A 'Buy And Forget' Oil Share

Published in Company Comment on 13 July 2009

The weakness in the share price of this oil explorer and producer looks like an investment opportunity.

Shares in heavy oil explorer and producer Nautical Petroleum (LSE: NPE) have taken a bit of a hammering recently after a downgrade by a broker and the slump in the oil price. To my mind, this presents a buying opportunity.

The main reasons for this are the temporary nature of such bad news coupled with Nautical's balance sheet strength and prospects. Investors at today's price are effectively buying a number of exciting possibilities for free.

Thank you Darling

Earlier in the year, the shares were buoyed by the budget which gave big tax incentives to North Sea Oil explorers. This saw Nautical reach the giddy heights of 65p at the start of June before tumbling down to its current level of 44.5p along with so many other oil companies. The shares were north of 250p less than two years ago but unsuccessful drilling, the dive in the oil price, and general market sentiment sent them to an all-time low of 21p last November.

Today the company is valued at a little over £28m. In exchange for a purchase at the current price, investors receive net assets of over £64m, including £21.4m in cash at the last count and a host of interesting prospects. The cash level was bolstered in the second half of 2008 by £11.5m from farm-out deals to other oil companies, of which £7.5m was spent on the continued exploration and evaluation of assets.

Operations

Nautical has various operations mainly in the North Sea, though the company also has interests in France. The main value at the moment lies in the company's Kraken and Mariner prospects -- but other prospects have long-term potential. Nautical's share of Mariner (operated by StatoilHydro) is 23 million barrels of oil (mmbo) though this figure is expected to rise to 44mmbo following a 3D seismic survey which is currently being processed. Meanwhile, the company's share of Kraken (where Nautical is the operator) has 37mmbo net best estimate contingent resources. This is heavy crude oil, but is a lot of oil for the share price, especially taking into account the cash. Kraken is expected to start production in 2011, whilst Mariner is expected from 2014.

At the time of the budget in April, the company told us that it expects the corporation tax breaks announced to enhance the value of its 35% share of Kraken by £56m and of its 26.67% share of Mariner by £43m.

The entire portfolio now totals 24 blocks (18 licences), with Nautical directly operating 12 blocks (8 licences). The company's aim is to secure farm-in agreements at favourable terms and it has a good track record of doing so with some major partners. Nautical's website includes a detailed appraisal of its North Sea prospects and of the commercial challenges of extracting and marketing heavy acidic oil from the area.

"Underperform"

It's not all good news though. Last week, broker Tristone Capital cut its stance on Nautical to "underperform" which did the share price no favours of course; losing almost 18% on the week. Who really knows; they may be right? But this may also present an opportunity for the long term investors amongst us, given the cash position and asset backing, who prefer to let the experts get on with the job -- using a little of our capital to do so.

Investors must accept that exploration is a risky business and any oil explorer is liable to disappoint. But Nautical's share price looks very well underpinned when balancing risk against reward. Overall, Nautical strikes me as a company that quietly makes progress on its operations, winning a few, losing a few, but doing what is required to steadily build good value with sensible farm-in agreements -- irrespective of the vagaries of the share price. And it wouldn't be a huge surprise to see the company get taken out at a price substantially higher than today's.

More share ideas from David Holding:

David holds shares in Nautical Petroleum.

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Comments

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KillerDriller 13 Jul 2009 , 5:27pm

I perosnally think there are a few above Nautical for a buy and forget.

I'd put these way in front:

Ascent Resources
Northern Petroleum
Mediteranian Oil & Gas

JerryLow 13 Jul 2009 , 9:13pm

I would favor the steady dividends of BP and/or Royal Dutch Shell.

http://www.TopYields.nl/Top_100_dividend_yields_1.php

drillernic 14 Jul 2009 , 6:23pm

I'd be careful concerning Mariner- it's a heavy oil field, that Chevron walked away from after a lot of work and due to the large capital outlay required to bring it on stream in the curent economic climate, first oil might be delayed?

That being said, the next decade in the North Sea is likely to be all about heavy oil (Mariner, Brae, Kraken, Bressay futher developments on Captain), so getting a heavy oil specilist cheaply might be a good long term punt?

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