Jadestone Energy - overdone drop on temporary production issues at Montara field says Gary Newman...

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Any disruption to production is obviously a big issue for oil producers, and even more so when a company only has a small number of operations and it causes a significant impact on output. Understandably the market always tends to react badly to any such news, but in cases where the disruption is only temporary and a solution to fixing it has already been found, and where the barrels of oil will eventually be produced just with a bit of a delay, this can also present good buying opportunities for the shares at a price level you’d otherwise be unlikely to see. I believe that to be very much the case with Jadestone Energy (JSE), which had been performing fairly strongly, fluctuating with the oil price, until it announced that it has suffered an oil leak at its offshore Montara field in Australia.

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This occurred whilst oil was being transferred between two of the tanks on its FPSO and production was immediately shut in whilst a small hole was found on one of the tanks. The company estimates that it will take around four weeks to fix it, and at a cost of $2-3 million, and the impact of that is production is expected to be at the lower end of the 15,500-18,500boepd guidance for the current full year. This isn’t the first time there have been issues for the company, having already suffered from a compressor outage at Montara, as well as issues with its non-operated FPSO in Malaysia. It shouldn’t have too big a financial impact on the company though, in terms of fixing the Montara leak, as it was already expecting capex for the year in the $90-105 million range and as at the end of May had $180 million in the bank, which had been increasing rapidly as a result of the high oil and gas prices, as compared to $118 million at the end of 2021. In fact, it is in such a strong financial position that it is planning to return up to $100 million to shareholders this year, via dividends, share buybacks and/or tender offers, and has already declared a final dividend of $0.193/share. Up until this latest issue, the performance of the company has been very impressive and it has taken full advantage of remaining unhedged and fully benefitting from high oil prices, to the extent that in 2021 it generated revenue of over $340 million (from average production of 12,545boepd), although after taking into account depreciation and depletion, alongside production costs, that did result in a post-tax loss of $13.7 million. Although the cash flow looks a lot better – with $102 million generated from its operations, and a $36.8 million increase in cash and equivalents, despite $27 million being used to repay loans and settle lease liabilities, as well as paying $7.7 million in dividends. It is worth bearing in mind that since the end of 2021 oil and gas prices have been much stronger, and despite the production issues, output has averaged a lot higher than the previous year, so I’d expect the interim financials to look even better, and the cash build for the first five months of the year certainly seems to support that view.

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Although Montara is its main field, it also has Stag in Australia where it averaged production of 2,350boepd in 2021, and the oil fetches a large premium to Brent – a massive $23.72/barrel premium at the last lifting. The company has also shown that it can put its cash to good use as well, with the acquisition of Sapura OMV in Malaysia last summer for a total consideration of $20 million, which was backdated and looked a good deal as when it completed in August there was $29.2 million of cash on its balance sheet. This added significantly to production with over 6,000boepd of mainly oil, and it also added 11.2mmboe of 2P reserves. But then the FPSO on two of the non-operated licences had its class suspended and production temporarily ceased, but it is hoped that the FPSO will be reinstated within the next couple of months and operations will restart. The company is also still making headway with its acquisition of the Maari project in New Zealand for $50 million, although very slowly as this has been dragging on since 2019, but approvals have been coming, and the company now needs ministerial consent for a change of operator. One big positive there is that the effective economic date was January 1 2019, and given the average oil price since then, the company is actually anticipating a net receipt should the transaction complete, such has been the profit generated from the asset in the meantime. There is plenty of potential from its Lemang production sharing contract in Indonesia as well, and a final investment decision to go ahead with the Akatara field was recently taken and contractors engaged, and with sales contracts already in place. Akatara adds around 16.8mmboe of resources and is expected to be relatively cheap to get back into production by H1 2024, as up until 2019 it was operational and a lot of the infrastructure is still in place. Resources from Akatara are expected to be booked at the end of this year. Jadestone also has potential in Vietnam as well with several large gas discoveries at its licences, and whilst development was deferred by the company in 2020 due to the global crash in oil and gas prices, discussions with the Vietnamese government are ongoing.

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So, overall, although Montara is very important to the company, it is by no means the only string to its bow, and Jadestone is gradually building and growing its business via acquisitions and development, and even after a big drop in its share price of around 16%, it is still valued at £373 million. Obviously that valuation is linked to the oil and gas price, but whilst both remain high and the consensus is that they will continue to do so for the foreseeable future, I believe that buying into such a valuation offers decent value and I see no reason why the share price couldn’t trade back up at around the recent highs of 110p. There is of course some risk as well, as if the problem at Montara turns out to take longer to fix than expected that would have a major impact on production guidance and revenue, and the field is due for inspection by the National Offshore Petroleum Safety and Environmental Management Authority so there is always a risk of some sort of sanctions relating to the spill. But overall I can see enough potential to believe that this offers decent value at the current share price of around 81p to buy, as long as we don’t see any sudden surprise big drops in oil and gas prices. I own some myself, mainly as a trade but will assess the position again if this gets back up to around the 100p level. Buy.

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Filed under: Jadestone Energy, Sam Smith, Morses Club, Ocado, Tortilla Mexican Grill, Verditek

2022-06-21 15:11:08

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