Jersey’s flagship project still on track – despite delay

Shares in Jersey Oil & Gas (JOG:125p) lost 16 per cent of their value after the North Sea-focused upstream oil and gas company announced that the timing for achieving key milestones and project sanction on its flagship Buchan field development project will depend on the result of the general election and securing fiscal clarity. Jersey retains a 20 per cent fully carried equity interest to first oil in the project, which are to be approved in the Field Development Plan (FDP).

While the Buchan operator, NEO Energy, is making good progress on advancing the work programme required for FDP approval by the year-end, project sanction is dependent on securing fiscal clarity from the next UK government and ensuring that the project remains financially attractive.

Completion of the necessary engineering work is on track and the first offshore survey was completed in May, obtaining the geophysical data used for the subsea and drilling rig contract tendering process. Work is also advancing on completion of two key workstreams: the subsurface studies required to finalise the drilling programme and operational verification; and preparation for the handover of the floating production, storage and offloading vessel to the Buchan joint venture. 

Following the receipt of fiscal clarity and subject to FDP approval, the major contract awards and capital commitments for the project are now expected in 2025, which leads to Buchan first production being targeted for late 2027. Under the current fiscal policy, the project’s valuation does not materially change as a result of the later first production date. Analysts at brokerages WH Ireland and Zeus Capital are maintaining total risked NAV estimates at 705p and 617p, respectively, while Cavendish expects to reduce its 534p a share valuation by less than 5 per cent.

Project still expected to go ahead

Analyst Brendan Long at WH Ireland expects that “the fiscal policy for the UK North Sea following the UK general election will be favourable for domestic energy security, HMRC tax revenues, UK jobs and the production of energy on a low carbon emissions basis. We anticipate the UK Government will provide fiscal clarity such that the operator of the Buchan redevelopment will have sufficient confidence in the fiscal regime to progress with project sanction.”

Long also adds that the Buchan field is overwhelmingly the best undeveloped oilfield of its kind in the UK North Sea in terms of it being of considerable scale and low-risk. Specifically, the field is estimated to contain 70mn barrels of oil equivalent (95 per cent oil) and benefits from 36 years of production history. Moreover, its petrophysical characteristics provide high confidence that the reservoir will respond favourably to a water flood strategy. The point is that the Buchan field has always had, in Long’s opinion, the odds stacked overwhelmingly in its favour – that hasn’t changed.

It’s a view shared by Daniel Slater at Zeus Capital who notes that although the introduction of the UK EPL tax regime in 2022, alongside somewhat nebulous comments from the Labour Party as to its attitude to UK oil and gas taxation, has created an element of uncertainty for new investments in the sector, Labour will find it very challenging to take a decision to make UK oil and gas taxes even less favourable than currently.

Jersey remains well funded

Importantly, Jersey remains fully funded with a cash position of over £13mn (39p) and a forecast annual base cash spend of £3mn. The Buchan project remains fully carried to FDP with a further $20mn (47p) payment due to Jersey following approval by the North Sea Transition Authority of the Buchan FDP and receipt of the associated regulatory and legal consents.

So, having viewed the investment case positively when I covered the annual results (‘Jersey Oil & Gas still has multi-bagger potential’, 13 May 2024), I feel that investors have massively overreacted to today’s announcement, which formalises the joint venture partners position relative to the forthcoming election and ultimately the UK’s oil & gas fiscal regime. I would not be selling the shares ahead of a likely autumn budget which should provide the fiscal clarity needed for the project’s partners. Hold.

■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.ypdbooks.com at the special discounted price of £5 per book plus UK P&P of £4.95, or £10 for both books plus UK P&P of £5.75, subject to stock availability.

They include case studies of Simon’s market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the content of the books can be viewed on www.ypdbooks.com.