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Shares in both AIM listed oil stocks have slumped today. Northern (LSE:NOP) is off by c14% at 54.75p, Wessex (LSE:WSX) by 21% at 4.8p. Not a good day for either. The reason is that the Zaedyus-2 well in Guyane does not appear to have found commercial oil although we will not get full data for another ten days or so – logging starts tomorrow. Though I am a Northern bull I am in a sense vindicated as well ahead of drilling I argued that folks should take a pair trade: buy Northern at 67p and sell Wessex at a share price of 8.375p. If you followed that pair trade you would be a net 24% ahead. That is smart investing.
You can read that cracking pair trade investment idea here
And now I urge you to consider the same call once again. Here is the state of play:
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 almost certainly a lot more than nothing.
The UK – worth a few million quid.
It can fund its Guyane commitments from Dutch cashflow.
Wessex is still capitalised at £35 million. It has enough cash to fund its Guyane commitments but little spare. It has UK assets perhaps worth £2 million (if it is lucky).
Now here are three scenarios:
After three more wells Guyane is worthless. In which case Wessex falls by 99%. It is pretty much a wipeout. Northern still has Dutch and Italian assets which are worth much more than its ex-cash value. You should not lose anything, in fact the stock is still cheap.
Guyane is commercial region but requires more exploration work even before development is considered. Wessex must either sell its asset or raise money ( big dilution) in order to stand its corner. A forced seller does not have a strong hand. Northern can stand its corner and hold out for a higher price or keep paying its share of drilling costs.
Guyane does hold a billion dollar reserve. Wessex’s stake is worth £60-80 million and it can almost certainly get a trade sale. Northern would probably follow suit. In which case Wessex shareholders might double their cash. Northern would on the same basis be sitting on almost £100 million of cash + Holland/Italy and as such you would expect to at least double your money there too.
As such if you hold Wessex shares this remains ever more of a shit or bust play. Under one scenario you lose everything, one you might just lose only some of your cash and one you could double your money or perhaps do a bit better. The same scenarios see the Northern share price going up, being 100% backed by Guyane/cash at 55p with the rest in for free so heading sharply higher, or doubling or more.
As such the risk averse Wessex shareholder simply switches into Northern. If you are not involved at all I would once again urge the pair trade ahead of the next Guyane well which spuds soon: buy Northern and sell Wessex.
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
