Why Jersey Oil is still an ‘extraordinary buying opportunity’

It’s not every day a share multiplies fourfold in just one day, but AIM tiddler Jersey Oil & Gas (JOG) has joined this exclusive club with an incredible rally following the discovery of oil at its North Sea Verbier Sidetrack Well.

Initial estimates from operator Statoil suggest the well, based in the outer Moray Firth, contains anywhere between 25 million and 130 million barrels of oil. Additionally, Jersey tells us, “this discovery provides valuable information to help better understand the prospectivity of the licence area”, which also contains the Cortina prospect and Meribel lead. JOG has an 18% working interest in the license.

Jenny Morris, vice president for UK exploration at Statoil, said the find shows sidetracking the well was “the right decision”. “This discovery proves that there could be significant remaining potential in this mature basin,” she added.

Broker WH Ireland said the fact this is the only truly meaningful development for Jersey since initiating coverage in January, suggests “the market dynamics have created an extraordinary buying opportunity”. It slapped a 441p target price on the stock.

Investors took the hint and Jersey shares surged as much as 435% to over 300p. Jersey’s still trading well below the record high reached in April after drilling of the well was announced.

A setback occurred last month when the drill failed and JOG said it did not expect a sidetrack to be forthcoming and that the well would likely be plugged and abandoned. Alongside this, another of its interested prospects encountered no hydrocarbons and was abandoned.

That had a “preponderantly negative effect on the share price”, WH Ireland’s Brendan Long points out with the stock initially plunging two-thirds to 75p from 220p the day before. Today’s news supersedes that failure, in Long’s view.

It’s a big turn of events for Jersey and, while many investors will still be nursing paper losses had they bought above £3, things are starting to look up. Now, it’s “a strong-conviction buy” for Long. That’s “due to an attractive valuation for buyers today combined with the company’s positive value creation trajectory”.

His price target, which implies further upside of almost 50%, is based on the mid-point of the potential find, 77.5 million barrels of oil, which results in a 588p valuation. “However, to reflect the early stage of the analysis we have included only half of that value in our TP,” explains Long.

He further adds 141p for the Cortina prospects, “reflecting circa 15% of the best estimate success-case valuation based on our assumptions”.

Long hopes his estimates are conservative, meaning there could be plenty more gains to come. That said, it’s bound to be a rocky road and he admits it will take time for the market to fully recognise the materiality of the discovery.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.