Northern Petroleum or a Falklands Explorer? Investing vs Punting

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The Bulletin Board crazies love the Falkland Island explorers. Sometimes they zoom ahead. Sometimes they crash. But every day thousands of words are exchanged between these various loons, none of which add much, if anything, to the sum of human knowledge and nearly all of which are bullish.  Real investing is so dull when you can enjoy the fun of the casino with companies such as Falklands Oil & Gas (LSE:FOGL) or Rockhopper (LSE:RKH). If Bob Diamond was an oil man he’d be floating another Falklands explorer: why bother with dull profitable companies such as Northern Petroleum (NOP). He’d probably short Northern (with other folk’s cash) just for the hell of it.

But here’s the rub, companies such as Falklands Oil & Gas are a total punt. At 67.25p it s valued at £215 million. It has a big farm out deal just signed with Edison. And it will drill two wells in the next 12 months. Post those wells it will have net cash of c£60 million.  Of course Falklands is targeting prospects where a) it still owns most of the acreage and where it has done extensive 2D seismic work etc. Each of its targets has the potential to be 1 billion barrels. But saying that 2D seismic shows potential and that there is 1 billion barrels are rather different matters.

The water around the Falklands is deep and rough so a find has to be vast to be commercial. So saying a find is 200 million barrels won’t wash. On a 35% recovery rate it would not be economic in that part of the world. What are the odds on 1 of the 2 wells coming good with 1 billion barrels? Perhaps 1 in 10. So you pay your money and take your chances. If 1 of the wells comes in you would potentially be looking at a share price of £3-4. If neither come in you are looking at sub 20p. The odds are on sub 20p. I would not be betting the bank on this.

On the other hand Northern has all the sex appeal of Ena Sharples. Okay, that may be lost on younger readers. It has all the sex appeal of Angela Merkel on a bad hair day. There may be some folk out there who get a kick out of the idea of being dominated by Frau Merkel wearing leather SS gear but that is enough about Max Mosely. You get my drift. Fantasising about Angela Merkel is, like, being bullish about Northern a minority pursuit.

Northern kicks itself in the goolies now and again. There was the downgrade of its Dutch reserves last year. And then just recently it seems to have not sent out its AGM notices in time so is going to have to hold the whole thing all over again. It does not look clever. That may deter a few folks and I gather that there is a short position in the stock which cannot be helping.

But at 67.75p it is valued at just £64 million. It has c£20 million cash and should be making a profit of at least £10-15 million a year from its Dutch as operations.  I cannot see how Holland is worth less than £75 million based on dull cashflow multiples.  The company also has extensive Italian acreage where it has failed, to date, in signing big farm-out deals to allow drilling. But with reserves of 52 million barrels, the farm-outs will come. Again that has to be worth £75 million. And finally it has a 1.25% stake in a mammoth field offshore Guyane where the second well will finish drilling in 3 months. The first was a hit so it is already streets ahead of Falklands Oil & Gas and this field could hold not 1 buy 7 billion barrels. There has been trade activity in this block (albeit not consummated) and so again we know Northern’s stake is worth at least £60 million.  And there are a few other bits and bobs.

My point with Northern is that this is not a punt. The cash + predictable Dutch cashflows suggest a base case share price of at least 95p. But you have two other big assets which could see a valuation of anywhere up to 200p without much of a stretch. Okay Falklands Oil and Gas might be an 8 bagger. But that is a long odds shot and it could equally well slump by 65%. Northern can only be a three bagger but your downside risk is minimal. The former is a punt the latter an investment.  The BB loons love punting, but that should not be confused with applying a sensible investment strategy.

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Comments

  1. Nathan Peters says:

    Could not agree more Northern Pet seem incredibly cheap at current levels. A re-rating seems due.

    It should also be noted that Total bid £71m for loss making Wessex (rejected) to acquire their 1.25% interest in Guyane (potential 1 billion barrel oil play) Northern are only capped at £65m with £20m+ cash and operating profit of £8m.

    Short position, well probably that is why one of the most popular NOP bulletin boards on ADVFN is populated by a bunch on loonies talking just about anything other than the company.

  2. larissa reed says:

    Tom,

    I think you make a valid case but Edison are happy to have a speculative punt so not surprising that others follow.

    L

  3. tom winnifrith says:

    Nathan

    Many thanks. I cannot say I follow ADVFN BBs in detail. Rather bad for my blood pressure and so I have the excuse of passing on medical advice. You are right on Wessex point. Assuming other Wessex interests worth sod all ( not harsh) it values NOP stake at £60m.

    Larissa, for Edison the financial committment is peanuts. So it takes a, for it, relatively small punt. No harm in PIs doing that too but a) they must remember – as you so clearly and wisely do – that it is a punt and b) it is a mistake to bet the ranch on a stock like this. I fear some BB loons are doing just that.

    Thank you to both of you for your comments and for continuing to read this blog.

    Best wishes

    Tom Winnifrith

  4. malabe says:

    Hi Tom,

    Looking at the assets the cash and the earnings then NOP is clearly undervalued, the problem is that it’s been undervalued for years and your average private investor doesn’t see that changing any time soon. I don’t hold but it’s on my watchlist and i’ve read the BB , the general consensus seems to be that the BoD are sitting on their backsides drinking tea and doing bugger all productive , they make statements about moving the company forward to realise the potential and unlock value etc. but 6 or 12 months down the line there’s nothing new to report and they just rehash the same statement and go back to drinking tea. That view may be a bit harsh but they’re certainly not proactive , i feel the only way that value is going to be unlocked is through a bid , but i’m not holding my breath.

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