Today's Small-Cap Oil Buy

Published in Company Comment on 16 March 2012

A higher-risk opportunity for small-cap oil punters.

Yesterday's announcements from Providence Resources (LSE: PVR) and Lansdowne Oil & Gas (LSE: LOGP) confirmed the oil and gas potential of the Irish Sea. They also confirmed my belief that SeaEnergy (LSE: SEA) provides an attractive high-risk, high-reward route into this region's oil and gas business.

Lots of high-quality oil

The announcement yesterday confirmed the presence of high-quality light, sweet crude oil -- the most valuable kind -- in the Barryroe Well in the North Celtic Basin Area of the Irish Sea, 50km off the coast of Ireland. This is jointly owned by Providence (80%) and Lansdowne (20%).

The test well achieved a stabilised (sustainable) flow rate of 3,514 barrels of oil per day (BOPD), almost twice the target of 1,800 BOPD, the level necessary for the find to be commercially viable.

Gas is also present and testing for gas flow rates will start shortly, which could lead to further good news.

Limited downside, 100% upside?

SeaEnergy owns a 24.68% stake in Lansdowne Oil & Gas. Lansdowne's current market capitalisation is currently about £68m, valuing SeaEnergy's stake at around £17m. What's more, SeaEnergy's last accounts carried cash of £27m, and no debt.

In contrast, SeaEnergy's current market capitalisation is just £22m at 32p, meaning that as long as Lansdowne continues to prosper -- and the cash pile is not wasted -- there is solid support for the group's share price at around double its current value, limiting your downside and offering good possible upside. Many Fools have spotted this valuation opportunity, too.

SeaEnergy vs Lansdowne

All three companies involved in the Barryroe field saw their share price rise yesterday, but Lansdowne's dropped back immediately to close to its previous level, suggesting that the market believes most of the good news was already priced in.

However, Lansdowne will undoubtedly make big gains if the Barryroe well makes it into production, so it could be a reasonable investment for the longer term.

On the other hand, any rise in Lansdowne's value should be reflected in SeaEnergy's shares; the key decision is whether SeaEnergy's other oil interests are likely to add or detract from this over time.

The potential is there -- SeaEnergy also has interests in Iraq, Bulgaria and the North Sea -- but the prospects are currently quite uncertain. Indeed, there's a chance the cash hoard could be wasted entirely on dud wells and other fruitless developments.

Decision time…

Investing in small-cap oil and gas companies is risky and you need to do your own research first. Depending on your assessment of each company's valuation and prospects, you might decide that Providence or Lansdowne make a better investment than SeaEnergy.

However, I believe that if you truly want a high-risk, higher-reward punt, then a small investment in SeaEnergy might be the way to go.

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Comments

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Oddsoxer 16 Mar 2012 , 1:53pm

SEA is only indirectly an oil and gas company. I think the article should have stressed that "The Group's legacy oil and gas assets are not deemed to be core to this business but whilst there remain some near term value accretive opportunities further investments may be made" and that "The Company will seek to realise the value of these holdings in due course."

The companies strategy now clearly lies in support for offshore wind, and whilst is is quite possible that they might waste this cash pile, it is unlikely that they will be wasting it on drilling as the article suggests. 10p is earmarked to be returned to shareholders after the AGM. One downside is they may however have to support any cash call from LOGL.

Its investment in Iraq has a nil value in SEA balance sheet and the company only has an limited upside up to maximum of US $20 million from their Montenegro interest which was sold to their former Chief Exec.

Having said that, I agree completely with the valuation case and in fact think its a lower risk/high reward scenario. (Disclosure - hold)

sopavest 16 Mar 2012 , 2:50pm

@Oddsoxer,

I take your point about SEA's future plans to develop an energy services business, but this seems to be in very early stages at present.

Given the size and potential future value of SEA's stake in LOGP, it seems a little disingenuous for them to claim it's not a part of their core business.

Thanks, Roland (article author)

mrj111 16 Mar 2012 , 3:39pm

I am trying to remember what the history of this oil discovery is, but I think the previous owner tried to develop the field and did a long term test which showed that the production rates fall off rapidly. Two possible reasons; the high pour point and the reservoir is naturally fractured and early production (which a well test would be) is good, but these fractures get produced quickly, say over a few months and the flow rate drops to noncommercial rates. Therefore to develop this field will need a lot of expensive subsea wells. Unless they have a way of keeping the rate up?? They quote the P50 reserves of 59 MMBO but I would like to see the RPS independent proven P90 reserves number. There is a lot of inplace oil but the problem is how to economically get it out. I hope they have a solution as Ireland needs the revenue.

Being valued at £240m I would prefer other small oil that are actually producing oil, eg Valiant, VPP, Premier, Enquest, all of which have similar development opportunities on their books but only valued on their producing assets.

The market always loves a story...

Being Irish I hope they can make it work.

Please correct me if I'm wrong

15551 16 Mar 2012 , 4:50pm

I'm thinking about New City Energy IT. Has a portfolio of small oil companies. Any thoughts?

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