This energy company is a jade in the rough

But some of the most glaring discounts, and recent price falls, are to be found among those companies – such as Jadestone Energy (JSE) – that have fallen off the dividend list. The company stopped paying out amid an eight-month production shutdown at its Montara field last year, and has been prevented from resuming dividends by high capital spending.

Although Montara production has resumed, Jadestone’s earnings have suffered, pushing the shares down by over 60 per cent, and making it an outlier in an already weak pack. For us, this presents a buying opportunity. 

While some investors need to see income from their oil and gas holdings, Jadestone’s valuation and overall situation is sufficiently compelling to compensate for the current lack of cash distributions. 

Sell-off

The company was punished for the Montara debacle, rightly, given its business case was buying mature assets and improving their operating performance. The knock was reflected in first-half numbers: sales fell 62 per cent to $87mn (£69mn), leading to an operating cash outflow of $24mn. While a 23 per cent drop in realised oil and gas prices didn’t help, the decline in production did most of the damage. 

The company did have enough cash to cushion the blow of the Montara suspensions, but by mid-year net cash had narrowed to $7.8mn from $123mn six months before. The company will slip into a net debt position at the end of this year (Peel Hunt forecasts $47mn) but expects the balance sheet to “exhibit a deleveraging trend by the end of 2024”.  Meanwhile, the company has maintained its reserves-based lending facility at $200mn, despite weaker energy prices. June’s sale of $51mn-worth of shares at 45p apiece also shored up the balance sheet saw existing investor Tyrus Capital maintain its stake at 26 per cent through an equity investment. 

So far, not so compelling. However, a shift to development alongside a new non-operated acquisition means the company will soon be better insulated from nasty surprises at individual operations. The focus on the Asia Pacific region also provides a point of difference from other UK-listed small- and mid-cap players, who largely operate in the North Sea, the Americas and offshore Africa. 

Jadestone is currently building up a new onshore gas project in Indonesia, which should contribute to a significant climb in production next year, to 20,000 barrels of oil equivalent per day (boepd) from this year’s upper guidance of 13,700 boepd. That second figure is lower than existing capacity due to the Montara suspensions.

That increase will also be supported from new wells at the Malaysian East Belumut field and the acquisition of a greater (non-operated) stake at the CWLH fields, offshore Western Australia, taking the total holding to one-third of the asset. Output, net to Jadestone, is now around 4,000 barrels of oil per day (bopd). 

Encouragingly, a recent trading update revealed better than expected production from the four new wells at East Belumut. “The three wells drilled to date in the 2023 drilling programme are currently producing at a gross rate of 6,200bopd, significantly exceeding the pre-drill gross rate expectation for all four wells of 3,500bopd,” Jadestone said. And on the day before the update, production hit 8,800bopd. The company owns 60 per cent of the project, so that is an addition of 5,300bopd net. 

The hiccup in the well drilling programme is the cost, which was $7mn more than the $21mn expected. This has pushed 2023 capital spending to the top of guidance of between $110mn and $125mn, although Jadestone believes higher output to date means the drilling campaign’s total outlay should be “fully cost recovered by Q2 2024”. 

Montara itself is back at 5,700boepd, with “good well performance”.

The beginnings

Jadestone listed on Aim in 2018 as the second major project of Paul Blakeley, three years after the first – the Canada-focused Talisman Energy – was acquired by Repsol (ES:REP) for $8bn. He served as executive chair after the takeover, having run the Asia Pacific division for a decade. 

At Jadestone, a more US-style leadership structure – under which Blakeley has taken on the ‘president’ title – has received a mixed reception from investors. At June’s AGM, 10 per cent of shareholders voted against Blakeley’s re-election to the board. On the morning of the meeting the company made a promise to appoint a chief operating officer, and an effort to “enhance internal succession [options]”. 

The development moves in the past two years are not Jadestone’s first, either. An offshore discovery in Vietnam – for which it was “targeting project sanction” by the end of 2019 – has been stymied by the need for a buyer. Jadestone sees the operator of a gas power plant in Vietnam as the obvious candidate, and Blakeley put the case to the Vietnamese prime minister in August. This could still turn into a cash generator for Jadestone.  

Peel Hunt still puts a 9p-a-share value on the two fields, even as its core NAV numbers have tumbled from Montara and fellow Australian offshore field Stag, which are down from 63p and 23p to 24p and 10p, respectively. The drop-off comes despite Stag’s decent performance in the past year (even with a planned shutdown in 2022), and Jadestone consistently being paid a premium of $20 a barrel for its output.

Here too, however, costs have been a bugbear. In the first half of 2023, a mix of shutdown issues and tanker costs meant Montara and Stag saw a combined $18mn increase in operating costs to $41mn.

Tanker turning

With the assumption that Montara reaches consistent performance from now on, the new production from Indonesia and Malaysia means Jadestone could quickly bounce back after a tough run. Progress in Vietnam would be a cherry on top. Getting through 2023 with a new loan facility, enough cash to fund both new production, the added CWLH stake and the East Belumut wells can be seen as a victory. Now the task is rolling everything into a much better 2024. 

In September, Blakeley told Investors’ Chronicle that much closer attention was being paid to Montara. The second shutdown, in July, was due to a defect in a tank of the Montara floating production, storage and offloading (FPSO) ship. “In using a finer probe we found and resolved why we missed it the first time around,” Blakeley said. Put simply, “we now have a higher confidence that we can predict greater reliability by adopting this inspection method”. 

This is a game of millimetres and microns, until it isn’t: Montara is famous in Australia as the site of one of the region’s worst oil spills in 2009 when under the control of PTTPEP, owned by the Thai state. Jadestone also suspended the operation over safety concerns in 2019.

Given the vigilance being applied, Jadestone’s wider portfolio should amount to a more resilient and diversified investment case. Barring disaster, Peel Hunt even sees the dividend coming back in 2025. If that’s an item on next November’s trading update, then it’s more than likely the share price will have recovered, too.

Correction: $7.8mn was previously listed as cash, not net cash, and Tyrus's stake is 26 per cent, not 21 per cent.