Simon say's29 Mar 2022 19:55
arkmead (PMG:51p), a well-capitalised UK and Netherlands focused energy group, is ideally positioned to profit from the European energy crisis and the UK government’s pressing need to improve the country’s energy security, too.
Dutch Title Transfer Facility (TTF) gas prices more than trebled to an average of €73 per megawatt hour (MWh) in the second half of 2021, peaking at €160 per MWh earlier this month. This has had a dramatic impact on the profitability of the group’s unhedged low-cost onshore gas portfolio in the Netherlands. With the benefit of a low operating cost of $8.6 per barrel of oil equivalent (boe), and average netbacks of $73 per boe, this business reported a gross profit of £3.8mn on revenue of £4.6mn in the latest six-month period.
Post results, analysts at house broker finnCap raised their gas price assumptions from €50 to €70 per MWh, which largely explains why they upgraded their group revenue estimate from £8.6mn to £11.55mn and pre-tax profit estimate by 69 per cent to £6.4mn. However, Dutch TTF prices have settled at a spot price of €108 per MWh, more than 50 per cent above the level embedded in those forecasts. As Europe looks at alternative sources of LNG to wean itself off Russian gas imports, then wholesale prices are likely to stay at elevated levels.
Furthermore, Parkmead and its Dutch partners are planning a low-cost two-well drilling campaign (€2mn-€3mn net combined cost) which has a high geological chance of success (40 to 49 per cent) and is targeting 37.3bn cubic feet of gross gas reserves. If successful, the prospects offer a fast-track tie-in opportunity.
In addition, the economics of Parkmead’s Greater Perth Area (GPA) project in the UK Central North Sea has dramatically improved following the 45 per cent oil price surge to $115 per barrel this year. With the potential to deliver 75mn-130mn boe on a P50 basis, the net present value of the project increases by £130mn (115p per share) for every $10 per barrel increase in the long-term $60 per barrel oil price assumption.
Bearing this in mind, the directors are assessing draft commercial offers for a tie-back of the GPA project to the Nexen-operated Scott platform which would reduce the capital expenditure required and lower operating costs.
It’s worth noting, too, that Parkmead’s newly acquired Kempstone Hill Wind Farm in Scotland will benefit from a new power purchase agreement from the third quarter this year, so will profit from the large increase in electricity prices through an attractive index-linked Feed-in Tarriff.
Strip out net cash (£19.3mn), Kempstone Windfarm (£4.3mn) and Pitreadie Farm in Aberdeenshire (£6.2mn), and Parkmead’s operational businesses are in the price for £25mn, or 3.5 times annual operating profit forecasts. The shares have rallied 20 per cent since I highlighted the opportunity (‘On a war footing’, 28 February 2022), and a revisit to last autumn’s highs (64p) and beyond looks a distinct possibility. Buy.
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