Potential of Jersey Oil and Gas’ NEO deal underestimated, says broker

Potential of Jersey Oil and Gas’ NEO deal underestimated, says broker

 

Jersey Oil and Gas PLC’s successful farm-out of a 50% farm-out share of its Greater Buchan Area (GBA) licences to NEO Energy is indicative of management’s dealmaking prowess and the quality of the asset.

That, at least, is the conclusion of finnCap, which update its research on the North Sea explorer. The broker said the move clears the way for JOG to seek further farm-out agreements in pursuit of retaining a 20-25% fully carried interest in the development.

finnCap’s updated valuation model has resulted in a 14% rise in the risked net asset value (NAV) and a price target increase to 755p per share, with the potential for over 900p per share if JOG succeeds in holding a higher-end stake in the project. The current price is 180p.

Underrated potential

The lukewarm response of JOG shares to the farm-out agreement is more reflective of the political climate than the deal’s success, noted finnCap.

NEO Energy has assumed control of the project, marking a key milestone in JOG’s strategy.

The 50% interest farm-out agreement in the GBA licences will lead to a significant cash influx and allow JOG to unlock over 100 million barrels of oil equivalent (mmboe) of resources.

Following the agreement’s completion, JOG received an initial $2m milestone payment from NEO, with an additional $22m expected within the next year, as well as a full carry through to field development plan (FDP) approval of up to $12.5m.

However, JOG still holds a 50% working interest in the project and will be liable for 37.5% of the development costs. The company’s management is actively seeking additional farm-out(s) to fund its share of the gross investment to first oil at the Buchan field.

Labour thawing?

Recent political developments have created a favourable environment for JOG’s additional farm-out ambitions.

The Labour Party has softened its initial punitive stance on new oil and gas developments and stated that it will honour new oil and gas licences, finnCap pointed out.

Further, the UK government introduced a price floor to the Energy Profits Levy, a move that while not likely to be triggered, is helpful for potential partners’ funding by increasing available reserve-based lending (RBL) capacity.

FinnCap now models JOG retaining a 20% interest in the GBA in return for a full carry-on phase-one of the project, which is the Buchan re-development and is the low end of management’s ambition.

Should JOG fail to secure the remaining funding, NEO has the option to acquire the unfunded portion, ensuring a fully financed project and setting a valuation floor for JOG of 525p per share, the broker said in a note to clients.

With this forecast and recent developments, JOG is well-positioned to further its prospects in the oil and gas sector, creating a significant valuation gap that offers a favourable risk/reward balance, according to finnCap.

Published: 26-06-2023