Longboat Energy – A Jolly Good Deal

On Tuesday of last week the shares of Longboat Energy (LON:LBE) leapt nearly 140%, that was after the now £11.8m capitalised company announced that it had tied up a mega-deal with Japan Petroleum Exploration concerning its Norwegian subsidiary.

Impressively, it is a significant capital injection for the group with no dilution of the equity, enabling Longboat Energy to retain exposure to its catalyst rich asset base.

The group, which was only established three years ago, is a ‘full-cycle’ exploration and production company, that has subsequently expanded through various acquisitions.

It has centred upon building up a portfolio of nine gas-weighted exploration wells drilling on the Norwegian section of the Continental Shelf.

Of those wells, which are situated close to existing infrastructure, eight have been drilled to date showing five hydrocarbon discoveries, achieving an impressive 63% technical success rate.

And that is what JAPEX is buying into, by making a significant $50m investment, through taking a 49.9% stake in Longboat Energy Norge AS, which is to be renamed Longboat JAPEX Norge AS.

The Joint-Venture will pursue a growth-led strategy through the acquisition of development projects, 2P reserves growth and establishing a significant production level within three to five years.

It will continue to target the drilling of one to three exploration and appraisal wells per year.

A Transformational Deal For Longboat

The deal involves the cash investment of up to $50m for 49.9% of Longboat JAPEX comprised of an upfront $16m cash boost to Norge, which is more than the total group’s capitalisation.

It will make a contingent consideration of $4m, payable on successful completion of a production acquisition currently under review; and a further tranche of up to $30m, payable on a sliding scale following a successful discovery on the Velocette exploration well, which is due to spud in Q3 2023.

JAPEX will also provide the Joint Venture with a 5-year $100m Financing Facility for acquisitions and associated development costs in pursuit of the JV’s strategy at an interest rate based on a sliding scale with an all-in cost over the term of <10%.

Set up in 1955, JAPEX is listed on the Tokyo Stock Exchange and has a market capitalisation of $1.8bn, its largest shareholder is the Japanese Government with a 35% stake.

CEO Helge Hammer stated that: 

“Longboat is delighted to have found a strong and complementary strategic partner in JAPEX. JAPEX has been looking for the best way to enter Norway and identified Longboat as an excellent match to reach its strategic objective.

The Longboat team has significant experience and expertise in the Norwegian E&P sector and has strong local industry relationships. JAPEX is a long-established E&P company with a strong balance sheet and significant worldwide technical competence including in the North Sea. By joining forces, we will have greater opportunities and strong financial backing to pursue them. We believe that this agreement has laid the foundations for exciting growth in the coming years.

We are also pleased to be in a strong position to continue to pursue our interests in the Kveikje area as this development project is being matured and additional value created.      

The team looks forward to delivering production and reserves growth to create value for shareholders both in Norway with JAPEX, but also in Malaysia following our recent entry into the region.” 

The Longboat Energy Interests

The company has operations in Norway and Malaysia.

Its Norwegian portfolio includes Rodhette, Copernicus, Velocette, Ginny/Galtwort, Kveikje, Lotus, Cambozola and Oswig.

The Rodhette Discovery in license PL901 in the Barents Sea with exploration well 7122/6-3 S.

Copernicus is an exploration well 6608/1-1S operated by PGNiG Upstream Norway AS.

Velocette is a gas-condensate prospect targeting Cretaceous Nise turbidite sands on the eastern flank of the Utgard High in the Norwegian Sea.

The Kveikje discovery is located in license PL293 B on the Lomre Terrace in the Norwegian North Sea.

Lotus license 1182 S lies in the Norwegian North Sea, 4 kilometres (km) south of its Kveikje discovery.

Cambozola is an exploration well 34/9-1S, operated by Equino.

Oswig is an exploration well 30/5-4S operated by OMV.

Its Malaysian portfolio, Kertang, is located north-west of the prolific Central Luconia hydrocarbon province.

In February 2023, Longboat entered Malaysia through the award of a Production Sharing Contract for Block 2A, offshore Sarawak. Block 2A covers approx. 12,000km² and is located in water depths of between 100-1,400 metres where a number of large prospects across multiple plays have been identified, with significant volume potential representing multiple trillions of cubic feet of gas.

The Equity

There are 56,666,665 shares in issue.

Larger holders include Progressive Capital Partners (15.6%), SVM Asset Management (8.66%), Janus Henderson Investors UK (5.29%), BlackRock Investment Management (UK) (4.99%), Evelyn Partners Investment Management (4.98%), Chelverton Asset Management (4.71%),Canaccord Genuity Wealth (4.12%), AXA Investment Managers UK (3.90%) and the ubiquitous Richard Sneller (2.99%).

Broker Views – 90p Target Price

Analyst James Mccormack at Cenkos Securities rated the group’s shares as a Buy, having increased his Target Price from 57p to 66p in the process.

Longboat last year reported a £49.4m pre-tax loss and ended the year with closing cash of £12.1m.

For the current year Cenkos goes for just a £10.5m loss, but with cash ending at £25.7m.

For the end December 2024 year, they estimate only a £5.0m loss, with cash falling to £22.6m.

Over at Auctus Advisers their analyst Stephane Foucaud also rates the shares as a Buy, but with a 90p Target Price.

This transaction is very good news for Longboat as it highlights the quality of the portfolio that it is material enough to attract a company with a market cap ~$1.8 bn.

This is a new country entry for JAPEX, a company partly held by the Government of Japan, which demonstrates the continued strategic importance of Norwegian oil and gas.

My View – Could Still Be The Punt Of 2023

This transaction is very good news for Longboat as it highlights the quality of the portfolio insomuch that it attracted a $1.8bn company.

As visible by the year’s low of 8p before the deal announcement there had been investor concerns about Longboat’s funding ability.

This deal now allows it to maximise the value of its assets.

It is worth noting that near-term news flow includes the drilling of Velocette (3Q23), potential acquisitions in Norway (2023) and in Malaysia (potentially 2H23 or early 2024), while further drilling in Norway and Malaysia is expected in 2H24.

The group’s shares touched 70.6p this time last year.

The shares reacted very well to the news, before others took their profits, meaning that now there could well be some cheaper buying possibilities.

Despite the recent massive rise in the share price, I still consider that there is massive upside with them closing on Friday night at only 20.75p.

Accordingly, I conservatively set a Target Price of only 26p.