A complex picture for Parkmead Group
“…Are Parkmead Group’s fundamentals strong enough to revive interest in a share price that has tumbled over the past six months?…”
Parkmead (AIM:PMG), an energy company focused on Netherlands and the UK, presents investors with something of a puzzle. PMG’s robust operational progress last year, together with surging gas prices, generated record revenues. But strong sales were more than outweighed by heavy windfall taxes and decommissioning costs. As gas prices continue to fall back to earth, are the company’s fundamentals strong enough to revive interest in a share price that has tumbled over the past six months?
PMG produces natural gas from a portfolio of four Netherlands fields and holds significant additional oil and gas interests across the UK and Dutch sectors. Last year the company became one of the first small independent oil and gas groups to branch out into renewables, taking full ownership of Kempstone Hill, a 1.5MW onshore wind farm in Scotland.
Operational progress
PMG’s latest updates paint a picture of light and shade. The company’s interim results for the half year to 31 December 2022, published in March, highlighted robust Netherlands operations which, with costs of less than $9 per barrel, PMG has cause to claim are ‘some of the most efficient and profitable in Europe, on a per-barrel basis’. Gross production for the period averaged 18 MMscfd, approximately 3,205 boepd.
Late last year PMG embarked on a two-well drilling campaign targeting several onshore gas prospects at its Drenthe VI concession. One, LDS-02, failed to intersect commercial volumes of gas, but LDS-01 encountered gas columns in the primary target horizons. Gas production commenced last month with flow rates ‘significantly higher than expected’ at around 40m3/day, ‘in addition to excellent dry gas production rates.’ The well has been temporarily shut-in to optimise the capacity of the receiving Garijp terminal to accommodate higher than expected production levels, post-drill modelling work indicating ‘the well has discovered a much larger net pay interval than initially thought at well completion.’ It is due to come back onstream later this month.
Progress has been made in opening up other Dutch prospects. A large integrated subsurface study is currently underway to target additional volumes at the producing Geesbrug gas field at Drenthe V, with work scheduled for completion ‘in the second half of 2023’. Commercial discussions are advancing with stakeholders and Dutch gas transmission networks regarding the Papekop prospect, a potential development targeting 35.6 Bcf of gross gas reserves, with potential for upside through oil production. A final investment decision will be taken after further engineering and permitting ‘over the next year’.
PMG is also advancing a cluster of opportunities in the North Sea, notably the Greater Perth Area (GPA), which has the potential to deliver 100 million barrels recoverable on a P50 basis, making it one of the basin’s largest undeveloped oil resources. A feasibility study is exploring the possibility of a tie back with a platform operated by the Scott Area partners located 10km southeast of the GPA project. The study indicates ‘no technical hurdles associated with the transportation and processing of fluids’ from the Perth producing wells through the offshore infrastructure and out to the onshore facilities. ‘Significant efforts’ continue to align suitable partners for GPA’s development.
PMG has increased its stake in the prospective Skerryvore project from 30pc to 50pc, and gained regulatory approval to progress into the next phase of the licence. A joint venture with Serica Energy and CalEnergy, Skerryvore would be PMG’s first operated exploration well. A technical work programme ‘has confirmed the considerable multi-interval potential of Skerryvore’. The planned well would target the main stacked exploration prospects at the Mey and Chalk intervals, which ‘studies indicate could contain significant volumes of light oil’. The licence also contains ‘additional prospectivity’ at the Ekofisk and Jurassic levels. Skerryvore is located close to operations by Harbour Energy, now executing the adjacent Talbot development project, and NEO Energy, which is proceeding with the redevelopment of its Affleck project.
Other North Sea interests include a 50pc stake in undeveloped discoveries at Fynn Beauly and Fynn Andrew, and additional prospectivity in the Piper formation. Fynn Beauly is ‘a very large’ heavy oil discovery with an estimated in-place volume of up to 1,343 million barrels across several blocks. Fynn Andrew holds 49.5 million barrels of oil-in-place on a P50 basis.
Though concerned by the Government’s mixed signals regarding the Energy Profits Levy PMG has has made ‘selective applications’ in the current UKCS Offshore Oil and Gas Licensing Round, the outcome of which will be known later in 2023. The Chancellor announced last November that the tax would rise from 25pc to 35pc and apply until 2028, even if energy prices fell sharply. But earlier this year Rishi Sunak hinted at a change in direction as the Government seeks to offer tax certainty to a sector that is being encouraged to invest in new energy projects, indicating that the levy would cease to apply if energy prices fell below a specified ‘normal’ long-term level.
Beyond hydrocarbons PMG continues to progress its renewables interests, notably Kempstone Hill, where electricity is sold through a power purchase agreement providing exposure to strong wholesale electricity prices. The company continues to seek opportunities to add to its renewable energy portfolio through further acquisitions of producing assets, as well as progressing existing organic projects.
Surging revenues – and costs
Strong results from PMG’s established Dutch gas business and blooming renewables interests, together with high European TTF gas prices, powered interim results with a strong underlying operating profit margin. The company increased its revenue by more than 140pc to £11.1m (2021: £4.6m), including record revenue from its wind farm of £343,000. Net cash generated from operating activities rose by over 400pc to £8.6m (2021: £1.7m). Operating profit – before non-cash impairments – was £7.6m (2021: £1.8m). The company maintains a robust balance sheet with total assets at 31 December 2022 of £70.3m (2021: £80.5m). Cash and cash equivalents were £19.2m (2021: £24.1m). Debt – inherited as a result of the acquisition of Kempstone Hill – was maintained at £0.9m (2021: £0.5m).
But decommissioning costs and windfall taxes cut into those advances. PMG has progressed legacy UKCS (UK Continental Shelf) decommissioning activities to capitalise on lower supply chain costs before the onset of anticipated inflation in the offshore market, completion of which will leave the company with no major abandonment liabilities going forward. But it added whopping £12.7m to costs through the period, with further costs to come this year. Taxation for the period was £4.8m (2021: £1.7m) due to high average gas prices. That, however, was before the imposition of a windfall tax imposed by the Dutch government, levied retrospectively on PMG’s 2022 gas production, of £4m. Together these expenses forced a net loss for the period of £14m.
As investors have digested the heavy impact on PMG’s bottom line the company’s share price has fallen away from a high of 75p last August to 25p at the time of writing. The price is down 55pc over the past year, taking PMG’s market cap to £27.3m. Just over a month ago house broker finnCap downgraded its PMG forecasts for 2023-24, to take account of the licence impairment, the one-off Dutch windfall tax, lower capex expectations for the year, and lower European gas prices, which have fallen from over €100 per MWh at the start of the year to €40 per MWh with the forward curve pulling back considerably. finnCap projects a 61pc downgrade in net profit from £6.5m to £2.5m for the 2023-24 financial year, a reduction in revenue of 46pc to £10.5m, EBITDA down 55% to £6.7m, cash down £18.1m to £10.7m, and risked NAV down 9pc from 184p to 167p/share.
But the broker remains positive regarding PMG’s essential prospects, noting that the company’s ‘Dutch gas and UK renewables businesses remain highly profitable and free cash flow generative’. The advance of growth opportunities in the Netherlands and progress towards drilling the Skerryvore exploration prospect ‘offer multiple opportunities to add value.’ PMG’s balance sheet remains strong, ‘providing ammunition for management to pursue complementary acquisition opportunities’. And while gas prices have been falling they remain subject to Europe’s volatile political landscape, with PMG’s Dutch gas business is ‘very well positioned’ to take advantage of any price spikes.
Veteran small cap commentator Simon Thompson, whose Bargain Shares column in the Investors’ Chronicle has frequently highlighted PMG, now takes a more hawkish line. For Thompson ‘the lack of reported net profits during a period of record high gas prices, and the absence of any farm-out news on the group’s flagship Greater Perth Area (GPA) development project’, considered with the expectation of lower gas prices and PMG’s forecasts for a further £6.5m of decommissioning costs this year, warrant a sell recommendation. But even Thompson’s sceptical note recognises ‘potentially significant exploration upside’, with the GPA licences accounting for 120p of finnCap’s risked NAV of 183p.
Outlook
A complex picture, then, the evidence suggesting that PMG might be best viewed as a longer-term holding. Though gas prices may, as finnCap suggests, spike higher than expected, it seems more likely they will continue to bottom out, depressing PMG’s revenues. Natural gas consumption in the EU fell almost 18pc in the eight months to March – they peaked at a record €343/MWh in August – eased by a relatively mild winter, energy conservation efforts, and a switch to alternative fuel and power sources following the sharp rise in prices that followed the pandemic and war in Ukraine. And as Simon Thompson noted, further decommissioning costs loom.
But as finnCap notes in turn, PMG, with its robust Dutch operations, and a set of intriguing prospects in development, seems well positioned to continue to help meet Europe’s pressing need for native hydrocarbons. It is also further ahead of the curve than most energy small caps in positioning itself for surging demand for renewables. At its current low price PMG may present an interesting prospect for the patient investor prepared to give the company time to allow its fundamentals to shine through.
