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Jersey Oil & Gas sees rich pickings in the North Sea

History tells us success is often forged from adversity. Take, for example, the early noughties, when Brent was trading well below its current level. We saw the emergence of a number of entrepreneurial mid-caps, which took advantage of the downturn to pick assets on the cheap. Will the contrarians win this time round? Jersey Oil & Gas hopes so.
Jersey Oil & Gas sees rich pickings in the North Sea
There are good deals out there to be done, as private equity is finding.

The transformation of Trap Oil to Jersey Oil & Gas (LON:JOG) took place to little fanfare over the summer.

Those who invested in Trap will probably be glad to see the back of the company and its management after it blew through tens of millions of pounds with little to show for the largesse.

It has, however, bequeathed a legacy to the AIM-listed successor company’s new team, led by Andrew Benitz:  £25mln of accumulated tax losses.

These are not the sort of things usually bragged about - but they are worth around £12.5mln in actual value to a North Sea producer looking to mitigate the 50% tax on output.

To say there has been scant recognition of this opportunity by the wider investment community would be understating things. JOG is currently valued at £1.5mln – just £500,000 more than the cash it has in the bank. So the market ascribes little or no value to those tax losses or the rump assets.

Not much has been said by Benitz, or his team, on JOG’s plans. However the company set out its strategy in black and white in a corporate presentation – which I’ll come back to in a sec.

First it is worth noting JOG seems to have cleaned up the mess left by the former Trap team.

Most notably, it looks like it has ring-fenced the business from losses being incurred by the ill-fated Athena oil field in the North Sea with a one-off payment to its partners. Trap paid £34.5mln for 15% of Athena back in 2012.

As mentioned earlier there is also £1mln on the balance sheet – which should be enough to meet the company’s immediate needs.

Now to that presentation - and if you have the time flick to page six you’ll see the money-shot.

It sets out plans for the next two years or so that would see JOG take working interests in six to 10 fields with the target of producing 10,000 barrels a day.

These would be non-operated stakes in sub-sea tie-backs, which are much lower cost than traditional platform-based operations and therefore have much smaller abandonment liabilities.

Now, in this oil environment there has been a very public stampede out by the big boys - most recently Shell, which has placed the 'for sale' sign above the Gannett Field, which sits 110 miles east of Aberdeen.

Meanwhile, the small and mid-cap players are struggling under the weight of debt working on projects that were economic at US$100 oil, but are hugely loss-making as crude has halved in price.

For problems, read opportunities for companies nimble enough to pick off the more economic projects.

There are assets that still deliver a decent internal rate of return in the current environment for Brent and work even if the price crashes below US$30.

Private equity has spotted this, as has Jim Ratcliffe, the billionaire owner of chemical firm Ineos, who is bidding for a clutch of North Sea gas fields owned by the Russian oligarch Mikhail Fridman. 

The challenge for a company like JOG looking to play this game of pass-the-parcel is finding the finance. It certainly isn’t getting US$100-$150mln from the AIM market, though there will, no doubt, be some form of equity backing required.

Debt funding looks a real possibility. While there’s little or no appetite to back exploration, the banks are happy to lend money against proven reserves and production.

This means it is possible to fund a deal at LIBOR plus 4-4.5%, I’m told; the process is a little like taking out a mortgage. There are tangible assets and cash flow backing the investment.

JOG describes its acquisition plans as an accordion-type strategy.

I don't quite know what that means. It strikes me that JOG could act more like a buy-to-let investor, borrowing against hugely undervalued assets, in this case stake in an oil field rather than a flat. 

The first deal then would be a platform to re-mortgage and create a decent, yield generating portfolio.

According to the JOG presentation, it is looking to build a reserve base of around 15-20mln barrels.

Word has it that the Benitz team may already be running the slide rule over a couple of opportunities. When approached he wasn't available for comment.

JOG does have an advantage over the other financial buyers - those accumulated tax losses should allow it to bid slightly higher than an opponent for the best assets and still have a slice in an economic project.

Forgotten in all of this is the fact it has exploration acreage in the form of the Romeo licence, which in all likelihood it will look to vend out and get a free carry to first oil on Liberator.

History, meanwhile, tells us success is often forged from adversity.

Take, for example, the early noughties, when Brent was trading well below its current level. We saw the emergence of a number of entrepreneurial mid-caps: names such as Dana, Enterprise, Lasmo and Bow Valley, which took advantage of the downturn to pick assets on the cheap.

Will contrarians such as JOG win this time round? Only time will tell.  

Looking at the make-up for the company’s technical team there is the expertise to create the sort of value enhancing opportunities I have outlined. It will be interesting to see just what Benitz and his colleagues do next.

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