The AIM market and its cohort of speculators have been called many things over its 25 years, but, risk averse is rarely one of them.
London’s junior market has had its fair share of flare-ups and burnouts. Investments, and punts, over the year, have seen fortunes lost and won and lost. AIM’s caricature frontier capitalism has been particularly prevalent among the oil exploration stocks.
Yet, there are notably fewer truly “transformational” exploration stories than in the past. Some still knock about, however.
Few opportunities presently seem as glaring or as underappreciated as Deltic EnergyCluff Natural Resources Plc (LON:CLNR) – soon to be renamed Deltic Energy.
Before making a short story long, a few quick facts are worth highlighting.
DelticCluff is presently priced at a big discount to its cash holdings and an even bigger discount to its net asset value.
Meanwhile, the funding position is secure and sufficient to cover current needs.
It is a small-cap explorer focussed on the North Sea, where it is targeting gas resources in the vicinity of existing infrastructure.
The company has a partnership with one of the largest oil and gas companies in the world, and, this partner, Royal Dutch Shell, is committed to drill at least two high impact wells in the coming years.
Success in either well will be an instant game-changer for the companyDeltic.
In the meantime, other catalysts are anticipated and management is aiming to close the value gap (c£13mln cash in the bank vs c£9.7mln in the market).
“One of the key challenges is the relative value that is attributed to the company,” said chief executive Graham Swindells.
“We’ve got the best part of £13mln of cash and we’re trading at a fairly significant discount to both cash and the best part of an 80% discount to net asset value.
“That’s the value gap that we’re trying to address, hopefully when people look at that it represents a compelling value proposition.”
“We have some pretty major catalysts there, success in any one of those wells would represent a transformation of the company and its value. So, the key message is, fundamentally we are significantly undervalued. Particularly given the portfolio that has a number of different potential catalysts.”
The portfolio in more detail
DelticCluff’s rebrand to Deltic Energy plc was approved at its latest AGM. It is being led by is essentially a reboot and rebrand of Cluff Natural Resources with Graham Swindells, continuing leading the company progress to elevate a company-building strategy following the 2019 retirement of natural resources veteran Algy Cluff.
In partnership with Royal Dutch Shell Plc (LON:RDSB) the company is advancing the Pensacola and Selene prospects, which are slated for drilling in 2021 and 2022 respectively.
The company Delticis, meanwhile, shoring up its exploration portfolio with a separate farm-out process for the Dewar prospect, along with the Cupertino and Cortez prospects which are still being advancing technically and could potentially be brought into the upcoming farm-out.
There may soon also be a boost in the UK government’s pending licensing round, awards for which had beenare anticipated during the summer months.
It applied for multiple new licences in the 32nd round and, if new acreage is secured, the company will aim to replicate what it achieved to date with its existing North Sea licences.
Closer examination of the portfolio adds to the weight of the apparent share price discount, albeit it is probably worth noting the COVID-shaped elephant-in-the-room – particularly as it has triggered sector-wide fears of spending cut backs across the majors (fears largely validated in a number of trading updates in recent months).
The virus has, among other market-specific factors, seen huge volatility throughout the oil industry and the manic falls in crude prices have led to massive trauma for oil producers.
Capital budgets have been cut to the bone practically everywhere and dividends which stood sacrosanct for decades suddenly were slashed.
Plainly, a lot investors are in ‘risk off’ mode and as such small cap exploration is likely low on many lists of priority.
Nonetheless, Delticthis North Sea company is presently de-risked in ways that other explorers are perhaps not.
Firstly, the company’s funding position is solid and secure. It had some £13mln at the end of December, by the end of the first half most of that remained intact.
Quality partnering is always another important facet for small cap explorers, and, few come with the resources and expertise as Shell - especially in the North Sea where the Anglo-Dutch major is increasingly one of the few remaining tier one operators.
Shell’s presence is naturally an important validator and endorsement for the company’s business strategy. Frankly, it is a great name to drop and it brings a certain amount of cache to the company’s portfolio.
The fact that the Delticteam originated the venureventure and then brought in such a high calibre partner should perhaps bode well.
Moreover, it positions the company ideally for a strategy which emphasises project origination and exploration rather than being just another junior with field development aspirations.
The company Delis one of only a handful of standout oil and gas opportunities presently on the radar in what is otherwise a challenging and scarce market for speculative investors, it will no doubt be one to watch more closely over the coming months.