Figuring Out West Newton - (RBD)
Figuring out West Newton
Look. This is silly. These shares are simply too cheap. No matter that the market price is always right, sitting as the balance between buyers and sellers, sometimes they just get out of whack and grow too high to make sense, or stick too low for logic.
Such suggestions are normally foolhardy, born of wishful thinking or an over-extended position. Experience has taught me arguing with the market rarely make sense. And yet…
Reabold Resources (RBD) barely moved as around 400m were traded yesterday and the price closed at 0.92p to 0.95p. Union Jack Oil (UJO) actually fell a fraction to 0.23p to 0.235p as over 600m changed hands. Yet the pair shared the applause from a brilliant announcement that further evaluation of the West Newton prospect on Humberside had confirmed that there was probably much more oil and gas in the Kirkham Abbey formation than had previously been assessed.
There are no absolute guarantees, mind. This is normal hydrocarbon exploration stuff, pretty sophisticated and probably a little on the cautious side, but always subject to unforeseen problems and so on. Good enough, though, for anyone who understands that share trading is a form of gambling.
Trying to translate the likely reserve numbers into hard cash per share per company is tricky. It amounts to taking the figure you first thought of, knocking chunks off for this that and the other, and then crossing your fingers. By the way, today’s news comfortably justifies my estimate back at the end of August that this was a billion pound well.
What follows is an attempt to estimate reasonable values of today’s potential reserves to Reabold, and to Union Jack, using both the stated base case figures then the upside case.
The basic assumptions apply to both companies, and while some analyst estimates will use slightly different but reasonable assumptions, these are derived from sources with experience of such things. This is not an exact science.
Base case 146m barrels of oil, assume 20% recoverable, so 28m barrels worth a notional $15 barrel in situ – value $420m.
Base case 211bn cu ft gas, assume 60% recoverable, so 126m cu ft equivalent to 13m boe at $15 –.
Base case value gas oil plus gas $615m, or £470m taking sterling at $1.30.
Upside case 283m barrels, 20% recoverable, so 57m barrels worth a notional $15 barrel in situ – value $850m.
Upside case gas 226m cu ft, 60% recoverable, so 135m barrels worth a notional $15 barrel in situ – value $202m.
Upside case oil and plus value $1,052m, or £770m with sterling at $1.30.
Once again, these calculations put a base case value of West Newton at £470m or an upside of £770m.
At 0.95p the market value of Reabold is £63.5m. At 0.23p, the market value of Union Jack is £28m.
As it stands, Reabold will hold almost 40% of West Newton via Rathlin. That would be worth a notional base case value of £188m, or £308m on the upside case. There could well be more to come. Reabold is currently negotiating a share swap deal with private equity holders of Rathlin, the operator at West Newton. If that is resolved – and the snags are in constructing the deal, not a dispute over values – it could lead to Reabold owning 50% (a rise of 10%) in West Newton. That would add significant extra value to Reabold’s interest.
Union Jack has 16.665% of West Newton, so would hold a notional £78m at base case, or £138m upside.
This, though, is not the end of the discount story. Whether or not the two rumoured big name companies are already sniffing around West Newton as buyers, no buyer will expect to pay pound for pound to buy into value. They will want a discount. What that discount might be is one more matter for speculation. Talk to those in the business and you get guesses that the buyer would expect to pay between 25% and 50% of the notional value. But we are talking here of notional values which have already been discounted heavily as we go through the sums – we assume a lowish 20% recovery where a 25% recovery would make a big difference to values, and $15 per barrel in the ground for oil selling at $60.
Assuming the sellers could get buyers to pay 40% of the notional value in the ground, that would mean £75m base or £123m upper to Reabold. At Union Jack, it would mean £31m to £55m.
When you get right down to it, with all of the bits and bobs snipped off, the numbers seem quite low by comparison with the potential gross value of the find, and the current market ratings of the companies. But on this conservative rating, both have well in excess of the current capitalisation in West Newton.
These values ought, indeed, to prove modest. The West Newton licence covers a large area. Current reserve estimates include nothing for the related Cadeby prospect. That is deeper than Kirkham Abbey, on which these projections depend, and it could add startling value. There has been an estimate that it could be worth $850m gross with a 24% chance of success. It would be wrong to overstate it, but subsequent work has added to the promise of Cadeby and raised the chances of success.
In addition, there are two more largely unexplored prospects with the licence. There is hope that at least one of these will prove commercial, and while they are unlikely to be drilled before any sale, there should be some seismic work to indicate value. There will be two wells, drilled back to back in the first half of next year, to continue to delineate what is there in West Newton before anything is sold to a major company bidder. So when it comes to a deal, the assets in the pot might amount to considerably more than there is now, so it is very early days to be making a serious stab at take-out values.
It is important not to get carried away with what might be – onlookers have already started talking about a $2bn or $3bn gross value – but the figures outlined above deliberately take a conservative view. Nothing is certain yet, though with each passing piece of news the downside begins to look limited, and there could yet be a great chunk of upside.
Go back, too, to the basic values of Reabold and Union Jack. It is easy to become transfixed by the West Newton bonanza. But Reabold has a whole string of valuable assets (some producing) in and around the UK, Romania and California. They could be worth at least the current share price on their own. Union Jack is excited by the chance of something big at nearby Biscathorpe, and planning delays appear to be coming to an end at Wressle, opening the way for what could eventually be $3m a year of cash flow and a move into profit.
The disappointing share action today probably illustrates the risks with Reabold and Union Jack better than business basics. Both are subject to fun and games in the market, with heavy volumes intermittently involved in speculative trades. One small institution supposedly required to shift out of smaller stocks is thought to have been a seller of Reabold in recent weeks for no reason other than a switch in trading style, while both are reckoned to have been flipped around by sizeable trades from one notorious share gambler.
Given time, the strong fundamental emerging at West Newton ought to ensure that both settle at significantly higher levels, but it is hard to know quite when that will happen. At short while back, it seemed time was running out to buy at bargain levels. Now we have had a cracking announcement of progress, yet both share prices still languish. It is tempting again to suggest current levels afford the opportunity for bargain buys (my conservative figures above hopefully underline that there is room for appreciation even on a cautious basis). Go for it.
I have a holding in Reabold Resources.
NB. Our bulletin board contains posts today with broker comments on Reabold and Union Jack.