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I met up with Derek Musgrove, CEO of AIM listed oil and gas producer and explorer Northern Petroleum (LSE:NOP) last night. He is an opinionated man but we disagree on little and so the conversation was wide ranging. But I guess you do not wish to here a detailed analysis of our predictions for West Ham this season (Musgrove is a lifelong hammer) but about Northern Petroleum. I am afraid that it is pretty much steady as she goes. No fireworks are likely in the short term but the stock is just ludicrously undervalued at 67.5p – giving it a market capitalisation of £64 million.
For starters Northern sits on a cash pile of c£20 million and it is generating cash from its Dutch gas operations of c£10-15 million a year. So it is not going bust and the downside risk here is really minimal. There are 4 assets of note in the Northern portfolio, I ignore its small UK onshore portfolio which should have been sold a while back. There may be a bit of activity offshore the Isle of Wight ( from a drill platform onshore) at some stage next year but I am really not too excited about the UK assets. They should, and could, be sold for a few million quid.
Holland – gas. This is a dull cash cow. Northern has missed output targets in the past and had to restate its reserves but it will bring onstream a bit more production each year. To be honest Holland has not lived up to initial (high) expectations but that cashflow is fairly predictable and the Dutch gas assets must be worth a (base) case valuation of c£60 million ( a pretty undemanding cashflow multiple). Since the market is not really enamoured with them I would hope that Northern would flog them too but that is hope, not expectation. So pro-tem I value them on a cashflow multiple.
Holland – Shale. This is blue-sky. Northern sits on vast potential gas shale acreage. Now this is a tad controversial since extraction would involve fracking which has the environmentalists hopping up and down in a frenzy. I gather that Holland has more than its fair share of woolly minded bearded loons. If the Green hurdle can be overcome Northern would need to find a specialist partner to go ahead with this project. And so this could be worth a multiple of the current share price in a few years. Or it would be worth sweet fanny adams. As a prudent sort I would value it at nil for now but just flag it as blue-sky potential.
Guyane. I have discussed this asset in some detail in an article published earlier today HERE. The bottom line is that a second well is being drilled on this prospect as I write and we will get the results in two months time. It is an appraisal well on an existing discovery. Northern has a 1.25% stake in this field which could easily be worth £60 million. Indeed I believe (Musgrove would not confirm) that had Wessex (WSX) accepted a bid from Total earlier this year, Northern would have been offered c£60 million plus for its stake. The matter is discussed in more detail in the other article HERE but you have a base case valuation for this asset and potentially exciting newsflow ahead.
Italy. This has been another area where hopes were initially high but which has not exactly set the world on fire. I kind of ignore the onshore acreage. It has been farmed out and is small. Where the potential (and 52 million barrels of proven reserves) lie is in various offshore blocks. But drilling here costs a few bob and so Northern has been keen to farm out its big prospects to de-risk them. I sense that this could change in one of two ways. Either we could get farm out news (at last) or – were Guyane or Holland to be sold – Northern might up the ante and drill a well or two on its own to prove up value and bring in partners on better terms. Either way Musgrove seems sure that there will be an offshore well drilled within 12 months. What is Italy worth? Unless Northern actually starts drilling , not a lot. But with its proven reserves I cannot see why a £1 a barrel valuation is extreme – in fact looking elsewhere in the sector it seems extremely mean.
My point is that, if we ignore Dutch shale and the UK, Northern has three assets each of which could easily be worth more than the current market capitalisation. The market does not recognise that. In part that is Northern’s fault. A few more farm out deals on Italian offshore acreage, not having to revise those Dutch reserves, would have made a world of difference to how this stock is perceived.
I sense that Musgrove recognises this. He seems in no rush to do anything drastic but appears to accept that the steady as she goes approach will not unlock value. There has to be offshore Italian drilling. Perhaps the only way to get the value of Guyane or Holland recognised is via a sale? I do not know. But deliver on any one of the three (non blue-sky) legs and this company would be trading at a discount to net cash with the other two legs and blue-sky in for free.
A lot of folk knock Musgrove. The shares are more than 50% down from their peak. But then again when he took the helm 12 years ago Northern was effectively bust and the shares were (in adjusted terms) little more than 10p so he is not quite the value destroyer some of his critics make him out to be. Au contraire.
There will be no quick fixes here but the downside really is minimal. If even one of the three legs comes good, the upside is pretty spectacular. On that basis, at this price Northern remains a stock to buy and tuck away.
the shorters on NOP also have a free ride as long as they are backed by Royal Bank of Scotland offloading their shares
dont get me wrong I am long NOP but we should face the reality too.