If you have any interest whatsoever in making money from FTSE 350, small cap and, mainly, AIM shares you want free share tips from experts. We send you one tip, each weekday morning. Unsubscribe anytime.
We are not a broker, we don't want your phone number, no salesman will contact you – we just provide free and informed comment and analysis on everything from small caps ('penny shares') and AIM stocks up to FTSE100 and FTSE250 blue chips. Our primary focus is on AIM and small caps but we look at value investments, growth stocks and also shorting opportunities. Our five comprehensive reports a week are all researched by a team of expert analysts who meet the CEOs of hundreds of quoted companies every year and look at markets daily.
The recent equity fundraise at Jadestone Energy (JSE) came as an unexpected and nasty surprise for shareholders, including myself, as I’d expected that its cash reserves and access to debt facilities would be sufficient to cover the capex for its ongoing oil and gas field developments. Only a couple of weeks beforehand the company had announced that it had secured a new $200 million reserves based lending deal, with a four year term and at an interest rate of 450 points above the secured overnight rate, which has been used to repay the $50 million interim facility, and with the rest of the money to fund its other projects, and in particular Akatara, in Indonesia, where first gas is expected during H1 next year. It seemed as though that would provide the liquidity that the company needed going forwards, so it came as a bit of a shock when it announced last week that it would be carrying out a $50 million equity fundraise, as well as entering into a standby working capital facility of $35 million with its largest shareholder Tyrus Capital. That placing ended up being done at a price of 45p, which although only a small discount to the prevailing share price, was way below where it had traded in recent months. This equity raise wasn’t well received by PI shareholders either, many of whom had invested at much higher prices and felt as though they’d been screwed by the management here. There was also an accompanying open offer of up to $8.3 million, but given that the share price has since plummeted to around 37p on the ask it seems unlikely that any of that will be taken up – not that it is needed and was there to try and placate investors who were unable to take part in the equity raise. Given the reaction to the news and the way the share price dropped, it seems that some have given up here, writing this company off and selling up. But I believe that they’ve likely sold at just the wrong time – unless they are very bearish on oil and gas prices in the short to medium term, and in which case I can see their reasoning, even if I don’t agree with that outlook.
BREAKING: Evil Banksta slams TW omission and says IOG equity is "toast". Read HERE
It is worth noting that as well as providing the standby facility, Tyrus also bought $13.2 million worth of shares in the placing, to maintain its 26.45% overall holding in Jadestone, and that other IIs also took part – FIL significantly increased its stake to 11.53%, from 5.248% prior to the placing. We also need to consider why the company felt the need to do an equity raise, especially when you look back at the fact that not that long ago it had large cash reserves and was generating significant amounts of free cash flow which were expected to cover the capex costs of developing its other assets that weren’t yet at the production stage. The main reason for all of this and the level that the share price is now at has been the major issues that it had at its Montara field in Australia, which was responsible for a significant amount of its output. Despite attempts to fix these infrastructure problems ‘on the go’, in the end the field had to be shut down for a significant period of time whilst the work was carried out, and only recently has it come back online and is beginning to get back to the previously see levels of production – currently it is producing circa 7000bopd. This proved incredibly costly for the company, not only in terms of lost revenue, but also the impact it had on its cash flow and ability to fund its other projects. You could of course argue that the management is partly to blame for this, given the way it was handled and how long it dragged on for, but you also have to remember that this infrastructure was already old when the company bought this asset. If anything, this highlights why there is such a need to diversify its production portfolio so that it isn’t as reliant on one asset as it has been up until now.
#BoycottWickes – the DIY store shoots itself in both feet in Pride Month. Read HERE
Obviously oil and gas prices have also been a lot weaker in recent months, certainly compared to the peak last year, and you could argue that the company should have hedged some of its output at higher prices whilst it had a chance to do so – turning that around though, I have to wonder if the same people would have been upset during 2022 had the company hedged significant amounts of its production at lower prices, only to then see oil trading at well above that level? Whatever your view on hedging, in the future and whilst the RBL facility is in place, the company will be required to hedge 50% of production anyway, and currently has hedges in place at an average price of $70.66/barrel. I get that many investors might have been happy with the company just continuing to produce from its Australian assets rather than expanding and taking on debt, as well as diluting investors via the equity raise, but as we’ve already seen, its recent problems have all been linked to those assets and without any growth potential I doubt it would have the support that it appears to have from IIs, both as equity holders and debt providers. Personally I see this as a period of weakness, as many producers go through at some point during their life as they grow, and whilst some will question whether the Akatara gas development is worth it in terms of the value that the 5,500boepd will bring, I think that it is longer term – currently the construction of Akatara is around 35% complete and on track. Plus of course the reserves there will also give the company access to further RBL funding in the future for its other existing projects (infill drilling is planned at Montara and Stag in the next couple of years, as well as PenMal in Malaysia). There is also infill drilling to come at Sinphuhorm, where the company has net production of around 1,400boepd since completing the acquisition of 9.52% of this asset in February.
It’s easy to dwell on recent events and I can understand people being upset as it’s never nice to see what looked to be a fairly safe share dropping on an almost daily basis. Personally though, all that really interests me now is where it goes in the future and whether or not I am likely to at least get my money back, and hopefully make a profit. Given that next year will see the company producing over 20,000boepd, and with that being spread across seven different producing assets, in different countries, and with the potential for further growth via work at those fields, I think that the company will be in a stronger position. Plus of course there is the possibility that it will add more producing assets as it has regularly made acquisitions which it views as being a good fit to its portfolio. Following this period of intensive capex and growth, in 2025 the company is expecting to generate net cash flow of $75-100 million, assuming oil prices are in the $65-85 range. I had been planning just to keep holding the shares that I already have, but felt comfortable adding some more at 38p, and around 15% below what the IIs paid in the placing. Obviously there is some risk here though and I’d never advise putting all your eggs in one basket, but when I looked at other similar sized producers - Jadestone has a market cap of £196 million - this still looked very attractive to me as a longer term investment compared to many of them. One other thing to bear in mind short term is that Odey Asset Management owns around 6.5% of the shares and has plenty of problems of its own at the moment, although I’ve seen nothing yet that suggests that it will be forced to start dumping its stakes in the companies that it has invested in.
Filed under: Jadestone Energy, Woodlarks, IOG, Wickes, Lift Global, Rob Terry
2023-06-16 12:34:23