Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
JOG was a punt in 2017, it was option value.
But we now know the final share count to first oil (well, the max number, they could reduce it...), which in 2017 and 2019 we did not.. Management is now in control of its destiny, barring a bid, and able to accelerate the path to profit without recourse to equity. Trying to finesse when to own is likely to become a risky game. Patience will out...
The optionality available to the Board now is immense. Suppose JOG does an RBL once we are past FDP against its carry……
So now we need the Board to review investment opportunities and the very best deployment of surplus cash is share buyback. I reckon they can buy back 20% …..
.. incidentally the analogy about arriving in Guernsey not Jersey is about right - Jersey, at high tide, 44 sq miles plays 27sq miles....
... it is Albert.
Up to now, it has been a stock needing faith that management could find a partner to help unlock a valuable asset. And whilst we have known the expected net present value of the total field based on $65 oil if they succeeded, we haven't known the end share count (neither how much of the CAPEX we would be left to fund, how much of the equity we would retain, or what discount would be needed in the share price to raise the capex needed...), we didn't know the the timing with any certainty, or the percentage of the NPV we would be left with.
We now know, with a decent degree of certainty that our worst case is 12.5% free carry ie with no new shares issued, our base case surely is no worse than someone matching NEO terms leaving us 20% free carry with no new shares (because with no CAPEX the cash in-bound will cover running costs even if you take, as some in here do, a dim and in my view unduly jaundiced take of the Board's future remuneration) , leaving shareholders with 20% of the NPV (but to this we add back the 20% capex others will pay and we don't have to). This goes up at 10% a year because it is an NPV and the discount unwinds....so if NPV is $1bn, and capex is in the range $0.75-$1bn, our share is $200 + $200 / fx1.25 / 35m fully diluted shares (count the options issued) = £9, and this goes up 10% per annum as the NPV discount rate unwinds.
With an extra $16 oil price ($81 not $65) over assumption, on a worse case 100m barrels, and at 78% tax if Labour do their worst = another£2.00+ a share. add Verbier (x25%), give no value to licences beyond, and you can have the tax losses for nothing.
Re-rating to this means the expected return on the shares will be 10% per annum - if we conclude this isn't enough, and we want 25% per annum, then unwind £9 forward at a 10% for three years, then discount back at 25% for three years, surely enough reason to continue to own the shares, we get £9 unwound at 10% per annum for 3 years = £12 / 1.25^3 = £6, with the $81 not $65 oil thrown in for free, and its Christmas, you can have Verbier and the tax losses for nothing too.
Feel free to think we have arrived, perhaps some are happy to get off the boat in Guernsey, let others travel the next leg to Jersey, I'm sure there will be takers once the emotion settles.
"...well 8 or 9 thats just fine..." - Beautiful South's perfect 10....
...standard non-deal roadshow.... pretty much all companies do them after announcing major news...
$250m would indeed be a good deal for a buyer and cheaper than a farm-in - £6 a share. To be equivalent to Neo's price you also should add the cash due to JOG from Neo, and pro-rata would be due to be paid by a prospective farm-in partner, and a value for the deferred tax losses - so more like £8-9 .... I think an offer of £6 far from being an amazing price for shareholders would be a case of leaving far too much on the table...
Bear in mind also NEO has jumped at the chance of paying the equivalent of £6, hoping or expecting to make the normal industry target 3x money in 3-5 years after allowing for the risks of a Labour Government and a lower oil price....
I imagine amongst the board's biggest concerns is trying to prevent being taken out too cheaply.
Fingers crossed a few of the institutions the board are going to see later this week see the opportunity presented by the rather skittish collection of jumpy small holders.
possibly Nobby31, but if we have inflation, oil will stay above $65. Another $10 adds nearly 50% to oil revenue vs model.... you probably only need $3-4 over $65 to fund 50% overspend on CAPEX based on a low-level reserves...
If NEO make no money on this, ie invest $625m and get $625m back (ie we write the NPV of Buchan down to $$250m from $1bn) - $1bn of NPV is a net present value after spending $1bn Capex, so $1bn goes out and $2bn of future discounted cashflow comes back), then JOG, before anything else, puts up the $375m to get $625m back / then JOG is worth $250m at NEO's in price (£5.70 a share if NEO make $0 / IRR 0%). NEO will target double your money in 3-5 years. If we take the low end, and NEO expects 2x money in 5 years (IRR 15% unlevered RoE), then JOG in 5 years is $625m x2 - $375 share of CAPEX / $1.25 FX rate, 40m shares in issue (assume we get more dilution) = £17.5 a share = 47% annualised return for 5 years owning JOG here. That's NPV, so if the discount rate is 10%, then this goes up by 10% each year on top.
I think JOG is now in play, it's too compelling to the many more with smaller pockets than NEO who couldn't take on the operatorship or fund the full $1bn Capex.
...don't think there are any allotments pertaining to Castle Quay....
...should read possible PE suitors... i'm not an insider, just observing PE activity in the North Sea has picked up....
oil up $5 since end of September. so humour me, what is the October oil price move worth per share...
172m barrels of proven resource (we'll ignore the rest...) - assume 50% of the project goes to a farm out partner. Assume 30% tax (taxes are going up...). Translate into £ and divide by 32m shares. £7 uplift.
So suppose even that the number of shares will increase 4-5x in raising the capital in dilution as the capital (assume farmout contribution and debt is only 50% of required capital), and all the rest is equity raised at the current price = $250m new equity / 1.35 £$ / £1.70 share price = 109m new shares... so the oil price rise in October alone is £1.60, lets not call this worst case, but its certainly a conservative case.
...so the current share price values the entire project at only the net benefit of October's oil price rise, and the value of the entire project at the end of September at zero.
Alternatively, a prospective farm out partner could pay £14 a share (£7 was for 50% remember..), and they are only paying for the incremental value of the October oil price rise, and get the entire project, 100%, priced on $78 oil, for nothing. Plus all of the prospects, possibly the same again. Do we think one of the many PE suitors might not work this out...?
I’m no expert, but buchan is nice sands, conveniently near Aberdeen, straightforward, loads of data and knowledge. HUR I believe is shale off Shetland and I think their raise was a function they couldn’t find anyone to farm out to? Feel free to correct me... good luck to Hurricane, I hope it works, but it’s a different risk of execution. If the public market doesn’t want to value JOG there is a world of dry powder in private equity who will take an interest. And I suspect the other licences awarded weren’t applied for without reason.
August