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I met up with Paul Atherley, the CEO of AIM listed Leyshon Resources (LSE:LRL) for a brief chat on Wednesday. It came on the heels of a trading statement the other day and a few points came out of that chat.
Leyshon is a rare beast on AIM in that it lays out its plans, stocks to them and delivers. Well it has done so to date. Check out my last chat with Atherley HERE and match it with this one. He is just doing what he said he would do. How novel…
The trading statement said that Leyshon has commenced its previously announced estimated $20 million accelerated exploration and appraisal programme on its Zijinshan gas project. With its on-ground experience and relationships in China, Leyshon has been able to obtain approvals quickly and is resultantly currently two weeks ahead of schedule – with more than 150 kilometres of a planned 300 kilometres of seismic already undertaken. This is being carried out as part of the company’s objective of defining a resource sufficient to delineate and submit a Chinese Reserve Report. The accelerated programme is following the company’s drilling at two wells – ZJS5 and ZJS6 – having intersecting multiple potential pay zones, with flow tests to determine whether commercial flow rates can be established from selected zones “expected to commence mid-March as planned, depending on the weather”.
The accelerated 2013 programme also comprises a further three committed wells and, potentially, a total of six wells, with flow testing of the wells as they are completed. The company emphasises that it remains “well placed to carry out its 2013 exploration and appraisal programme with a strong cash position of U$45 million. With 249 million ordinary shares on issue this represents approximately 12p per share”.
The accelerated programme suggests that Leyshon is confident in what its exploration has discovered thus far, but this remains just potential at this stage – with the company retaining some drilling optionality in the programme which it can decide on based on testing and seismic results. However, with also “pipelines sitting on the surface within 10 kilometres that access one of the fastest growing gas markets in the world, rising gas prices and a strongly supportive government policy”, the current risk-reward trade off at this stage means the shares continue to look attractive on a risk reward play.
What is the downside? There is a six well programme this year. Now it is unlikely that Leyshon would carry on drilling if it got duster after duster but if it did it would still have c $20-25 million net cash and so the shares (at 16.25p the market cap is £41 million) would probably halve. The upside, Atherley still reckons that his asset could have a NPV of $1.1 billion. On a risk reward basis that looks attractive enough.
What of newsflow? Atherley tells me that by Christmas you will have had results from 6 wells and 12 fraccing tests. So 18 bits of on the ground news. That should help keep investors interested.
Does Leyshon need to issue shares? No. If the current programme goes well it will have enough indication that it has a resource to spend a maximum of $20 million on a 2014 programme and will then
a) Get a rebate of c$18 million from a Chinese oil company farms back in for a 40% stake
b) secure debt funding to build the field in 2015.
Atherley is clearly already talking to the banks. On a risk reward basis this looks far better value than most in the benighted AIM oil and gas sector.
Having added these shares to my Nifty Fifty Growth portfolio in October at a discount to net cash (11.5p offer price), recommended top-slicing (selling half) at 24.75p the following month and then suggested last month that the cash taken off the table be reinvested at the then 13.5p offer price. So Nifty Fifty readers should already have made their subscription back many times over ( even on a £1000 initial investment) with Leyshon. A new share tip will appear on Nifty Fifty later today. To access that and the 23 share tips that have appeared there since October 28th click HERE
