Is Jersey Oil & Gas worth a look following Verbier volatility?
Jersey Oil & Gas has collapsed by nearly 70pc since the beginning of the month thanks to a major disappointment at its much-hyped Verbier discovery. With plenty of cash in the bank, Verbier still offering potential commercial viability, and remaining prospects on the discovery’s wider licence, could Jersey Oil be a buy at its current 74p share price?
Jersey Oil & Gas has seen its share price fall from 224.5p to 74p since the beginning of the month, a 67pc decline that puts its market cap at £16.5m. The trigger for this collapse was the news last Wednesday that the company’s hotly-anticipated Verbier appraisal well had disappointed. The well, based on the P2170 licence in the North Sea, reached a total depth of c.3,800m but did not encounter Upper Jurassic sands as anticipated.
However, far from Verbier being a duster, Jersey Oil said contingent resource volumetric estimations for the asset are now likely to be revised towards the lower end of previously-announced estimates. This puts estimated recoverable oil at around 25MMbbls gross – in comparison, best-case forecasts before the failed drill came in at a whopping 130MMbbls.
Regardless, Jersey Oil – owner of an 18pc stake in Verbier – expects the site to remain commercially viable at this level. Alongside its partners Equinor (70pc)- previously known as Statoil- and Cieco (12pc), the company will now integrate the appraisal well results with 3D seismic data acquired last year. This will be used to evaluate the upside potential for further Verbier appraisal activity, with a large part of the mapped area of the discovery remaining untested.
Meanwhile, it has identified additional resource potential in an untested, deeper horizon beneath the Verbier discovery. This will be matured with new seismic data and considered for future drilling. Andrew Benitz, chief executive of Jersey Oil & Gas, said:
‘We are both surprised and disappointed by the results of our appraisal well. JOG remains confident that Verbier is a commercially viable development project that could be further enhanced by the potential for a new area hub development, together with undeveloped discoveries that sit in close proximity to Verbier.
‘Verbier has been a play-opener for JOG and we remain excited about the growth potential surrounding this valuable asset. JOG remains well-funded to pursue our growth plans and will continue to assess various acquisition opportunities as we move forward.’
So, does Jersey Oil now represent good value following this decline?
To begin with, it is worth acknowledging that last week’s collapse provides a great example of the risks of exploration and appraisal drilling. While a successful well can propel a business into another league of valuation, failure can wipe off vast amounts of value. This is especially true when a company’s market cap is so highly correlated with a well’s performance, as was the case with Jersey Oil.
So, with this in mind, another failed well in the future could create yet more problems for investors. Those who aren’t keen on betting the house on one well would presumably be more comfortable with Jersey Oil if it were to introduce more diversification into its portfolio. This would provide some additional protection against the possibility that licence P2170 is not as prospective as first thought.
An excellent example of this protection in action recently has been Reabold Resources. The firm was hit by the failure of wells at both the Colter and Wick prospects – which it had exposure to through its significant holding in Corallian Energy. However, this downside was limited by the business’s large exposure to additional assets in Eastern Europe and California.
It is, therefore, encouraging that Jersey Oil has indicated a willingness to expand its portfolio. In its last results, it said it plans to build a production portfolio through both organic development and acquisitions coinciding with the cyclical recovery in the oil price and the opportune buying market in the North Sea.
‘The Company is involved in multiple acquisition opportunities and intends to draw on its management team’s considerable experience, knowledge and expertise to deliver shareholder value from its stated growth strategy,’ it added.
Another consideration for investors is Jersey Oil’s funding situation if another drill is required. The business has not provided a cash balance for some time, but we know cash stood at £22.1m as at the middle of 2018 against admin costs of c.£900k for the six months (£150k/month). If we subtract drill expenditure (£9m-11m) and admin costs of £1.35m to account for the nine months that have now passed, then cash currently sits at around £10m-£12m. Obviously, this is a back-of-the-envelope calculation, but it highlights the need to be aware of Jersey Oil’s balance sheet.
Despite these considerations, Jersey Oil’s recent decline has also served to highlight the several remaining strings to the firm’s bow. First-of-all, in spite of the market’s reaction, Verbier is still – in theory – commercially viable. The firm has stated previously that the prospect offers an NPV(10) of £31.2m under the low-end estimates towards which it is now gravitating.
It is also worth noting that P2170 contains two additional prospects called Cortina and Meribel, which offer Jersey Oil an NPV(10) of £52.2m-£199.3m and £0.3m-£4.5m respectively. A low-case scenario for all three candidates still gives the licence at total NPV(10) of £83.7m. With this in mind, the company’s current £16.5m market cap could look very attractive – especially given that it is now primarily underpinned by cash.
All-in-all, whether or not Jersey Oil looks attractive at its current price really comes down to whether success can be made of P2170’s remaining upside. Without the aid of a crystal ball, this is impossible to predict.