Deltic Energy – Worth Exploring Further?

Broker Canaccord Genuity sees the shares of this North Sea natural resources company as a Speculative Buy with a 12p Target against the current sub-2p price.

While another broker, Allenby Capital, suggests that they are worth at least 20.9p each.

This company has come a long way since it was known as Cluff Natural Resources.

It was formed in 2012 and changed its name to Deltic Energy (LON:DELT) in June 2020.

The Business

It is an independent oil and gas exploration and production company with a focus on the UK Continental Shelf.

Its portfolio includes a range of exploration and production licenses in the North Sea, covering both the Southern and Central North Sea areas.

The company owns a 100% working interest in License P2252, which contains the Pensacola prospect, a potentially significant gas prospect in the Southern North Sea.

In addition, the company has interests in several other licenses in the North Sea, including License P2480, which contains the Selene prospect, and License P2568, which contains the Cupertino prospect.

The £34m group’s strategy is to leverage its expertise in exploration and production to identify and develop new oil and gas reserves in the UK Continental Shelf.

It aims to create value for its shareholders by partnering with other companies to share exploration and production costs and risks.

Today it has a strategically located portfolio of high-quality gas exploration licences in the Southern North Sea over a number of licensing rounds. 

Those licences are located in areas that have been underexplored despite significant discoveries such as Tolmount, Breagh, Pegasus and Cygnus, most of which have gone on to be developed and could provide ready access to export infrastructure for any future developments on Deltic’s licence acreage.

Transformational 2022

In the last trading year, the group enjoyed a 30% interest in a potentially transformational gas discovery at Pensacola on Licence P2252 in the Southern North Sea, representing one of the largest gas discoveries there in the last decade.

The group’s second potentially high impact exploration well on the Selene prospect is the largest undrilled structure of its kind in that part of the Southern North Sea.

Chief Executive Graham Swindells stated that:

“2022 saw a fundamental shift in the delivery of Deltic’s business model as the Pensacola well started drilling in November, subsequently being announced as a highly material gas discovery in February this year.

Pensacola entirely vindicates our long-term business strategy of identifying high-value exploration assets at a very early stage and bringing them to fruition.

We are now in the enviable position of deciding how best to appraise and develop this 300 BCF discovery alongside our partners and delivering value for shareholders.

Moreover, we continue to advance our second potentially high-value asset, the Selene gas prospect, also located in the Southern North Sea.

Together with our partner Shell, we expect to drill this similar sized prospect to Pensacola in the summer of 2024.

With this drilling activity coupled with additional prospectivity from the rest of our portfolio and potential new licence awards, I believe the future looks extremely positive for Deltic, especially at a time when the UK should rightly be focused on its longer-term energy security.”

The Equity

There are 1.86bn shares in issue.

Larger holders include Michael Spencer (18.8%), Richard Sneller (9.85%) and David Newlands (2.01%).

Others include Hargreaves Lansdown (9.20%), Interactive Investor (8.3%), Canaccord Genuity Wealth (5.84%), Janus Henderson Investors (5.23%), The Clarendon Trust (2.26%), SVM Asset Management (2.18%), Fidelity Management & Research (1.32%), Guinness Asset Management (1.25%) and Guinness Atkinson Management (0.11%).

Analyst Opinion – A Speculative Buy With A 12p Target Price

Analyst Charlie Sharp, at Joint Broker Canaccord Genuity Capital Markets, rates the group’s shares as a Speculative Buy with a Target Price of 12p a share compared to the current market price of just under 2p.

He notes that there is an increased appetite for oil and gas transactions across the sector, including North Sea focussed deals.

Sharp considers that the relatively high change of commercial success for both of the group’s Pensacola and Selene interests, makes for a compelling story as the company progresses towards monetisation through farm-out or sale of those high impact/high value projects.

The analyst reckons that the success at Pensacola and the already low risk on Selene gas potential and its proximity to export infrastructure, should be attractive to a variety of potential incoming industrial investors.

Over at the group’s NOMAD Allenby Capital, its analyst Peter Dupont considers that upon a ‘success case’ valuation across the group’s five main projects its shares could be worth a recently upgraded 52.2p a share.

That was centred upon a $10 barrels of oil equivalent valuation quotient.

Even on a $4 boe basis that would be a value of 24.9p a share, which he states still “implies plenty of headroom vis-à-vis the current share price.”

Conclusion – Could Be Set To More Than Double In 2023

It is worth noting that the oil and gas exploration and production industry can be subject to significant regulatory and environmental risks, as well as severe market volatility.

However, the group’s shares at 1.82p value the equity at just under £34m – I feel that they are inevitably due to rise, if not to more than double within the year.

Even so, I now set an easy Target Price for the shares of Deltic Energy at 2.50p.