Northern Petroleum - built for growth

It is evident when one looks at the share chart of London listed Northern Petroleum (NOP), that this junior oil and gas company has had a good year - in the last twelve months the company’s share price has more than doubled in value

Northern, now a member of the AIM UK Top 50 Index is an oil and gas exploration, development and production company focused on onshore and offshore project in Europe and nearby geographical areas with low political risk.

The company operates strong exploration and appraisal drilling programmes mainly in the Netherlands, Italy and the UK. Following the acquisition of PLUS listed ATI Oil, Northern’s oil reserves were augmented by some 26.6 million barrels. The latest company statement (issued 30th September) announced a 35% increase in proven and probable reserves to 103 million barrels of oil equivalent.

Northern Petroleum’s objective it to obtain significant licence positions, then add value through new seismic, drilling, completion and computer technologies. To date, the company has done exactly that.

The most prospective assets in Northern Petroleums Portfolio are in the Adriatic Sea. Northern sees off-shore Italy as the company’s core area and the one with greatest future potential thanks to a mix of excellent prospectivity, strong demand for domestic sources of energy and good political capital. 

Current Italian assets include a total of 27 licences (6 of these are on-shore exploration and 21 are off-shore exploration) with probable reserves of 53.23 million barrels of oil a day. Total area held under licence now exceeds an impressive 16,114 square kilometres.  
     
Perhaps the most interesting and high potential ground held by Northern Petroleum in Italy is a cluster of offshore licences held in joint venture with Shell off the cost of Western Sicily. Shell is currently acquiring 3D seismic over the licences, which is the first significant step towards drilling.

Closer to home, in Netherlands, Northern’s assets include a total of 8 licences (5 on-shore producing, 1 off-shore producing and 2 on-shore exploration) with proved plus probable reserves of 10.75 million barrels of oil a day and 200.62 billion cubic feet of gas.

This morning Northern Petroleum and its partners announced that gas production had started at the  Grolloo  gas field,  the  first  of  four gas and two oil fields planned for development onshore the  Netherlands.  The Grolloo facilities have been commissioned and first gas sales commenced on 4 December at a daily rate of   200,000 normal cubic metres a day (7.4mmscfd).  Development of all four  gas  fields  (Grolloo, Geesbrug,  Wijk  en  Aalburg  and Brakel) are expected to be completed by early  next  year, and will  produce  in aggregate daily rate of up to 800,000 m³ per day (30 mmscfd) in 2010. Gas from Grolloo is being delivered via a dedicated pipeline to the nearby Vries facilities and then on to the Westerveld process facilities. Geesbrug will be the next field to be brought on-stream employing a similar scheme of development.

Northern also reported in October that it had fracced the reservoir at of the Tiendeveen – 1 exploration well and Geesbrug gas field. Partners in the well are Northern Petroleum (45%), EBN (40%) and Dyas B.V. (15%).

In the United Kingdom the company’s assets contain proved plus probable reserves of 4.48 million barrels of oil a day. These comprise of 15 licences (2 on-shore producing, 12 on-shore exploration and 1 off-shore exploration).

Northern’s capital base consists of equity only (€75.6m at 1H2009). The cost of this is 16.4%. The reason for the seemingly high required return is a comparatively high stock volatility (beta), at 2.07 (Reuters). 

1H2009 revenue came in at €2.8m (€2.86m in previous comparable period). Losses Before Interest and Tax (‘EBIT’) in 1H2009 were €1.18m ( loss €1.1m in previous comparable period). Diluted loss per share in 1H2009 totalled 0.1 cents (income of 1.9 cents in previous comparable period). The positive income figure for 1H2008 is predominantly attributable to higher interest receivable and higher foreign exchange gains by Northern during 1H2008.

Total assets jumped to €100.3 million at 30th June 2009 (€76.2m June 2008). The increase is explained by higher intangibles, as well as additional oil and gas assets. Cash stood at a very healthy €27.9m (€31.4 million June 2008). Total liabilities increased from €19.8 million at 30th June 2008 to €24.7m at 30th June 2009. The higher number is due to increased payables and deferred tax liabilities. The balance sheet is highly liquid at current ratio of over 6.

Despite negative income for the period, cash flow from operating activities in 1H2009 came to €2.9m (€2.4m in 1H2008). Lower foreign exchange gains and a decrease in receivables in 1H2009 compared to 1H2008 have contributed to the result. Capital Expenditure in 1H2009 was approximately €10m. The management is expecting this investment to be sufficient until production income comes in.
 
Current share valuation seems fair assuming Northern achieves a net income of around €13 million to ensure profitable return on its current capital, Northern re-invests 50% of this net income in capital expenditure and working capital, and the company’s cost of equity declines to 10% reflecting lower risk as it matures, and perpetual income growth does not drop below 5%.

With 2013 production forecast of 6,000 barrels of oil equivalent per day, plenty of prospects to test, and a Managing Director (Derek Musgrove) with plenty of industry experience, you have a company built for growth.