Jersey’s management team is in a position of financial strength to seek a second farm-out partner with the aim of retaining a fully-carried 20 to 25 per cent interest in the GBA project. Discussions are ongoing with industry parties who are interested in farming-in the GBA licences for a non-operated working interest.
The progress NEO is making can only facilitate Jersey securing a second farm-out transaction. The large UK North Sea producer has already moved the Buchan redevelopment into the FEED phase, is preparing the environmental statement for submission before the year-end and preparing the field development plan for submission to the UK oil regulator in the first half of 2024.
Jersey’s move to completely de-risk the project comes at a time when the coffers of UK North Sea oil producers are being swelled by the surging price of Brent Crude, giving them an extra incentive to recycle excess profits into a tax shelter to mitigate the impact of the UK’s windfall energy tax. The GBA project fits the bill.
Unwarranted discount to fair valuations
The disconnect between Jersey’s current valuation and the value of its assets is even more striking given that the $147mn (362p) combined value of the full carry on 12.5 per cent of Buchan’s gross project development capital expenditure and the deferred cash payments from NEO are worth double the company’s current market capitalisation.
So, although Jersey’s share price remains below the 205p in my 2019 Bargain Shares portfolio, and has flatlined since my last article ('A bargain way to exploit a rising oil price, 14 August 2023), a second farm-out possibly before the year-end is a likely catalyst to drive an overdue re-rating. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
