Jersey Oil & Gas deal is being overlooked by investors

UK North Sea-focused upstream oil and gas company Jersey Oil & Gas (JOG:277p) has announced a farm-out of its GBA licenses to NEO, a major UK North Sea operator producing 90,000 barrels of oil equivalent per day. NEO is backed by HitecVision, a private equity investor focused on Europe’s offshore energy industry with $8bn (£7.1bn) of assets under management.

In exchange for divesting a 50 per cent working interest and operatorship in the GBA licences to NEO, Jersey will receive a full carry on 12.5 per cent of gross project development capital expenditure to Buchan first oil (this element is worth $125mn); full carry on its share of FEED expenditure to Final Investment Decision (worth up to $12.5mn); $2mn on farm-out transaction completion (likely in the coming months); $9.4mn on confirmation of the development plan (likely in the second half of 2023); and $12.5mn on project FID (likely in the first quarter of 2024). Jersey will also receive a further $5mn on FID on each of its J2 and Verbier discoveries. Moreover, management plans to farm out a portion of its 50 per cent retained stake, with a target of ultimately holding a 20 to 25 per cent interest on a fully carried basis.

Analyst Daniel Slater at Zeus Capital values the 12.5 per cent interest on which Jersey will now be fully carried to first oil at 374p per share on a risked basis, or 468p unrisked. Assuming the company achieves similar terms to the NEO deal on a farm-out of its remaining stake to retain 22.5 per cent, Slater values this additional 10 per cent retained stake at 241p per share risked, or 344p unrisked. After adjusting for valuations of the J2 and Verbier discoveries, the upfront cash payments under the NEO farm out, and factoring in Jersey’s current net cash of £6.5mn, Zeus arrives at a total risked NAV per share of 703p, or unrisked NAV of 952p.

It looks a cracking deal that significantly de-risks the investment and should drive material share price upside once investors fully digest its full implications. The muted initial response – an 8 per cent fall, although the shares had almost doubled in the past week – is a repeat buying opportunity. Buy.

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