Shares in Jersey Oil and Gas (LSE:JOG) are currently sitting at 185p to buy, below their most recent placing price of 200p. This is despite the firm priming itself for a potentially game-changing drill in just a few months’ time. Alongside large oil players Cieco and Statoil, Jersey plans to drill an appraisal well at its Verbier discovery this summer to get a better idea of how much oil it contains. Estimates place recoverable resources at a remarkable high of 130MMboe, making Verbier one of the largest oil discoveries in the North Sea in the last 20 years. The muted recent market reaction seems at odds with such a positive narrative.
Verbier is just one of Jersey’s three main prospects, to which the firm has collectively assigned a maximum value of £400.5m (see below). With Jersey’s £41m market cap looking undervalued against these projections, we asked CEO Andrew Benitz to shed some more light on current operations and future prospects.
Jersey owns an 18pc stake in the P2170 licence in the North Sea. Alongside the firm, Cieco owns 12pc of the licence and Statoil owns 70pc. The reason behind the two large oil players’ interest in P2170 became clear in October when a side-track well on the licence’s Verbier discovery revealed an estimated gross recoverable resource of between 25 and 130MMboe.
Verbier was the largest discovery in the North Sea last year and sent Jersey’s share price up by a remarkable 500pc on the day of announcement. The three licence holders have now agreed on a work programme and budget for the appraisal of Verbier, and earlier this month secured a rig to drill an appraisal well and possible side-track well this summer.
Verbier is, of course, Jersey’s main focus at present, but the business also has other exploration opportunities at P2170 up its sleeve. The most significant of these at present is the Cortina prospect. This has estimated recoverable resources of 39MMboe in the low-case scenario, 123MMboe in the mean case, and 240MMboe in the high case according to an independent CPR commissioned by JOG last year. The second, smaller opportunity is the Meribel lead, which has estimated recoverable resources of 6MMBoe in the low-case scenario, 13MMboe in the mean-case, and 19MMboe in the high-case. Other exploration opportunities across the block are being interpreted on the back of the Verbier success, leading to possible further exploration drilling during 2019.
Assuming continued success on Verbier, Jersey expects first oil to come from Verbier in 2022. If a standalone development scenario can be pursued, Jersey has run notional economics with a peak of around 60,000boepd. Jersey estimates that Lifecycle costs under this scenario could be under $35boe.
Far from these three opportunities being all that Jersey has in the pipeline, the firm said October’s Verbier discovery has given it valuable geological and geophysical information about P2170. It said it now has a better understanding of the ‘prospectivity’ of P2170 and is planning further exploration both within and beyond the licence, while also planning additional wells.
In October last year, the company even said it was evaluating a number of live acquisition targets with reserves ranging from 2 to 24MMboe and projected 2018 production of between 1,000 and 3,800boepd. This would provide it with a number of producing assets to provide near-term cashflow while it proves up its larger resources.
So how will the business afford this?
In October, Jersey raised £24m by placing shares at 200p, giving it year-end cash on its book of around £25m, effectively de-risking its operations. With its portion of the Verbier appraisal programme only expected to cost around £9-£11m, aside from any further financing requirements, any leftover money can be used by the company to fund exploration.
As chief executive Andrew Benitz put it in an exclusive interview with ValueTheMarkets.com: ‘Now that we have made the Verbier discovery we are understanding the geology of our acreage much better. Verbier is a flank prospect and we think there could be more flank prospects here. As a result, we are actively exploring and mapping up other opportunities.
‘I hope on the back of the successful appraisal programme at Verbier we will be able to do further exploration into the acreage well into 2019. When we went out to raise our equity in October we wanted to make sure we were fully funded so we could meet any work programme that our operator wanted to pursue. We are keen to grow and are looking at other opportunities and we will take advantage of other opportunities at an appropriate time.’
What’s it worth?
In February, Jersey said its 18pc stake of Verbier’s notional net present value (NPV10) was worth £31.2m in the low-case scenario, £49.3m in the mid-case and £196.7m in the high-case. Things look even better when you add on the business’s cut of the notional NPV10 of Cortina and Meribel. As seen in the chart below, collectively, the three sites are expected to make JOG £83.7m in the low-case scenario, £130.2m in the mid-case, and £400.5m in the high-case.
Again, these estimates are notional and made using the current Brent strip curve and Jersey’s indicative development and production cost estimates. But, regardless, with a current market cap of just £41m Jersey is looking seriously undervalued by these estimates.
Indeed, at a current share price of 186p, the business is sitting below its 200p placing price in October, and well below the heights of 358p it reached on the day of the Verbier discovery. Benitz told us it is likely that some investors are sitting on the side-lines ‘waiting patiently’ for the lead up to Jersey’s summer drill.
He said: ‘As we get closer to the drilling campaign I would like to think there will be more activity in the shares. We are not trading significantly off the placing price, we are treading water. Personally, I read that as there being happy, patient shareholders waiting for the main catalyst of our story, which is the appraisal well programme.’
North Sea experts
Aside from the prospects of its assets, Jersey possesses a great deal of local knowledge, as it were, with the firm claiming its management team has over 100 years’ experience worth in the North Sea. Benitz, himself a former chief executive of Longreach Oil and Gas who has also worked in oil and gas corporate finance for Deutsche Bank, fiercely disagrees with those who claim the North Sea has run out of steam.
Throughout the recent oil price crash experts said it had become ‘impossible to make money’ in the North Sea and warned that up to £55bn worth of projects could be cancelled. This didn’t happen, and plenty of oil activity still takes place in the North Sea. But to the remaining Doubting Thomases, Benitz says the area is currently in something of a sweet spot.
He told us: ‘I think the North Sea has a very robust and healthy future. The oil price crash was very cathartic for the area because it helped to drive down costs. Rig rates are almost a quarter of what they were at their height and average operating costs are down 30-40pc. This is amazing for a firm like us.
‘Commodity markets go in a cycle and it is almost as important to pick what time to come into the market as picking what assets to acquire. We started up in March 2014 at a counter-cyclical time. By getting in when the oil price is rock bottom you are able to pick up assets on the cheap and ride the wave as oil prices recover. That was our thinking when we started the firm.’
Primed for lift-off
Jersey Oil and Gas has a strong management team, a decent stake in a highly promising licence alongside big names like Statoil and Cieco and is fully funded for further exploration efforts. All of this against a backdrop of strengthening oil prices and an – arguably – favourable operating environment in the North Sea.
From whatever way you look, the company’s market value looks undervalued given its stated prospects- indeed, the one thing holding tempted investors back at present is likely a lack of newsflow in the run-up to summer’s drill. The real question is whether the market will re-rate the stock and, if it does, to what degree?
If you think that Jersey is primed to shoot-up, then its probably worth getting in quickly- shares could soon look cheap at 185p.
As Benitz puts it: ‘We want to build the business on the back of the success of Verbier. If we can prove up the discoveries high case recovery of 130MMboe, then we have more resource than the market is currently accounting for.’
Author: Daniel Flynn
Disclosure: The author of this piece does not own shares in the company covered in this article.