i3 Energy – earnings accretive acquisitions have transformed this penny stock

If you are a passionate about the environment, please do not read any further – this stock is not for you.

However, if you assume that there will be an ongoing demand for both oil and gas then carry on.

Better still if you like investing in developing companies with masses of upside potential then this is for you. Even more appealing for masses of readers is the fact that this company’s shares are a ‘penny stock’ which enables you to buy more with your money.

But, of course, it doesn’t matter how many shares you may have in any particular company if it is bad value.

Could well double again

I consider that the Aberdeenshire-based i3 Energy (LON:I3E and TSX:ITE) has a lot going for it over the next year or so and, despite its shares having more than doubled this year, they could easily double again.

Following a set of complex asset and funding transactions concluded in late 2020 the group transformed itself into an oil and gas production company.

It is now an independent oil and gas company with a low cost, diversified, growing production base in Canada’s most prolific hydrocarbon region, the Western Canadian Sedimentary Basin and a portfolio of promising appraisal assets in the North Sea.

The company describes itself as ‘an energy company focused on the development and production of high return hydrocarbon fields and discoveries.’

You can now see why this is not one for the environmentalists.

Part of its strategy is to focus on the development of discoveries located close to existing infrastructure and the exploitation of producing fields, whilst maintaining limited exploration exposure.

Four important expansion struts

That group is highly acquisitive, searching out accretive purchases. Its strategy centres around four main struts – seek, acquire, extract and produce.

The group’s Seek strut is to pursue high quality assets where cycle, situation, or geography offer disproportionate opportunity. Those targets must exhibit excellent technical and economic underpinning.

With Acquire it looks to purchase producing or late-stage development assets from companies where required ‘finish-line’ financing, market conditions, or cost of capital provide opportunities with a sizeable margin of safety.

To Extract the company looks to maximise shareholder value during times of cyclical strength and market sentiment. Furthermore, it must remain equally strategic when large valuation gaps exist.

Then as it goes on to Produce it actively participates in production and development partnerships to smooth operations, mitigate delivery risk, and preserve project value.

Its development

i3 Energy’s strategy is to focus on the development of discoveries located close to existing infrastructure and the exploitation of producing fields, whilst maintaining limited exploration exposure.

In the Western Canadian Sedimentary Basin, the group has a portfolio of 242 operated wells, at an average 78% working interest, and 1,044 non-operated wells with an average 14% working interest. It also has 172,000 net developed acres and 186,000 net undeveloped acres of land.

The group’s interests in the UK Continental Shelf of the North Sea includes a 100% working interest in a three-well drilling programme in the Liberator, two blocks, and the Serenity, one block, fields. These are at an early stage and could well require the group to take farm-in partners in their ongoing development.

Recent Update

By the end of Q3 in the current year to the end of this month, the company reported some 13,740 barrels of oil equivalent per day for the period. However, it appears that the average was well up in just the September month, to 18,985 boepd.

With prices of both oil and gas going higher that is a quite healthy rate. There are anticipations by analysts that the company will be growing its production bases in order to take advantage of the positive commodity market price strength.

Good investor support

There are 1,126,425,992 shares in issue and the larger holders include Cairn Capital (26.13%), Premier Miton Investors (13.93%), Slater Investments (9.33%), Amati Global Investors (7.16%), Hargreaves Lansdown (4.26%), Interactive Investor (3.59%).

Broker’s Views

Brendan Long, an analyst at brokers WH Ireland, having raised it recently, now has a ‘fair value’ estimate out on the group’s shares of 35p. He sees the operating cash flow trebling to £71.1m in 2022, helping to generate earnings of 3.6p per share.

A team from Mirabaud Securities switched over to Tennyson Securities, who earlier this year were made joint brokers to the company. Their analysts Tim Hurst-Brown and James Midgley have a ‘buy’ rating on the shares, with a price objective of 28.5p per share.

My View

I am bullish about this £124m capitalised company.

Clearly as the company says it ‘is well positioned to deliver future growth through the optimisation of its existing 100% owned asset base and the acquisition of long life, low decline conventional production assets.

I know that these shares, which are now 11p, were up to nearly 17p in early July this year, while they were as low as 4.65p in January, so I may well be too cautious when I set my Target Price at just 14p, but it is a very easy objective.