Hi Breezer,
Anything goes here - please fire away - there have been plenty of both, historically ...
Well in that case...
Disclosures first so you can see my bias: I hold these shares, but not as a substantial portion of my portfolio. I see them as high risk, high potential reward opportunities. Never trust people trying to sell you on shares without giving you this context! They might have all their wealth or none of it tied up in them. The investment might suit them as part of their "play money" so they can take a loss on the chin. It might not be the same for you.
I’m not providing anything in depth, just a loose and amateur overview of my current thoughts on these – I have in the past been a professional investor but in my view not a very good one so don't listen to me! I’m not providing any advice and you should always do your own research before considering an investment. Each of these companies provides excellent information in their investor presentations and in their results and trading updates.
For context I’ve bought these because of their unique situations or what I perceive to be a value disconnect. I’m happy to be in the space overall as I see a rising tide reducing the risk of my being wrong on the specifics. The rising tide to me is likely due to years of underinvestment in oil and gas production capacity, the removal of significant potential US capacity due to Biden’s new policies, and the significant potential for natural gas (as a relatively clean hydrocarbon) demand to grow as many markets use it as a transition fuel on the way from oil/coal to renewables.
1) Savannah Energy (ticker: SAVE, 18p) is my highest conviction position. It has licenses covering 1bn bbls of2P (and 35MMstb of 2C gas prospect) in a quite phenomenal onshore oil field in Niger, a stable country. This basin contains plentiful sweet light crude with easy access, an 80% well hit rate (on its licenses SAVE drilled 5 wells and has hit profitable oil deposits in all 5). It has identified 146 further well prospects on its licenses...
There is plenty of existing infrastructure (pipelines, airfields, etc that are operated by the CNPC) and Niger has recently announced a big export pipeline to which SAVE will have guaranteed access.
Its second asset is a producing gas field, local monopoly pipeline, and processing facility in Nigeria, but well away from the Delta region. They bought this out of insolvency and it is throwing off significant FCF (c.$120 p.a. vs. an EV of c.$600m) due to significantly improved operations, shedding of debt, and reduced downtime. It is currently de-leveraging at a fair clip, and given a cost of debt of around 10% and debt outstanding of around $500m, the fact that it paid down nearly $80m of debt in 2020 should add $8m to its cashflow, allowing for snowballing debt reduction until refinance. In any even the debt is easily sustainable, with a 2.5x interest coverage ratio. A re-finance would just be icing on the cake. The cashflows are well protected and not connected to global oil prices – its contracts are long term, fixed price, take or pay agreements meaning revenue visibility is high.
Its gas clients are all either regional state power plants or blue chip internationals like Lafarge, and all are backed by a world bank guarantee. Nigeria (where the gas assets are) is undergoing a gas revolution. It’s added 2 new gas clients recently, and has capacity for many more, with 80%+ cash margins on offer and minimal setup costs required to add new clients.
Simply put I think this should be worth 150p+ and think the market is pricing Niger oil at 0 and not pricing in any growth in Nigerian cashflows.
CEO bought £3m worth of shares for cash in 2020 (i.e. he went to market and bought, he was not given them for performance!), and the strike price for employee options is over 60p iirc. Amazingly they didn’t try to weasel the strike price down “due to market conditions” they just carried on building a cash generating machine.
Key risks clearly Nigerian social unrest (mitigated by community investment, education, employment, and being away from the Delta region), inability to restructure debt (mitigated by 2.5x serviceability ratio and stable revenue), inability to fund drilling (will likely need a farm in partner for Niger, which has looked unlikely for the last 2 years. However it’s looking more likely at current oil price levels).
I expect many catalysts this year, including full year results confirming cash flows through COVID, new gas customers, and hopefully (wishful thinking?P) a refinance or farm in partner.
2) Jadestone Energy (JSE) – I’m only in this in a small way, and have settled for much lighter diligence but in short it’s a SE Asian offshore oil producer whose management team have made some astonishingly good acquisitions – to the extent one is now producing more annual FCF than the cost of the acquisition itself! Speaking of that metric, at $65 oil a sensible FCF forecast for 2021 is $286m, which would exceed half the market cap of $460m...
Average opex/bbl on their 3 producing assets are:
$18.50 - Montara - Est Current Actual
$25.00 - Stag - Est Current Actual
$16.50 - Maari – Confirmed Current Actual
So at any realistic oil price expectation this thing is a cash generating machine. Note it’s selling into Asia, where it receives a premium over Brent.
Catalysts include confirmation of cashflow generation in the new oil price world.
3) Deltic Energy (DELT, 2p) – is a pure play explorer with a broad set of potentially excellent and well explored gas assets in the South North Sea, several of which are joint owned with Shell, which has just announced that it is expanding its focus on natural gas…I’m awaiting a near term farm in announcement from Shell on the first asset. In the meantime Shell is paying all expenses for that asset, and Deltic has very few operating costs given its lack of operations! It’s well funded with no debt and is trading not far above the value of the cash on its balance sheet.
I think this could be worth 3p on the Shell announcement and up to 7 or 8p longer term IF the deposits are as good as the 3D seismic and other indicators suggest. Key risks include a negative drill decision from Shell, negative results of drilling, or change in UK regulation or taxes.
I expect very near term catalysts, including the shell drilling announcement.