Currently a lot of private investors seem to be looking around the oil and gas sector for the most bombed out stocks that they can find, in the belief that these will offer the most upside on commodity prices eventually recovering. The big problem with that though is that if commodity prices do stay fairly low for a prolonged period of time, as seems likely given expected demand levels even when things do start to recover plus the huge amount of oil sat in storage currently, then some of these companies may never actually recover. I can see why it is tempting to buy some of the producers that have been hit hardest, as on the last big oil price drop a few years ago these tended to be the shares that bounced back the most, but this time around I’m not convinced that we will see prices recover quite so quickly, and those with high levels of debt and reliant on much higher oil prices, could find themselves in real trouble. It makes far more sense to me to pick out a company that looks strong enough to weather the storm and which had been performing well prior to the arrival of Covid-19, and Jadestone Energy (JSE) is one of the few that fits the bill and which I would consider buying as a longer term investment at the moment.
With a current share price of around 48p giving a market cap of £220 million, and having 'only' seen its share price halve since the highs that it hit at the start of the year, some will argue about it being cheap. But I would counter, pointing out that its production is strong and set to increase, hedging is decent, it has plenty of cash in the bank, has cut its Capex costs and despite the current situation is still confident of paying a maiden dividend this year. Currently production comes from its fields in Australia - Montara and Stag - and they achieved a combined average of over 13,500bopd in 2019, more than triple the previous year. In addition to those assets, the company acquired a 69% stake in the Maari offshore project in New Zealand in late 2019 for $50 million, which equated to a price of $3.61/barrel of 2P reserves – the company effectively took over the field from January 1 2019, in economic terms, but approval by the government for the completion of the deal isn’t expected until later this year. It may be that asset now takes slightly longer to pay back the investment than originally anticipated - payback had been forecast in less than 12 months - but it still seems like a decent deal.
As at the end of March the company had nearly $110 million in the bank, with net cash of over $72 million, and as part of its measures to conserve that it recently announced that it would be cutting back on capex and delaying some of its drilling, none of which was mandatory. That makes good sense to me as there seems little point in investing that money now and producing more oil at a time when prices are very low. As a result of that, it has cut Capex for 2020 by around 80% to $30-35 million, of which over $15 million had already been spent during Q1. That will have some impact though on production for the coming year, as that work had included infill drilling in Australia to maintain existing levels of output, and it will now mean that it is expecting to produce 12,000-14,000bopd. But in 2021, with the addition of Maari once that deal completes, that is expected to grow by circa 25%. Reserves remain strong, with 41.8mmbbls of 2P reserves in the Australian assets at the end of last year, rising to 54mmbbls once you include Maari. Elsewhere, it has gas fields in Vietnam at Nam Du and U Minh which were due to be developed and $90 million of capex had been ear-marked for this, but it wouldn’t have produced any revenue until late 2021. So that has now been put on hold, plus the company is still awaiting approval of its field development plan there anyway. In terms of its hedging, the company is also in a decent position with around a third hedged at an average of $68.45/barrel through to the end of September. Aside from that, the company has managed to reduce operating costs to around $20/barrel, or around $27/barrel when you take into account its other costs. Obviously oil prices are currently very low with Brent at around $28/barrel, and having been below $20/barrel briefly, but it is also worth remembering that the type of oil produced from Jadestone’s fields has been generating a substantial premium to Brent – Stag managed $21/barrel and Montara $7.6/barrel premiums in early March (Brent would have been trading at around $40/barrel at the time the company announced this).
There’s not much point dwelling on the past financial performance as things are now very different to where they were in 2019, but last year the company did manage to generate revenue of $325 million, with a $73 million pre-tax profit and net operating cash flows of $177 million – once you strip out debt repayments plus the acquisition that falls to around $23 million, but has substantially improved both the balance sheet and future production as a result. Despite the recent falls in oil price, the company is still planning to pay out a maiden dividend this year and, although the exact amount is yet to be finalised, previous suggestions point to it being a decent yield. In terms of the balance sheet, there is nothing which really concerns me as by far the biggest liability on there is future decommissioning, but that isn’t expected to occur until 2033 for Montara and 2036 for Stag. Overall, I certainly wouldn’t bet against the share price falling lower, especially if the oil price and/or the markets in general take a tumble, but from these levels I can see plenty of upside once the oil market recovers, as it always seems to do after the bottom of the cycle, and often quite spectacularly if the past is anything to go by. You don't need to buy in right at the bottom, just at a price which offers value and a good chance of a profit in the future.
Filed under: Jadestone Energy, Bearcast, BT Group, Filta, PetroTal, URU Metals, TheWorks
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