Jadestone's new Akatara facility set to boost second half

When we covered Jadestone Energy’s (JSE) full-year figures for 2022, we ventured that “adding significant debt would be a risk given the industry’s history of running into trouble once prices dip”. Since that April 2023 release, we have outlined the Asia-Pacific-focused driller’s investment case, which was predicated to a large extent on new production from Indonesia and Malaysia coming on stream. A cursory glance at the preliminary statement for 2023 suggests that the former statement probably carries more weight, but as ever with energy companies, it’s a question of timing.

The legacy Montara field, located in the Timor Sea, has continued to present operational challenges, as Jadestone was forced to carry out tank repairs on the floating production storage and offloading (FPSO) facility. The repairs at Montara reduced total lifted volumes by 11 per cent to 3.9mn barrels of oil equivalent (boe). This issue, along with a 16 per cent reduction in year-on-year realised prices, weighed on the top line, as did a hedging loss of $10.3mn (£8.2mn) from commodity swap contracts. All this fed through to a 44 per cent reduction in cash profits (ex-exploration costs) to $90.6mn.

Management has previously lamented Jadestone’s over-reliance on Montara for operational and financial performance, a point borne out by upstream performance in the early part of 2023. So it is not difficult to appreciate why the decision was taken to broaden the group’s production profile. Perhaps the most significant related development is that construction at the Akatara gas processing facility is nearing completion. Four out of five planned production wells have undergone successful workovers, with the initial three easily exceeding requirements under the gas sales agreement. When it’s up and running, Akatara will become the group’s prime producing asset.

The imperative to reduce reliance on the group’s legacy assets comes with a hefty price tag. Midway through May 2023, the group signed a $200mn four-year credit facility with a group of banks. It is secured against Jadestone’s main producing assets and is bound to a financial covenant for a maximum total debt of 3.5 times adjusted cash profits.

Due to the impact of an active cyclone season in Australia, management has downwardly revised full-year daily production guidance to the lower end of the 20,000-23,000 boe range. Analysts at Peel Hunt, however, point out that this still amounts to a 45 per cent year-on-year increase. The broker duly reiterated its 60p target price. Overall, a mixed showing, and although investors would be well advised to monitor the leverage ratio, the second half of 2024 will provide a clearer indication of the extent to which the new assets will affect cash flows. Buy.

Last IC view: Buy, 32p, 23 Nov 2023