Making a profit on small oil and gas exploration and appraisal companies largely comes down to timing your buys and sells correctly, rather than just holding onto your shares through the ups and downs. With many of these companies the actual risk of holding for a drill often isn’t worth it, especially with exploration plays, but good money can still be made in the lead up to drilling activity, and by leaving some profit to run in the case of some of the safer appraisals. Buying when there is a general lack of interest and no immediate operational activity, and then being patient, is often the best way to get in at a good price – even if not necessarily the lowest price, as that generally comes down to a large slice of luck. I would definitely place Cluff Natural Resources (CLNR) into the ‘buy whilst it is quiet’ category, as the share price isn’t far off of the yearly lows, currently trading at around 1.6p, and although no actual drilling has been planned as yet, there will be news on that front over the coming months. The biggest issue for companies like Cluff, with a market cap of just £22 million, is usually being able to afford to do any work at all on the licences it owns, including shooting seismics and actual drilling, and especially so when it involves offshore North Sea prospects like the ones that this company has. Cluff though has found itself in the fortunate position of having Shell as its partner on two of its most interesting licence areas – Pensacola (P2252) and Selene (P2437) – following the completion of a farm in agreement early in 2019.
Shell has already shot 3D seismics at Pensacola - plus will use legacy ones for the neighbouring Lytham and Fairhaven prospects which Cluff also own - and is in the process interpreting the data, with a final decision on the drilling of a well likely to come before the end of this year. Pensacola is located fairly close to the already producing Breagh gas field, and both Fairhaven and Lytham, also on licence P2252, have previously been drilled in three locations, with all three proving the presence of gas in the Zechstein zone. Although it is worth noting that the reef structure being targeted is a relatively new play in the UK, there has already been some success and in other countries it produces significant amounts of gas. This licence is of a size which would offer huge upside in the success case, as there is estimated to be 566bcf of gas initially in place, which equates to 100mmboe. Of that, around 309bcf is expected to be recoverable on a gross P50 basis – which would equate to around 16mmboe net to Cluff. In the event that a decision is made to drill, the company will still have to find its 30% share of the costs though, but I wouldn’t be totally surprised to see Shell assist with that rather than it all coming via an equity issue. Shell also farmed into 50% of the P2437 licence, which includes the Selene prospect, and is currently assessing the existing 3D seismic data to decide on whether or not to drill at this location, with a drilling decision to come as soon as that work has been completed. This licence is in an area where there is a lot of other activity and fields, and Selene itself has previously been drilled down dip, but it turned out to be a major fault area where the well was drilled, and led to poor reservoir quality, and was classed as a dry hole despite some gas shows. The licence area also contains the Sloop discovery, which dates back to the late 1980s and has GIIP of anything up to 54bcf. Plus, there are the Endymion and Rig and Jib prospects which would also have enough GIIP to be interesting. The main focus though would be Selene, as gross prospective resources on a P50 basis are estimated to be 291bcf. If a decision is made to drill, then Shell are committed to paying 75% of the cost of an exploration well – capped at an aggregate cost of $25 million.
Aside from the licences that Shell has farmed into, Dewar is also of significant interest, as P50 prospective resources are estimated at 39.5 million barrels of light oil, and the company has been in discussions with a number of potential farm out partners. Usually in this situation I would now be saying that this all sounds great but the company still needs to find significant amount of funding from somewhere in order to meet its share of the costs, assuming that drilling goes ahead. But that is where Cluff differs from many of its peers, as it has already raised that funding via an equity issue last year, and as at the last interims, it had £14.8 million in the bank on July 1. This is enough money to pay for its share of both Pensacola and Selene wells, plus fund its corporate costs up until the end of 2021, so unlike many other similar sized companies, there won’t be any fear of a fundraise should the share price suddenly begin to rise – in recent times we’ve even had some companies raising money mid drill!
There is of course still significant risk here, as there always is with any drilling activity of this type, but given the location of the drills and the history of those licence areas, there would seem to be a reasonable chance of success at least at one out of the two wells, and the prospects being targeted are of a size that would be transformational for a company of this size, even if there is only success with one of them. So, this really is a gamble on a commercial find from one of the wells, with the risk being that two dusters would not only send the share price plummeting, but would also make it hard for the company to raise enough money for any further drilling. But as long as the decision is made to ultimately go ahead and drill, then I also see a very good chance of being able to de-risk your initial investment along the way and leave a free carry running for any drills – especially from the current low share price level. For any of you who do like to take a bit of a punt on oil drills, you could do far worse than this one, and it is hard to see how anyone who does take such gambles could ignore the speculative potential of Cluff.
Filed under: Cluff Natural Resources, Roland Cornish, ADVFN, Ted Baker, Tissue Regenix, AFC Energy
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