The AIM market has been called many things over its 25 years, but rarely risk averse.
The junior market’s caricature frontier capitalism has been particularly prevalent among the oil exploration stocks.
While there are notably fewer truly ‘transformational’ exploration stories than in the past, some do still exist and few opportunities presently seem as underappreciated as Cluff Natural Resources – soon to be renamed Deltic Energy.
Cluff is presently priced at a big discount to its cash holdings and an even bigger discount to its net asset value. Meanwhile, the funding position is secure and sufficient to cover current needs.
Cluff Natural Resources is a small cap explorer focussed on the North Sea, where it is targeting gas resources in the vicinity of existing infrastructure
It is a small cap explorer focussed on the North Sea, where it is targeting gas resources in the vicinity of existing infrastructure.
The company has a partnership with one of the largest oil and gas companies in the world, and, this partner, Royal Dutch Shell, is committed to drill at least two high impact wells in the coming years.
Success in either well will be an instant game-changer for the company. In the meantime, there is an immediate value gap, £13million cash in the bank versus a £9.7million value (at a share price of 0.68p) in the market.
‘One of the key challenges is the relative value that is attributed to the company,’ says chief executive Graham Swindells.
‘We’ve got the best part of £13million of cash and we’re trading at a fairly significant discount to both cash and the best part of an 80 per cent discount to net asset value.
‘Hopefully when people look at that it represents a compelling value proposition.’
‘We have some pretty major catalysts there, success in any one of those wells would represent a transformation of the company and its value.
‘So, the key message is, fundamentally we are significantly undervalued. Particularly given the portfolio that has a number of different potential catalysts.’
Those catalysts include the partnership with Royal Dutch Shell, where the company is advancing the Pensacola and Selene prospects, which are slated for drilling in 2021 and 2022 respectively.
The company is also shoring up its exploration portfolio with a separate farm-out process for the Dewar prospect, along with the Cupertino and Cortez prospects which are still being advancing technically and could potentially be brought into the upcoming farm-out.
There may soon also be a boost in the UK government’s pending licensing round awards, results of which are anticipated during the summer.
The company has applied for multiple licences in the 32nd round and, if new acreage is secured, the company will aim to replicate what it achieved to date with its existing North Sea licences.
Coronavirus has, among other market-specific factors, sparked huge volatility throughout the oil industry and the dramatic swings in crude prices have led to massive trauma for oil producers.
Capital budgets have been cut to the bone practically everywhere and dividends, which stood sacrosanct for decades, suddenly have been slashed.
The company has a partnership with Royal Dutch Shell, which is committed to drill at least two high impact wells in the coming years
Plainly, a lot of investors are in ‘risk off’ mode and as such small cap exploration is likely low on many lists of priority.
Nonetheless, this North Sea company is presently de-risked in ways that other explorers are perhaps not.
Firstly, the company’s funding position is solid and secure. It had some £13million at the end of December, by the end of the first half most of that remained intact.
Quality partnering is always another important facet for small cap explorers, and, few come with the resources and expertise as Shell – especially in the North Sea where the Anglo-Dutch major is increasingly one of the few remaining tier one operators.
Shell’s presence is naturally an important validator and endorsement for the company’s business strategy.
The fact that the team instigated the venture and then brought in such a high calibre partner should bode well.
Moreover, it positions the company ideally for a strategy which emphasises project origination and exploration rather than being just another junior with field development aspirations.
All of which marks the company as one of only a handful of standout oil and gas opportunities presently on the radar in what is otherwise a challenging and scarce market for investors.
This is one to watch more closely over the coming months.
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