It’s not often that AIM is home to a major supplier in a market seeing ‘ridiculous’ growth.
But with some confidence chief executive, Eskil Jersing can say that is where oil and gas junior Wentworth Resources Limited (LON:WEN) stands at present.
Wentworth is now the number one supplier of gas for electricity in Tanzania from the Mnazi Bay field and demand is soaring.
New gas to power stations are ‘lining up to come onstream’, he says and that puts Wentworth in a fantastic position.
House broker Stifel agrees; “This is the number 1 marginal gas producer in a structurally growing energy market desperately short of gas.
“Even on our base case, the business can sustain production and generate average US$15-20mln pa of FCF [free cash flow] into the 2020s, against a current market cap of US$50mln.”
Even on the lower figure, a cash flow multiple of under four is low, anomalously so suggest Stifel.
“A 30% annual free cash flow yield across 2018-2020.”
One reason is that there has been a sharp drop in the share price over the past month.
Jersing says this is partly the result of some corporate housekeeping that will see the company shift its domicile from Canada to Jersey and de-list from the Oslo stock market.
Some longstanding Norwegian retail investors have been selling, he says, in the (mistaken) notion that they won’t be able to once the company completes its restructuring.
Wentworth’s switch to Jersey and consolidation on AIM is to simplify its structure and be nearer its assets, he says, nothing else.
Moving to Jersey also doesn’t trigger any potential change of control clauses, though, for all other purposes, such as tax, it will effectively be a UK company.
Jersing insists Wentworth’s fundamentals will make it stand out among its peers on AIM and underpinning this is the growing demand for gas in Tanzania.
Gas demand soaring in Tanzania
This is going to rise from ca.160mcf/d (million cubic feet per day) currently, to up 300mcf daily in the next few years, Wentworth believes.
Mnazi Bay gas field is in the Ruvuma Basin, which straddles southern Tanzania and Northern Mozambique.
French company Maurel et Prom is the operator, with Wentworth having a 32% interest.
Production is currently running at a consistent 90million cubic feet per day (mmscfd), but Jersing says there is a plan to boost this to 130mmscf.
This will require improvements to the gas sharing agreement, lower pressure in the export pipeline, drilling more wells and extending the production licence (PSA) for another ten years.
Wentworth would have to spend pro-rata on gas compression equipment and additional wells to achieve the higher output, but Jersing says it has a prime opportunity.
A huge offshore liquid natural gas (LNG) project is planned for offshore Tanzania by Statoil and others.
Window of opportunity
That will come online in five years time or possibly longer, so Wentworth and its partners have every incentive now to maximise production while they are the market leader.
The infrastructure is also in place to send any gas it produces through the pipeline to Dar es Salaam.
“Just now the seller has a key advantage rather than the buyer,” says Jersing.
Additional production will also allow it to build a cash pile, reduce debt and consider the possibility of dividends and diversification in the mid-term.
Wentworth does have a technical gas discovery in Mozambique at Tembo on its books but attempts to find a partner have proved fruitless and this is on the backburner for now.
Jersing adds that the company is talking to the relevant ministries in both Mozambique and Tanzania over further opportunities to expand.
This might be in the Ruvuma Basin.
“There is an argument for doubling down,” he says, “but also for looking elsewhere to offset some of the risks”.
Any expansion will focus on producing assets, he adds, not early stage exploration.
It might also be at the corporate level, as Jersing believes Wentworth ’paper’ is cheap on a relative net asset valuation and that can be utilised for M&A.
Two possible deals are on the radar.
Profits and cash pile heading higher
But Jersing soon goes back to Tanzania and the fact that Wentworth is operating in a country where demand is growing and it is the main supplier.
The country has it challenges, he admits, not least payment with more than US$34mln outstanding at the end of June 2018.
Jersing says he would like to offset this receivable exposure, though Stifel points out that delays to monthly payments from the state utilities that buy the gas has occurred only two times 2017.
The broker has a 38p price target and says the selling from Oslo has created an opportunity for UK investors.
It is also predicting profits of US$8.1mln and a cash pile of US$22mln at the end of next year.
“We regard the current valuation as compelling, an investment opportunity created we believe by the forthcoming delisting of the company from the Oslo Borse and the retail investor selling we think this has triggered.”
At 21.75p, Wentworth is valued at £41mln.