Longboat Energy has doubled since I tipped it but is there still further upside? Gary Newman writes

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A couple of months back I covered Longboat Energy (LBE) as a highly speculative buy, and since then the share price has moved far quicker than I expected and is currently pretty much double the level that I tipped it at. Given the way that the markets are at the moment, and with very few smaller companies being able to actually retain any large upwards share price momentum for longer than a brief spike, you could be forgiven for thinking that the best move now would be to sell up and bank profit. Whilst we may well see the share price fall a bit from here in the absence of any further short-term news and when traders become bored and move onto the next ‘best thing since sliced bread’ share, I actually think that there is potentially plenty more to come if you’re prepared to hold longer term. Certainly the downside risks from such a low market cap level look worth taking given the potential upside from its new partnership and funding which the company has recently announced, and which could be company-making.

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Prior to that news the company had seen its share price gradually collapse over a period of time, to the extent that its market cap had drifted to around £6 million at a share price of a little over 10p. Given that its exploration drilling, some of which looked very promising, has had mixed results and cost a lot of money to carry out, it probably shouldn’t have been too much of a surprise that it was trading at the level where it was, albeit with some more funded drilling to come this year. I pointed out in my prior article that it had already been successful at Kvelkje and had the nearby Lotus prospect to drill in early 2024, and that if that was also successful then I’d be surprised if Equinor didn’t do some deal to acquire both as part of its Ring Vei Vest development hub. Another positive is that the directors/management here are all former Faroe Petroleum, so are well connected in Norway and know the business inside out. I still expect that any such deal for those licences won’t conclude until Lotus is drilled though. In the end news came completely out of the blue and from an unexpected direction, when an RNS came of a new deal with JAPEX to form a joint venture for the Velocette prospect – via Longboat JAPEX Norge AS – and that JAPEX would be making significant investment in the JV, as well as providing it with a large finance facility.

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When it comes to funding, Longboat has always done pretty well, since announcing a £52 million finance facility that would cover around 75% of all its planned drilling costs. Whilst a facility of that size might seem unusual for a company the size of Longboat, when it is all being used for exploration drilling, the lender is actually well protected as it is basically funding a proportion of the work which it is able to fully recoup at a later date via the tax breaks on offer in Norway – JAPEX will be able to benefit from similar as well with its newly announced facility for the JV. The deal with JAPEX will see the JV receive a staged initial investment of $50 million, along with a finance facility for $100 million to fund any development or acquisitions made by the JV, over a five year term. In return JAPEX will receive 49.9% of the JV, which was previously Longboat Energy Norge AS and holds all of the Norwegian licences. This deal, which is expected to complete during Q3, will see JAPEX invest $16 million into the JV initially; followed by a further $4 million subject to the completion of the acquisition of a producing asset, which is currently being assessed; and then up to $30 million based on the outcome of the Velocette exploration drill, which is also taking place in Q3. So, as it stands, Longboat has effectively given away 49.9% of its existing discoveries and licences, in return for around $8 million up front – the Longboat share of the $16 million initial cash injection into the JV. Which may well be - alongside that the transaction doesn’t complete until Q3 - why the share price didn’t move even higher on this news, as few seem to have any patience these days to even wait for a few months! Plus of course the money going directly into the JV and none of it flowing back to the PLC. The deal does seem to be of benefit to both parties though, as JAPEX look to be getting a share of the Kvelkje discovery and Lotus licence, which seem likely to have value to Equinor at some point, plus the drilling of the Velocette well as that was already funded anyway, and which all seems to justify the drilling risk when taken alongside the fact that the $30 million investment is contingent on the outcome of Velocette. It is also getting relatively risk free future drills as well - with the JV hoping to carry out one to three of these per year, and with the goal being significant production in the next three to five years - as a lot of the money linked to the finance facility will be recouped at a later date via tax breaks on capex.

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For Longboat, it is getting a significant partner that has the sort of financial clout that it needs to make real progress at its licences - assuming of course that future drilling and appraisal is positive and they proceed to development - and whilst it did already have a finance facility that allowed it to carry out its drilling plans, this new arrangement sees it forming an actual partnership with the financier, as opposed to just borrowing some money, as it has been doing. It has had to give away 49.9% of its Norwegian licences in return for this, including discoveries such as Kvelkje, but it all comes down to whether it is better to have 100% and no partner, or a big partner onboard to help develop these discoveries or sell them onto Equinor at probably a better price than Longboat would get on its own. For me the latter is the best option longer term and most likely to realise the most value. So, overall, I think that this is a good deal for Longboat and offers the potential for it to be trading at much higher valuations in the future, even just based on current licences and activity. At this point some of you will be eager to point out that I’ve not mentioned Malaysia, and the main reason is that I see it as largely irrelevant at this stage and with an exploration drill on this recently acquired Sarawak block unlikely to take place until the end of 2024 at the very earliest., it is unlikely to have much real lasting impact on the share price until that drill happens. Even after the share price rise, the market cap is only around £12 million, at a share price of 21p, and even if the Velocette drill fails - it has a 30% CoS and is targeting gross mean oil in place of 177mmboe - I can see enough potential from the other assets, with the involvement of JAPEX, to still see little downside from here. In the meantime, the shares could drift a bit lower – I see it as highly unlikely that the share price will get back to anywhere close to where it was trading prior to the JV announcement, unless there is negative news of some sort – and if you’re sat on the sidelines then you may get a chance to buy in cheaper when all the noise stops. But regardless of that, I still see upside from the current share price level.

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Filed under: Longboat Energy, FCA Link Woodford, Cellular Goods, SDI Group, TomWinnifrith.com

2023-05-11 11:55:54

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