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Northern Petroleum: Canada could transform this oversold oil development play

Northern Petroleum's £23mln valuation pays absolutely no regard to NOP’s present – as a cashed up oil junior with £21.4mln on the balance sheet – or its future as a producer.
Northern Petroleum: Canada could transform this oversold oil development play

The stock market, and in particular that segment devoted to growth companies, is one driven by sentiment.

While its bi-polar fluctuations can be disorientating at times, they do create opportunities, particularly where a share is oversold.

Take Northern Petroleum (LON:NOP); its rather chequered past definitely counts against it in the eyes of market makers, traders and long-term investors who steer its price.

However, the current £23mln valuation pays absolutely no regard to NOP’s present – as a cashed up oil junior with £21.4mln on the balance sheet – or its future as a producer.115

In fact, it saddles the new board and management tasked with making a fresh start with the legacy of the old regime.

That fresh start for chief executive Keith Bush and the team is in Canada, where there’s the opportunity to add meaningful production very quickly. 

It is a fairly easy way to add significant value, while the current share price provides an opportunity to ride the upswing if Northern succeeds with what looks like a fairly low-risk oil field development.

Last year it picked up 9,320 acres of the Keg River carbonate formation in north-west Alberta and subsequently increased its land bank to 26,454 acres with 101mln barrels of oil in place.

This was a productive corner of the province during the 1970s when recoveries were in the order of 20% and was shut in when the oil price was far lower than it is currently.

Today, Northern’s team is using 3D seismic data to guide the development of the reefs.

Three proof-of-concept wells have already been drilled and, while we’ll have to wait a few more weeks for the definitive data, including flow rates, this is a proven hydrocarbon producing play.

However, we do already know Northern’s re-entry well (14-22) flowed at 150 barrels a day (from the early swabbing test on a pro rata basis) before being put on long-term test to establish a production rate that will maximise oil recovery. 

The deviated well hit a 15 metre gross oil column, while the new reef well hit a 22 metre column

As mentioned earlier, this development project is not high risk exploration. The hydrocarbons are there.

The first three wells will give investors an indication of the daily rate that can be achieved. The economics could go wrong if the group has hideously misjudged the decline curve.

However, lifetime production of 100,000 barrels of oil looks realistic.

These are reasonably low cost wells. The current programme – one re-entry, one deviated and one completely new well – are estimated to have cost US$5.5-$6mln.

The hope would be to get the cost down to the US$1.7mln per well spent by near neighbour Strategic Oil & Gas.

Meanwhile, operating costs are likely to fall once production is tied into the local pipeline rather than being trucked. In those circumstances a ‘net back’ of US$35-$40 a barrel of crude is not unrealistic.

Of course, the emphasis on Canada ignores other areas of operation: Italy, the UK and Australia.

It is understood the group will look to be carried on a planned 3D seismic survey of its potentially world-class licences in the southern Adriatic.

Meanwhile, its onshore Horndean and Avington fields here in Britain (combined production 20 barrels a day) could be offloaded at the right price. Australia, while exciting, is at a very early stage of development.

The focus on Canada is one orchestrated by the new management team, led by Bush and finance director Nick Morgan. CEO Bush cut his teeth at Amerada Hess and Burlington Resources before becoming general manager of operations for E.ON Ruhrgas in Norway.

Morgan, meanwhile, comes with 13 years’ investment banking experience, specialising in mergers and acquisitions – possibly giving a pointer to future strategy once Northern’s credibility has been restored.

Equally as interesting is the industry heavyweight team of non-executives the AIM group has managed to attract.

The board includes Jonathan Murphy, former chief operating officer of Venture Production; Stewart Gibson, ex of Sterling Resources; and Ian Lanaghan, who was finance director of Faroe Petroleum.

Each has a track record of success and one assumes they wouldn’t back Bush et al unless they were confident the Northern CEO had crafted a convincing strategy to initiate and grow production in Canada.

Northern investors might take for inspiration the phoenix-like resurrection of Nighthawk over the past year.

Here was a North America focused group where expectations were mismanaged.

But buoyed by new management it has turned from a sporadic producer to one churning out 1,885 barrels of crude a day.

The share price reaction, although muted at first, has been spectacular over the past year or so as Nighthawk has advanced almost 200% in the last 12 months.

On that basis, it should only take limited success to move the dial of Northern, which has an enterprise value of just £1.6mln. 

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