Irish Oil At Half Price

Published in Investing on 8 June 2012

This junior oil is ripe for a takeover offer.

Times are tough for small companies needing to raise funds, especially if they are high risk -- like small oil and gas companies.

A number of these junior oils look very cheap compared to their assets at the moment, and one that I have been watching for a while is Lansdowne Oil & Gas (LSE: LOGP), which is currently sitting on a very valuable asset but struggling to raise funds for new exploration.

(Incidentally, if you'd like some more share tips on companies that look good value at present, I'd recommend this free report, "Top Sectors of 2012", from the Fool's in-house analysts.)

Lansdowne's prize asset

Lansdowne has a 20% stake in the Barryroe oil discovery in the Irish Sea. When I first wrote about the company in March, Lansdowne's share price was around 48p. It's now just 35p -- so what's happened since then?

Well, initial testing results from Barryroe suggested flow rates of 3,500 barrels of oil per day (bopd) and 2.9 million cubic feet of gas per day (mmscfd). This was acceptable, especially as these flow rates were restricted by the test drilling equipment, so there was always a good chance that potential was much higher.

Four times faster

Since then, we've found out how much faster. In May, Barryroe operator Providence Resources (LSE: PVR) said it now expects that Barryroe will flow oil and gas at 12,500bopd and 11mmscfd - almost four times the flow rates in the test.

There's more good news, too. At the start of June, Providence announced the independent test results on the sample of oil it took from Barryroe. The oil was described as "a premium light (43° API), low sulphur, low TAN and low metal crude" -- in other words, it's a top quality crude oil.

What's it worth?

The most recent independent valuation of Barryroe's resources gives Providence's 80% share of the 58 million barrel Barryroe discovery a discounted net present value (NPV10) of $808m. Since Lansdowne owns the other 20%, its share is worth around $202m, or £131m.

Lansdowne's current share price of 35p gives it a market capitalisation of just £43m -- only 33% of the value of its Barryroe asset, leaving plenty of profit for a potential acquirer.

What's the catch?

Lansdowne's fundraising problems are serious and it needs a partner to continue exploring any of its other prospects. In the company's recent final results, the directors declared a "material uncertainty" over whether the company could raise sufficient funds "to continue as a going concern".

While this would normally spell disaster for a company, in Lansdowne's case it shouldn't. Providence has nearly completed its post-drill studies for Barryroe and already has an agreement with Royal Dutch Shell (LSE: RDSB) to buy the oil from the well.

Although further investment is needed to bring Barryroe into production, I have no doubt it will go ahead, generating strong cashflows for Lansdowne.

Takeover time?

We've already seen one opportunistic takeover recently, with The Parkmead Group (LSE: PMG) acquiring cash-strapped Deo Petroleum (LSE: DEO) for a song, just as Deo was on the verge of being able to start developing its best asset.

Lansdowne's current situation leaves it looking vulnerable to a similar takeover. Even with a typical 30% premium added on to the current share price, it still looks cheap alongside its share of Barryroe and its other prospects.

I'm very tempted to buy into Lansdowne, and may do so as soon as the Fool's trading rules allow me to. Why not leave a comment and let me know what you think?

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Roland owns shares in Royal Dutch Shell but does not own any of the other shares mentioned in this article.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Cyfran101 08 Jun 2012 , 8:46pm

My immediate reaction is to wonder if Providence Resources is the better investment. Its also at a discount using your figures but less risky?

sopavest 09 Jun 2012 , 11:23am

@Cyfran101

I agree that Providence might be a good investment, but it is not such a straightforward case as Lansdowne -- it is much larger and has a range of other assets at varying stages of exploration and development.

Might be worth a look though, especially over the longer term.

Roland (article author)

thebuffoon 10 Jun 2012 , 10:49am

I'm very tempted to buy into Lansdowne, and may do so as soon as the Fool's trading rules allow me to.

We also use numerous freelance writers who cannot write about a stock in the period of 2 full market business days before, to 2 full market business days after, purchasing or selling the stock.


Not too long to wait. Although, I think I'd wait a lot longer...

Buffy

cityvoiceuk 11 Jun 2012 , 10:04pm

"struggling to raise funds for new exploration."


Their house broker has stated that LOGP arent raising any funds. So I dont know where you get that info from that they are raising funds.. let alone struggling.

cityvoiceuk 11 Jun 2012 , 10:09pm

And details of the farm out process for their acreages.

http://www.macquarie.com/mgl/com/macquarietristone/mandates/lansdowne

sopavest 12 Jun 2012 , 1:19pm

@cityvoiceuk

The fund raising comment comes directly from LOGP's final results (25th May):

"The Directors believe that at the date of these financial statements there exists a material uncertainty regarding whether or not the Company will be successful in raising the required future funding to progress the development of the licences held"

http://www.investegate.co.uk/Article.aspx?id=201205250700130840E

Cheers,

Roland (article author)

cityvoiceuk 21 Jun 2012 , 8:59pm

@sopavest

that's the run of the mill sort of formal text that is present in virtually all small cap oil/gas explorers.

In the same RNS, they also write :

"Although this material uncertainty exists, the Directors have a reasonable expectation that the Group and Company will have adequate resources to continue in operational existence for the foreseeable future and have therefore concluded that it is appropriate to adopt the going concern basis in preparing these financial statements."


Their own house broker is finncap and I believe they had it confirmed from the group that there was no need for fund raising.

Today's good news just derisked Amergin a lot further .... the structure is the same as barryroe. Any farm out will mean back payments to LOGP for their share of costs incurred for the 3 licences.

sopavest 12 Jul 2012 , 7:17pm

@cityvoiceuk

I take your point, but LOGP certainly doesn't have the money needed to proceed with any of its other licence areas so does need a partner/funding. This isn't true of all explorers.

You're right about Amergin, though, LOGP's other prospects are looking increasingly attractive.

We shouldn't have long until we find out - an update on funding is due towards the end of the month and PVR is due to provide an update on Barryroe at the end of July too. Given the recent share price action, something may be afoot.

Regards, Roland (article author)

Disclosure: I now own shares in Lansdowne Oil & Gas.

curde 21 Jul 2012 , 8:25pm

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