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Cluff Natural Resources

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CLNR-01Can Dewar put an end to the Cluff Natural Resources’ bear-run?

After a brilliant start to the year following a major tie-up with Shell on two of its assets, AIM oiler Cluff Natural Resources has been hit by a raft of profit-taking and, more-recently, dilution in the wake of a placing. With the company recently launching head-first into farm-in marketing efforts for its highly prospective Dewar prospect in the central North Sea, could a re-rate be looming?

Vote of confidence

Cluff Natural Resources is an investment firm focused on making a profit for its shareholders by investing in and exploring offshore UK oil and gas assets. The business holds a substantial equity stake in numerous licences in the southern and central North Sea, awarded to it in the 28th and 30th offshore licencing rounds.

According to Cluff, these licences are located in areas that have enjoyed a great deal of exploration success and development activity. All-in-all, the organisation’s portfolio contains P50 prospective resources of more than 2.5tcf spread across multiple prospects, trap styles, and reservoir formations.

Cluff’s approach enjoyed a massive vote of confidence in February when, after much anticipation, the firm revealed that it had entered into a deal with Shell UK covering two of its southern North Sea licences.

Firstly, it secured a binding, conditional, farm-out agreement with the major player for licence P2252. This contains the Pensacola prospect, which is estimated to contain unaudited mean GIIP of 566bcf (c.100MMboe).

In exchange for a 70pc stake in and operatorship of the licence, Shell must cover the entire cost of a work programme ending on the earlier of 31 December 2020 or the date of making a well investment decision. This programme includes the shooting of at least 400km2 of new 3D seismic over Pensacola, the processing of this data, and sub-surface studies required to support a drill-or-drop decision.

Elsewhere, Cluff granted Shell a three-month exclusive option to acquire a 50pc interest in licence P2437. P2437 contains the Selene prospect, which is estimated to contain unaudited mean GIIP of 509bcf (c.90MMboe) and is based near Shell-operated infrastructure.

Shell decided to exercise its option on 30 April, leaving Cluff with a 50pc stake in the permit and operatorship until a well investment decision is made. In exchange, the major paid Cluff $600,000 and committed to paying 75pc of the cost of an exploration well at the soonest possible opportunity to a maximum of $25m.

Dewar re-rate?

Shell’s involvement in Pensacola and Selene provided Cluff with a mighty boost, pushing its shares up to a high of 3.9p in February before a raft of profit-taking sent it back below 2.6p by March. The business then went on to sit comfortably above 2p until last month, when it announced a placing to raise at least £15m at 1.75p a share.

Cluff said the ‘transformational’ money was required to fund its share of well costs at both P2437 and P2252 in the wake of the Shell farmout. However, the dilution pushed shares down to below 1.8p, where they have continued to sit since giving the organisation a sub-£30m market cap (£23.6m as at writing).

Since last month’s placing, a third major prospect called Dewar has emerged as a potential catalyst for a Cluff re-rate that – if ultimately realised – would make the firm well worth a look at currently depressed prices.

Wholly-owned by Cluff, Dewar is estimated to contain up to 272MMbbls of light oil with P50 prospective resources of 39.5MMbbls. It has also been given a geological chance of success of 41pc, with oil having already been proven locally. What’s more, the licence is 100pc covered by modern reprocessed 3D seismic and is based fewer than 5km from BP’s Eastern Trough Area Project, where a $1bn investment was completed several years ago.

Earlier this month, Dewar became particularly exciting for investors when Cluff revealed that an early-stage feasibility study had identified a viable development scenario asset based on a two-wells tied back to ETAP. On this basis, the project is estimated to have a post-tax NPV(10) of £555m and a post-tax project IRR fo 123pc in a P50 prospective resource scenario. Critically, Cluff said it will now look to reduce its 100pc position in Dewar, commencing a formal farm-out process to attract one or more partners to fund future exploration. 

If Cluff can once again engage a partner of Shell’s calibre on favourable terms, then it could be hugely beneficial for its share price. With the firm’s currently lingering far below the highs they hit in the wake of February’s farm-out announcement, it could well be worth taking a punt on this outcome.

Cluff Natural Resources – Oil Capital Conference March 2019
The author was remunerated but does not hold shares in the company