A Big Bonus - Northern Petroleum (NOP)
8/1/2010
(119264)
A Big Bonus
Tucked away in plain sight, Northern Petroleum (NOP) appears to have delivered a great big New Year bonus to shareholders. We knew production was about to start at the Geesbrug gas field in Holland, and we knew the Utrecht licence looked promising – but most of us never knew that the three old Utrecht discoveries could be worth nearly 100p a share.
At this point it is tempting to scuttle behind the nearest snowman for shelter as sceptics start throwing things. It seems too good to be true – another gem in managing director Derek Musgrove’s treasure trove. But the figure seems to make sense, even though it is crude and open to revision for all sorts of factors. Whatever, it indicates that there is so much more value in Northern than the market allows, even if the price edged up to 148.5p today.
Check the fifth paragraph in Thursday’s release about Geesbrug. It talks about re-drilling and placing into production three of the old discoveries in the large Utrecht licence in the southwest Netherlands. ‘Combined, these discoveries are estimated at about 217bcf (37.4m boe) in place, 60% to Northern.’
The wording is a trifle ambiguous, but it does appear to suggest 217bcf of gas is in place. I am indebted to the well-informed Hallucigenia on the ADVFN thread for the handy calculation that 1bcf (billion cubic feet) of undeveloped gas has a net present value of about £1m. Take 60% to Northern, and you have £130m, then take 60% recovery (conservative) and you have £78m. That is close to 100p a share.
If you were an analyst, of course, you would then go on to knock chunks off for all sorts of things – risks, the passage of time, changing prices and so on. Until you get this stuff out of the ground, you don’t really know how much of it is there. So play it cool. Forget that there might actually be more than estimated. Cut the notional value by half – you still have an extra 50p of value in solid old Holland, where Musgrove knows the territory and is currently proving he can cope well.
Remember, we are talking about ‘old discoveries’, not blind faith. And we are talking about Northern’s share being 60%, against the current nominal interest of 100%. The Dutch state oil company takes 40% of any production licence, so Northern clearly is serious about getting into production.
This does not yet appear to have been factored in to analyst projections, though I might not have seen the latest efforts. But those boys who have been talking about a core net asset value of 160p to 172p ought perhaps be looking at 200p or more – not that such figures impress the market much.
The basic Geesbrug start-up news is good. Bad weather appears to have prompted Northern to hedge the timing on starting at Wijk en Aalburg and Brakel to ‘this summer’ from March/April, but Geesbrug looks good and there is clear intention to increase production significantly. Geesbrug and Grolloo could generate maybe Euros 15m income for Northern this year, with decent gas prices virtually guaranteed for 2010.
Raising output at Geesbrug ought to be relatively simple. This year there is likely to be no need for extra wells, and the flow rate can be advanced from the existing well. Thereafter the first two or three supplementary wells might be accommodated within the existing site, avoiding permit red tape.
It is assumed that NAM will be happy to process the extra output, but there is a longer term possibility of Northern installing its own gas processing plant and raising margins. Northern will put in its own processing plant at the two other fields as they come onstream later this year, so those margins will be higher.
Results from the long-delayed Tiendeveen well ought to be available very soon. Though there have been real difficulties, the overall result is not necessarily disappointing.
Successful production in Holland provides cash flow for Northern to push ahead in Italy, which offers what directors have long felt to be the most exciting opportunities. As ever, Musgrove will be working on various deals, where he has proved a shrewd operator. There has long been the chance of some deal involving Utrecht, which clearly has substantial value.
Hold tight.
I have a holding in Northern Petroleum.
PS. By all means talk about this report, if you wish. Comment does help this site. But please don’t say too much about Utrecht before our subscribers have had the chance to think about it.
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