Jersey Oil & Gas (LSE:JOG) rose slightly yesterday after its results revealed a robust financial position ahead of a potentially game-changing summer drill and provided an update on the company’s future expansion plans. Jersey’s shares have recovered well over recent weeks and there is a plenty of speculation they have the potential to move higher. To what extent do yesterday’s numbers underpin this view?
In its results for the year ended 31 December 2017, Jersey reported a profit of £727,000 up from a loss of £793,000 in 2016. Most importantly, as a result of a £24m raise in October, the firm also reported cash at year-end 2017 of just over £25m, up from £1.9m at the beginning of the year. Furthermore, Jersey said it has no debt, administrative expenses of just £1.7m, and that cash made from operating activities (£2m) outstripped cash used to fund investing activities (£1.3m), meaning cash burn is not a critical issue.
This cash balance and lack of liabilities leave Jersey well positioned to fund its P2170 2018 work programme, which it expects to cost between £9m and £11m. Jersey owns an 18pc stake in the P2170 licence in the North Sea alongside Statoil and Cieco. Last year, its share price soared by a remarkable 500pc when a side-track well on P2170’s Verbier discovery revealed an estimated gross recoverable resource of between 25MM and 130MM barrels of oil equivalent. Chiefly, this year’s work will involve an appraisal programme over the summer to determine the potential of Verbier, including the drilling of an appraisal well.
The anticipated remaining cash balance after the appraisal well also gives Jersey plenty of room to begin work on its plans to build a production portfolio via both organic development and acquisitions in line with strengthening oil prices. It already has other exploration opportunities at P2170- the Cortina prospect has mean estimated recoverable resources of up to 123MMboe and the Meribel lead has mean estimated recoverable resources of 13MMboe. The business has also previously said Verbier had given it a better understanding of the ‘prospectivity’ of P2170 leading it to plan further exploration both within and beyond the licence, while also preparing additional wells.
Yesterday, Jersey said it has continued to engage with multiple vendors in connection with the acquisition of producing assets, although it is sensitive about equity dilution in the run-up to the Verbier appraisal. It said some potential transactions have reached very advanced stages of negotiation but have not completed for ‘quite different, deal-related reasons’. It added that its stronger balance sheet is likely to provide vendors with greater confidence in its ability to execute on potential acquisitions and give it the resources to carry out its own studies on prospects.
Andrew Benitz, chief executive of Jersey Oil & Gas, said: ‘2017 has been a significant and exciting year for Jersey Oil and Gas and has been the culmination of years of hard work by the company. Our exploration drilling programme on our highly exciting Verbier prospect in October delivered a stand out discovery in the North Sea which we look forward to appraising this summer. Our successful fundraising in October has meant that the company is well funded for the upcoming work programme on the P2170 licence. The board and I look forward to 2018 from a position of optimism and would like to thank shareholders for their ongoing support and look forward to updating them on further progress.’
Question of value
Following its results, Jersey’s shares rose 1.2pc, or 2.5p, to 210.50p, giving it a market cap of £45.4m. With the results putting the firm’s net current assets at around £25m, the market still seems to be undervaluing the prospects of the organisation’s assets.
To illustrate the point, 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 £45m Jersey is looking undervalued by these estimates. When ValueTheMarkets spoke to Benitz last month, he told us it is likely that some investors are sitting on the sidelines ‘waiting patiently’ for the lead up to Jersey’s summer drill before buying, holding back shares:
‘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.’
At that point, shares were sitting at 186p, below Jersey’s 200p placing price in October and well below the heights of 358p it reached on the day of the Verbier discovery. Shares have since risen and are now clear of the placing price, but Benitz’s points still stand – many people may be waiting to see what happens at the Verbier appraisal before buying into the rest of the company’s estimates. If that’s the case, it could be worth having a punt now before any significant news over the summer.