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I published this earlier on my Nifty Fifty website – where I shall publish a new share tip later today: The Zeadyus-2 well in Guyane has not found commercial oil and has been abandoned. The share price of Northern Petroleum (LSE:NOP) has duly slumped by 14% to 54.75p. This is a total market over-reaction. I have discussed this at length with exploration manager Graham Heard and CEO Derek Musgrove and here’s the score. The shares remain a buy. The same cannot be said for Wessex Exploration (LSE:WSX) which like Northern also has a 1.25% stake in this field.
I explained a few weeks ago why the smart move was to be Long Northern at 67p and short Wessex at 8.375p as a Guyane play: Wessex shares are now 4.8p so that pair trade would have been a real winner. You can read that cracking investment idea here
This article is about Northern. Wessex will come later. This well was five kilometres from the first Zeadyus well. It does not invalidate the results of that well – a potential find of several hundred million barrels. It merely shows that the oil there does not connect in that direction. In fact there were oil shows and since logging has not yet been completed we will not know the detaled score for another 10 days. So this does not mean that Guyane is a write off at all. Indeed the drilling rig now moves on to another target on the system : “The future drilling of the next three wells of this four well programme will target some of the greater undrilled prospectivity in both the Cingulata fan system that contains the Zaedyus oil discovery and at least one other major fan system in the licence. “
Clearly it would have been better had this well flowed stacks of oil but drilling is very risky. No-one ever pretended otherwise.
The Guyane prospect could still be a multi billion barrel play. Given the first well result it is unlikely to be worthless. As such Northern’s 1.25% stake must have a clear value. And as Northern has cash and is cash generative it can easily fund its share of the next three wells ( £2 million a pop).
At 54.75p Northern is now valued at £52.5 million or ex cash £35 million. For that you get:
Italy 52 million barrels reserves
Holland – generating £10-15 million cashflow per annum from gas
Guyane – worth whatever but clearly a lot more than nothing.
The UK – worth a few million quid.
As I noted in my original recommendation Holland and Italy alone could each justify a valuation of £60 million. Guyane could still be worth more than that or less.
Northern remains a great value play. Sadly it will only deliver that value in market terms by demonstrating value by selling an asset. That was a point that Heard could not disagree with. I would hope that Northern now accepts that this is what must happen. The stance remains buy.
Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
