By Gary Newman | Wednesday 18 May 2016
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Highlands Natural Resources (HNR) has enjoyed a great run recently but now looks way over-priced to me and I would expect a return to reality in the near future.
I suspect its meteoric rise from a share price of around 11p back in mid-April is largely a result of so few shares being in issue – just 33.7 million – and have caused it to rocket to a current price of around 42p to buy, and were it more liquid the increase would have been far more modest, even taking into account the update around the time that the rise started.
That corporate update partly related to the company’s DT Ultravert technology in which it owns 75% and which is basically a way of allowing fluids to reach as much of the reservoir as possible. Unlike traditional ‘diverters’, which act at the bottom of the well where oil and gas have already been extracted, this technology is supposed to act on areas of the reservoir which are yet to be depleted.
It is still early days though and this technology is yet to be tested, although a licence agreement with Schlumberger has been signed and the first of five trials to assess the technology is expected to get underway in June at the Pinceance Basin in Colorado.
There has been plenty of talk on the chat forums about how this technology could revolutionise fracking, but it is worth remembering that Highlands purchased its 75% stake for just 1.9 million shares (at the time the share price was 13.5p) plus 30 million warrants at 25p (which would effectively double the shares in issue) – effectively £256,000 up-front.
The fact that a tiny company like Highlands was able to get its hands on this technology for such a small payment suggests to me that it may not be quite as ‘revolutionary’ as some expect it to be – otherwise one of the majors that are heavily involved in fracking would surely have snapped it up.
In addition to this the company has been buying gas acreage in Dakota, initially 1,900 acres in the Williston Basin for $19,000, and today it announced a further 1,979 acres for $14,000. It is also expecting drilling to commence by around mid-June, with the shallow gas well costing in the region of $50,000.
It also has an interest in land in Utah with potential for uranium, having purchased 1,219 acres back in March for a total of $39,326.
In terms of the financials and going on the last set of interims up to Sept 30 2015, the company had £677,000 in cash and has since raised £519,000 gross proceeds at 18p, plus close to 2.5 million warrants have been exercised. The RNSs don’t state exactly which warrants have exercised, so I’ll be generous and assume that they are the 25p ones, yielding around £600,000.
Admin costs for the period from November 13 2014 until the end of September 2015 were £937,000, so allowing for as much as £500,000 to have been spent on the listing, that suggests the company goes through £40,000 or so per month in admin expenses.
So I would guess that the company is left with somewhere around £1.3-1.4 million in cash presently.
The DT Ultravert asset is recorded on those accounts as being worth £706,500 (largely based on the value the company attribute to the warrants issued), and you would have to value the other assets currently at close to the amount that was paid for them, given how recently they have been acquired.
So taking into account cash, DT Ultravert, plus the gas and uranium licences, that should give a fair current asset value of maybe £2.2 million or so (and that includes any proceeds from the unexercised warrants that relate to that technology).
It would seem fair to allow a certain amount of value based on the potential and that testing of the technology is about to commence, plus the possible gas drill, but the current market cap of £14.1 million is attributing nearly £12 million to that potential and means that it is trading at around seven times NAV!
It may well be that there is further hype on this one with further newsflow in the coming months, but I certainly wouldn’t be buying at such an inflated share price level, and for anyone lucky enough to be sat on a 250-300% profit you’d have to be mad not to have at least banked some of it by now!
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