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By Gary Newman | Thursday 8 March 2018
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.
Jersey Oil and Gas (JOG) hasn’t had much luck in the past, having managed to get a decent sized field into production it was subsequently hammered by the collapse in the oil price.
Back then the company was known as Trap Oil and it owned a 15% share of the Athena field in the North Sea, which produced at rates of up to 22,000bopd, but by early 2016 the field had ceased to produce, due to the relatively high costs of doing so when compared to oil prices. A lot has happened since then though, including a deal with the other partners to release the company from any future liabilities relating to this field.
Around the time that it became apparent that Athena was no longer viable, in mid 2015, Trap Oil acquired Jersey Oil and Gas E&P, and soon afterwards the company changed its name to the one which it is listed under today. Subsequently it ended up with an 18% interest in a field – of which 10% of its costs are still carried by CIECO under the original terms of the deal between the two companies – following a farm-out with Statoil, who now operate the field and hold a 70% interest, as well as having funded an exploration well as part of that deal.
Initially, when that well was drilled in September 2017, it looked as though Jersey’s run of bad luck was continuing as the sands were water bearing, but just a few weeks later things came good when the sidetrack hit hydrocarbons and an oil discovery was announced. Analysis of the logging results suggests that there will be at least 25 million barrels of gross recoverable oil, and that is just from within the vicinity of the wellbore.
Now if we consider that the company is currently valued at around £41 million, and that total costs per barrel of oil from the field – including capital expenditure – are expected to be in the $26 to $35 range (although further discoveries could reduce that via tie-backs), then you could argue that currently it is priced about right to reflect the risks and timeframe involved. But then if we look at the upside case for this field, which is located in a part of the North Sea with plenty of infrastructure already in place, it isn’t hard to see where the potential value is, with up to 130 million barrels of gross recoverable, and a mean estimate of 69 million.
The field could be in production by 2022 if all goes to plan, and if that does happen then it will be producing large quantities of oil, peaking at an expected 65,000bopd. Given the partner who is onboard – Statoil – plus the connections of the Jersey team, it would seem likely that development would be funded via reserves based lending, or even pre-selling the oil.
There is still a lot of work to be done though before that stage is reached, and an appraisal well is planned for this summer with the option to drill a sidetrack – at the start of the month it announced that the West Phoenix rig had been secured for the drill. Of course, there is still plenty of potential for things to go badly wrong as we have seen elsewhere, but it also means the chance to prove more of the upside case and ultimately book some reserves. In addition, the drilling at Verbier has also given the company a better understanding of the Cortina prospect on the same licence area, and that has the potential to be even bigger, with gross prospective resources of up to 240 million barrels, and the mean scenario is for 124 million barrels.
In terms of funding, the company still had £25 million in the bank at the end of 2017 – plus was debt-free - and the planned total capital expenditure for this year won’t exceed £11 million, so even allowing for admin costs of possibly £1.5 million for 2018, it should still have circa £12 million left in 2019. That is of course assuming that no other opportunities present themselves, as the company is still actively looking at adding assets, should a good one become available at the right price.
Whilst writing this I have realised that I have said similar in the past about other companies and fields in this part of the world, only for them to ultimately not reach the production stage as things started to go wrong, so there is still a high level of risk here. But it is also worth pointing out that others have indeed gone into production, and those who were invested in the early days have done very well. It is also worth remembering that there are only just under 22 million shares in issue here, and well over half of those are in the hands of various funds and high net worth individuals such as chief operating officer Ron Lansdell, who holds 4.12% of them. This means that the share price tends to move quite quickly at times and I would expect plenty of interest in the lead up to the drill.
I would expect that even if you buy in at the current share price of 193p just for a trade and plan to exit before the drill results are released, rather than as a longer term investment, then there should still be plenty of upside to be had over the next few months or so. I would class this as a speculative buy at the moment, but wouldn’t risk huge amounts until the appraisal confirms that Verbier will be commercial and will reach production.
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