In this article published in The IRS Report in May 2010, John Snowden discusses a new opportunity in the North Sea...

A new opportunity in the North Sea

This month I have found two stocks I consider worthy of a write up. One has been on my radar for over a year while the common factor is that both are newcomers to the stockmarket. One positive fact about the general state of the market and the attitude of investors is that there has been a steady flow of new issues which have attracted investors and started life as public companies at a premium to their issue prices.

Just over a year ago, I noticed that there were a few new company names in my locality. Some years ago I had written about Alphameric, a local company which had done well, changed its spots and done not so well. Two names stood out this time, Fidessa and Petrofac. At the time, the latter's share price was below 400p but by the time I had completed my research, the price was about 50p higher, so I put my notes on this company to one side and chose Fidessa. I am happy to remind you of the 79% gain in Fidessa's shares since my write-up in TIR Issue 293 (March 2009).

Petrofac too went from strength to strength and the share price recently topped 1250p, giving this oil equipment and services production company a market capitalisation of more than £4bn. Earlier in April, Petrofac announced the intended demerger of its subsidiary EnQuest into an independent oil and gas production and development company. This looks like a good second opportunity for investors.

Enquest's operations will focus on the UK continental shelf, aiming to convert contingent resources into reserves and commercialise new discoveries.

The EnQuest exploration and development assets will be combined with the UK Continental Shelf (UKCS) oil and gas assets of Lundin Petroleum AB. The latter declared assets on 1st January last with total net proved plus probable oil and NGL reserves of 80.5m barrels.

EnQuest will acquire the Lundin interests in the Heather, Broom, Thistle and Deveron fields which will be combined with the Petrofac, now Enquest interests in the Don Southwest, West Don fields and the Elke discovery. The combination of these interests will offer growth opportunities through low-risk drilling near existing fields rather than higher risk drilling exploration opportunities.

The new group will have interests in 16 production licences covering 26 blocks in the UKCS of which 15 will be operated by Enquest. The assets contributed by the two companies will be on a debt free, cash free basis and will have a strong management team with offices in London and Aberdeen with approximately 220 employees. The team will be headed up by Amjad Bseisu, the current chief executive of Petrofac's Energy Developments Business Unit who is now CEO of Enquest. A duo are joining from the Canadian company Talisman Energy, James Buckee as nonexecutive chairman and Nigel Hares as chief operating officer. The Petrofac team is strong on facilities management and execution while the Lundin team excel at reservoir management and geology. This should enable an increase in the amount of oil recovered from the reservoirs and give opportunities for selective acquisitions and new joint venture agreements.

The new company will be 45% owned by Petrofac shareholders and the 55% owned by the Lundin family will be reduced to 30% after they sell a portion of their holdings in a secondary listing to increase liquidity. Annual output growth is targeted at 10% for the next three or four years using the end-2009 yardstick level of 13,260 barrels per day.

Cash flow will come from Petrofac's Don oil and gas fields and the cash will be recycled into the Lundin fields which need additional investment but are likely to produce a higher eventual income. Debt facilities for the new group are being negotiated and Petrofac will also contribute significant tax losses, which can be offset against future profits.

The UKCS represents a significant hydrocarbon basin in a low-risk region. The infrastructure already installed is extensive and there is plenty of skilled labour available. The technology to drill to greater depths has improved greatly over the last few years and extraction of oil and gas at the current prices is highly profitable. EnQuest aims to widen investor interest by seeking a listing on the OMX Stockholm exchange and also on NASDAQ, which must be regarded as positive for the future.

You can see all of John Snowden's articles at www.TheIRSReport.com

John Snowden is a regular contributor to The IRS Report.

Call 0800 756 5437 or click here for more information.