As is so often the case with oil and gas drills amongst the smaller companies, private investors built expectations around West Newton up to such a level that the actual results were never likely to live up to that. West Newton has been all over the news in the last 24 hours or so, following the successful drilling of an appraisal well at this onshore licence, near Hull, and there were expectations that the share price of its AIM listed partners would rocket – Reabold Resources (RBD) has a 24.67% indirect share via its 37% in Rathlin Energy, which is the operator of the PELD183 West Newton and owns 66.67% of it; and Union Jack Oil (UJO) with a 16.665% direct interest in the licence; with private company, Humber Oil and Gas, also with 16.665%.
Briefly the shares of both companies did rise rapidly, but that didn’t last for long and many PIs have been left scratching their heads as they had been expecting multiples of where the share price was the day prior to news. What many seem to be forgetting though - along with the fact that both companies saw large share price increases in the lead up to drill results, with Union Jack pretty much doubling - is that this was an appraisal drill and that the ‘discovery’ being trumpeted all over the press, and even TV, (biggest onshore gas discovery in the UK etc) had already been made during the drilling of the A-1 well a few years back. Estimates for 2C contingent gas resources following that initial drill were 189bcf, equating to 31.3mmboe, and that was known when both Reabold and Union Jack took their stakes in this licence.
It is worth remembering that Union Jack only effectively paid £1.15 million for a 16.665% stake – it earned that by paying 25% of the drilling and testing costs, which will total around £4.6 million - and Reabold secured its interest by paying £3 million for 37% of Rathlin, so that does give an indication of how those 189bcf of gas were being valued at that time. This successful appraisal drill further derisks things here and initial data indicates that there is at least 189bcf of gas present, plus the 65m of net hydrocarbon column in the primary target was also saturated with a significant liquid component. If it does turn out that there is also a significant amount of oil or condensate present then that will add a lot more value – how much will depend on exactly what is present. An added bonus was the discovery of oil in the secondary Cadeby target, although no further testing will be carried out on that at this stage and it will be drilled in the future from West Newton B, where the reservoir potential is expected to be optimal. All of this sounds very promising and points to plenty of upside potential given the relative market caps of both companies, but it is worth pointing out that until the upcoming extended well test - which already has planning consent and will take place during Q3 of this year - is completed and the cores are analysed, to obtain more data and actual flow rates, it is difficult to determine just how good a result this actually is.
How much of the market cap of each company West Newton actually underpins is hard to determine – but in the case of Union Jack and just taking into consideration the £10 million or so that its market cap increased during drilling (in reality it would also have accounted for some of the market cap prior to that), its share of 189bcf would equate to roughly $2.25/boe, which for 2C in the ground and with no plan in place yet to extract it, is actually quite high compared to many of its peers. You do also have to consider that it is onshore, in the UK, and with infrastructure in place already in this area, so you would expect some sort of premium for the 2C on that basis. Really, the point I’m trying to make, is that the market caps of Reabold and Union Jack aren’t actually that undervalued at this stage, based on the original gas estimates. On the positive side though, if there are indeed increases in the gas resources as well as the presence of commercial oil in any sort of significant quantity - and of course assuming that it flows at a decent rate - then there is plenty of further upside, and the risks are significantly mitigated by the existing 2C resources (assuming of course that nothing goes wrong with the test and it actually flows).
Currently Union Jack is trading at around 0.19p on the ask, which is only slightly higher than the day prior to results, and Reabold is at 1.05p to buy, and I would expect that anyone who was looking to bail out on the news has now done so, and we should start to see some interest build again. In terms of picking which one to put your money in – Reabold has a larger stake, although it is indirect via Rathlin, and does have more going on with its operations elsewhere, such as the forthcoming Mica-1 appraisal drill at Parta in Romania, plus production in California. It also seems to have a much better PR company in the form of Camarco, who look very impressive and seem to have ensured that most of the national press coverage mentioned Reabold rather than the other partners. But it isn’t quite so popular with PIs and is unlikely to see its share price pumped as high during the lead up to the EWT results. Success here would be significant for Union Jack, and I would expect it to be pushed harder in the coming weeks and months until the results come, and on a successful outcome I would also expect the share price to spike higher, in percentage terms. So, based upon that, if you’re looking to sell on positive EWT news, or possibly to derisk some along the way, I would expect that Union Jack will provide the larger returns. But as an actual longer term investment, I think that Reabold has more potential and has less risk exposure to this EWT due to the diversity of its assets. Whichever you choose, I think both will offer plenty of potential to make a profit from the current levels whilst testing is underway. I might even be tempted to have a trade myself!
Filed under: Union Jack Oil, Reabold, Patrick Abbott, Versarien, Woodford, Bluejay, Bagir, Whitbread
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