Jadestone – LON:JSE

Assets

Montara: Located in NWS Australia, is the main asset of JSE. It is made up three parts: Montara (H1,H2,H3,5H,6H), Skull (10,11) and Swift (N1,2,Swallow). Overall they produce an average of 13000 boepd, including 3kboepd from 6H (the newest one). Montara is an offshore location working with an FPSO, having a lift every 2 months on average. Its Brent is sold at a premium of $3-4 and the asset has a significant natural decline (10-15%). The average production on 1H22 was 7500 bbl/d (even with a problem in a turbine in March). At the moment, the entire production is stopped and there is no clear guidance about when it will be restored (we expect Jadestone to publish more specific guidance in the next few days). The issue is that an internal defect was identified in a ballast water tank on the Montara Venture FPSO. They need an external agency to verify that everything is correct after doing the repairs. Our thoughts are (based on our interpretation of the information published) that solving this issue was going to take 2-4 months, so it should be working in December (mid-point). We believe that this is the real catalyst that the share price is waiting for.

Stag: It is also located in Australia (offshore). We think that it is the best asset of Jadestone. Although it only produces around 3000boepd, its decline rate is lower than Montara and produces heavy sweet crude oil, which is sold at a Premium >$22 (at the moment). Now it has an infill drilling campaign underway, with the first well now at the completion stage and the second well soon to reach the reservoir interval. This campaign is expected to increase its production by 1200-1600 boepd. Its lifting is sold at the spot price on lifting day (in Montara the spot price is fixed one week before and we believe that NWSO works the same way as Montara)

PenMal: Acquired in 2021, this asset produces 6000boepd also sold at a premium of around $3. However, 4900boepd are from assets operated by Jadestone and 1100 boepd are from non-operating assets. The non-operating assets suffered a problem and as the decommission date is 1Q24, we believe that there are not going to produce again. Consequently, our estimated production is 4900 from now on. Furthermore, they have identified early infill drilling opportunities on the East Belumut field in PM323, and plan four wells for 2023.

NWSO: North West Shelf Oil is the latest acquisition of Jadestone (announced in July 2022 and closed today). It is located in Australia and the oil obtains a premium similar to Montara assets (Brent + Tapis). Jadestone owns 16.67% of the NWSO assets, producing 2330bbls/d net. It gives Jadestone priority to acquire the stack of other partners if they want to sell its piece. Based on their RNS since they announced NWSO, We firmly believe that they are in negotiations with another owner to acquire its part and increase its exposition to this asset. There are usually 6 liftings per year (650k barrels). The way that it is distributed is that 1 every 6 lifting is entirely for Jadestone. And the next one for Jadestone is in mid-November. Jadestone’s partners are Woodside (50% + operator), Chevron (16.67%) and Mimi (16.67%). We think that one of these 2 players is in negotiations with Jadestone.

Vietnam: Jadestone owns a 100% working interest in two offshore gas blocks in Southwest Vietnam. The two gas fields (Nam Du in Block 46/07 and U Minh in block 51) have 2C resource of 93.9mm Boe estimate. JSE is expected to take the FID decision later this year.

Indonesia: On Lemang, they took the FID on Akatara gas project in June. This field has a net to Jadestone 2C resource of 15.2 mm boe. Akatara is on track for the first gas in the 1Q24. JSE has signed a gas agreement for a Daily contract quantity (“DCQ”) of 20.5 BBtu/d commencing in Q1 2024 (at a Gas price of US$5.60/mmBtu). Jadestone has the intention to fund up to 60% of the project CapEx through debt. 

Maari: Unfortunately, Jadestone and OMV agreed to cancel the deal last week. After more than 3 years of waiting for the approval of the NZ government and a lot of time & money invested in completing the deal. 

Corporate

Jadestone initiated a $25MM buyback program in August. So far, it has bought 12MM shares. Jadestone said that it could increase the buyback program depending on the price of Brent and operations. We believe that because of the Montara issue, the amount of the buyback program will be increased but it will not meet the $100MM capacity they explained in its 1H22 report.

Apart from it, Paul (CEO) said in an interview 4 months ago that he expected to close up to 4 deals in 2022. He closed the NWSO deal, but we think that it is quite improbable to meet the target. We think that they are negotiating several deals in parallel at the moment. However, this type of deals take time, so we would be happy if they announce another one before the end of the year.

Valuation

We have used a DCF model to value Jadestone, with the following assumptions:

• Fields decline rate: 12% YoY decline in the Montara assets, 7% in Stag and 10% in the rest.
• Brent prices and Premiums: $90 in 2022, $80 in 2023, $70 in 2023-2025 and $60 onwards. $10 premium for Stag and $3 for Montara and PenMal (Although the current premiums are $9 for Tapis and $23 for Stag)
• Capex: $100MM in 2022 for the 2 Stags wells & Montara works. An expense of $94MM is forecasted in 2023 before Akatara’s first Gas
• WACC: 15% (It does not have any debt at the moment)
• Liquidity risk premium ( we add an additional 1% to calculate equity premium)
• Unit Opex: $34 in 2H22, $28 per barrel until 2025, $27 onwards 
• GBPUSD: we assume a constant 1.25 exchange rate (note that the lower this number the higher the valuation – so we prefer to be conservative)

Our estimated value for Jadestone is £1.56, without taking into account any new acquisition.

Risks

Commodities price: We believe that this commodity cycle is going to last several years. But if we are not right, Jadestone share price will suffer.
Buyback/Dividends: Management can do more on this. At the level that JSE is generating cash now, investors in the sector are demanding more returns for shareholders. 
Liquidity: Traded in AIM London which is an exchange with limited liquidity which penalise the stock price.

Skin in the game: Management only has 2% of the company’s shares, which we believe that is insufficient (even more at this share price)

Conclusion

We see Jadestone as a good bet to play the current macro environment where oil is expected to remain at high prices for several years (we expect higher prices than the forecasted in the model)
We like Jadestone as it is not hedged, it is located in an area that is going to see a huge increase in the population, it has significant and sustainable Brent premiums, it is signing very attractive deals and it has some catalyst in the short term that can make the stock rise higher (Montara re-opening, a new deal, more buybacks,…).

We have been increasing considerably our exposition to Jadestone since the March publication as we believe that the company is quite cheap taking into consideration the amount of money they are printing. Montara has been a setback, but Jadestone is taking advantage of it by buying back shares at very good prices. We hope they can continue buying at these prices for a while before the Montara re-opening, when we understand the share price will be back to previous highs.

Note: This analysis does not constitute any recommendation. It only explains our views about the company as it gives a more transparent opinion about the evolution of the companies we hold on our portfolio