By Tom Winnifrith | Tuesday 4 September 2012
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.
It is a strange old world and I gather that some folks reckon that there is a bid on the way for AIM listed oil exploration penny share Wessex Exploration (WSX). I bet you 5000 Albanian Lekke that there is not and as such I would rate this stock, at 7.3p, a sell. If you want exposure to Guyane (the only real asset of note in Wessex) I would obtain it by buying AIM listed Northern Petroleum (NOP) at 67.5p.
On 26th March Wessex received a bid from Total at 10p a share. The company said that it was minded to accept. On 12th April Wessex said that having consulted some shareholders it had decided the offer was not good enough and walked. My sources tell me that Total was livid.
On 10th July Wessex managing director Frederik Dekker sold 5 million shares (leaving him holding c92 million shares) at 6p. So 10p undervalued the stock but Dekker is happy to sell pa at 6p? Go figure. I am confused by this rather mixed signal
Will there be another bid? I think not. The only asset of note in Wessex is a 50% stake in NorthPet Investments which owns a 2.5% stake in the Guyane Maritime permit. The other 50% of Northpet is owned by AIM listed Northern Petroleum and it is Northern which has the casting vote which decides how this company proceeds. Thus anyone buying Wessex would inevitably also snap up the Northern share of NorthPet as well. And there are only three possible buyers of this asset, the other partners in the Maritime block: Shell, Total and Tullow (TLW).
Such a deal is too small for Shell to bother. Tullow is more interested in Africa and so is, I am reliably informed, just not a buyer. And Total is a) livid at being jerked around last time and b) worried about how the new crackpot French socialist Government is blathering on about windfall taxes for oil projects. So I cannot see any action there.
Back in Guyane a second well on the acreage was spudded two months ago. This is an appraisal well designed to firm up the findings of the first exploration well. This could be an enormous asset (hence the 10p a share bid for Wessex) but we will not know for sure for two months. Wessex is fully funded for its share of that well plus another exploration well on the acreage next year but after that it has to go back to its shareholders.
In the absence of a bid, positive results from this well could see Wessex head back towards 10p but anything less than confirmation of what folks already suspect could see a sharp movement down because Wessex would then be a “shit or bust” play on the next exploration well. At 7.3p Wessex is now valued at £51 million. At 67.5p Northern is valued at £64 million. Both companies have a few UK onshore assets which are worth not a great deal although Northern has some production and so its assets are worth something.
But Northern also has Dutch producing and exploration assets which chuck off £10-15 million cashflow per annum, Shale exploration upside in Holland and a portfolio of Italian exploration assets and a cashed up balance sheet with c£20 million on the book. If it can farm out its sexy offshore Italian assets and start drilling then this has real value. I should say that its record of getting Italy moving to date is not great but one day...
It strikes me that if there is another bid for Guyane then 10p a share for Wessex equates to more than Northern’s current market cap and so its shares would rocket as well. Indeed drilling success in Guyane would see its shares move ahead as sharply as Wessex’s given the respective current market capitalisations. But if there is any disappointment in Guyane, Northern has two other assets (Holland and Italy) each of which could support its current valuation, Wessex would be left with sod all.
As such, if I was a Wessex shareholder I would take the opportunity presented by this (I think unfounded) bid speculation to sell. If I desperately craved Guyane exposure I would reinvest the proceeds in Northern.
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