Stock Pitch - Wentworth Resources (LON:WEN)
Oil and gas producers have been on a stellar run over the past 6 months. OPEC’s reluctance to meaningfully increase production has seen oil prices recently hit 7-year highs, whilst natural gas prices have soared to levels not seen since 2005 in the UK.
Tanzanian natural gas producer Wentworth Resources has witnessed its share price languish since the start of 2021, whilst many of its peers have produced notable gains. This may be due to the nature of the company’s long-term fixed price contracts with the Tanzanian government, which limits its exposure to current spot prices.
However, with Wentworth Resources’ gas production increasing at a time of soaring natural gas prices, this should lead to much more favourable contracts in the future. Could Wentworth offer a unique opportunity in the Oil & Gas industry that the market has simply overlooked?
The company is attractively valued based on forward estimates for the coming years and is one of the highest dividend yielding companies on the UK market at this moment in time. A cash pile equivalent to just under half the current market capitalisation is equally enticing, but there are undoubtedly a multitude of risks to be wary of when investing in a Tanzanian micro cap natural gas producing company. Not least the fact that a lack of liquidity means shares are hard to sell in a hurry.
Wentworth Resources was pitched to the Stockopedia Investment Club on the 5th October 2021 at a share price of 22.5p.
Profile
About the Stock:
Wentworth Resources (LON:WEN) is a UK headquartered company operating in the energy sector as a natural gas producer in Tanzania. Its shares are listed on the UK Alternative Investment Market (AIM) and are currently trading at 23.8p, giving a total market capitalisation of just under £43 million.
An Exchange Market Size of 7,500 means that liquidity might be an issue, as could be expected with a micro cap. The spread is also quite large though at 870bps.
From a fundamental perspective, Wentworth currently boasts a StockRank of 93, with strong Value (91) and Momentum Ranks (82) in particular. The 12m forecast PE is 9.8, whilst the 12m forecast dividend yield is a staggering 7.77%.
About the Opportunity:
Wentworth Resources offers a compelling opportunity as a natural gas play, which hasn’t yet seen a meaningful rerating on the back of surging natural gas prices.
The company has made great strides in recent years, to become a leaner and more efficient organisation overall. A strong focus on cost discipline and extracting maximum value from its working interest in the Mnazi Bay gas field has proven to be a rewarding strategy for shareholders, especially in regard to capital returns. Wentworth maintains a progressive dividend strategy and paid out a whopping $5.12 million to shareholders over the last 12 months (over 10% of the value of the company).
Source: Wentworth Resources H1 Interim Presentation
The higher natural gas prices means that at the current levels of free cash flow generation, Wentworth is adding around $1 million worth of cash to its balance sheet each month. Management has historically taken a cautious approach on utilising this capital, but acquisitions have been touted for some time now.
As an Adventurous micro-cap this Tanzanian natural gas producer is not for the risk averse. A lot depends on how long natural gas prices can be sustained at this level, but if they do then Wentworth Resources shares could be set to light up. Equally, if natural gas prices do fall, then the share price may follow suit and the lack of liquidity means that you might not be able to sell out.
Business & Model
What is the company history & what does it do?
Wentworth Resources has been operational in Tanzania since 2004 through its 31.94% non-operational stake as a joint venture partner in the low-cost onshore producing gas field at Mnazi Bay, located in southern Tanzania.
Mnazi Bay is operated by Maurel & Prom (holding a 48.06% stake) with the Tanzania Petroleum Development Corporation (TPDC) (holding 20%) and Wentworth Resources (holding 31.94%) under the Mnazi Bay Production Sharing Agreement.
The company is Jersey incorporated but based in the UK, after having re-domiciled from Calgary, Canada. Wentworth was readmitted to AIM on the 2nd November 2018 and its delisting from the Oslo Børs was completed on 13th February 2019. Explaining the motivation behind this move, the company states that: 'Through this process, we have refreshed our leadership team, adopted a leaner corporate structure, and installed an impressive dividend policy poised for significant growth.'
Highlights of recent company history can be seen in the screenshot below. If you would like to view a detailed timeline of the company's history, you can see this here.
Source: https://www.wentplc.com/who-we-are/our-history/
What are the key business segments and revenue breakdown between them?
The entirety of the company's revenues are generated from the production and sale of natural gas to domestic clients based in Tanzania. The company's Tanzanian onshore gas asset, Mnazi Bay, produces 50% of Tanzania’s natural gas, powering over 30% of the country’s electricity generation.
Highlighting the importance of the company's gas-producing assets to the domestic economy is the $3.8 billion saved in public finances since 2007, directly from Mnazi Bay natural gas.
The company maintains a close relationship with its stakeholders and partners in government in order to help the nation meet its ambitions, which are increasingly dependent on rapidly expanding energy needs.
What is the company's strategy?
The company's current strategy focuses on the optimisation of its Mnazi Bay asset. Five key growth drivers are highlighted by the company: optimising production output, monitoring field production, identifying new opportunities, partnering with government and transitioning to a sustainable future.
Below is an overview of the Reserves summary for Mnazi Bay at December 31, 2020.
The company remains optimistic about its production outlook. Working closely with the Tanzanian government to achieve its ambition of becoming a regional power hub and delivering universal access to power by 2030, the fundamental long-term backdrop for natural gas production remains secure.
Wentworth anticipates that gas-fired electricity will rise substantially in line with regional power demand. Mnazi Bay's production capacity currently exceeds 100MMscf/d, or million standard cubic feet per day. Production recently hit an all-time production high of 110.65 MMscf/d.
In the coming years, the company expects to proceed with additional development plans to further optimise the Mnazi Bay field with its partners. A key area of focus will be the preliminary front end engineering and design (FEED) study for future compression, which is anticipated to be required in 2023-24. This could boost Wentworth's production interest to over 130MMscf/d.
Market & Competition
What is the state & size of the company's market?
The global natural gas distribution market was worth approximately $466.18 billion in 2020, and is expected to grow to a staggering $553.09 billion in 2021. Furthermore, the market is forecast to be worth $758.91 billion by 2025, growing at a CAGR of 8% (according to the Global Natural Gas Distribution Market Report 2021 by ResearchAndMarkets.com).
In Tanzania, the company is also a clear beneficiary of the government’s energy policies. Energy access currently sits at 33% in the country, with 7.7 million households having no access to power. As one of the fastest growing African economies, Tanzania has made universal energy access a key goal to achieve by 2030.
Who are the company's key competitors?
The international natural gas market is highly fragmented with plenty of industry heavyweights and smaller producers contributing to global supply.
Midstream and downstream natural gas activities in Tanzania are being carried out by four companies, which include Wentworth's two joint venture partners TPDC and Maurel & Prom, in addition to Songas and Pan African Energy Tanzania (PAET). These are all the companies responsible for the supply of natural gas to Tanzania's power plants for electricity generation.
Norwegian state-owned multinational Equinor has also made a series of significant natural gas discoveries offshore Tanzania, although there is no concrete date as to when these assets will come online.
Whilst not direct competitors, Ukraine based JKX Oil & Gas and Enwell Energy are other UK listed natural gas producers. Both companies have recently seen their share prices more than double within the space of 3 months, on the back of surging natural gas prices.
How does it derive its competitive advantage (if any)?
There is no clear competitive advantage evident from the company's financials. The ROCE, ROA, ROE and Operating Margins have historically been quite poor, and the current Quality Rank of 61 echoes this.
Although, it might be worth noting that the company’s operating costs have been falling quite substantially in recent years and this could contribute to a sturdier business model moving forward. In H1 2021 alone, operating costs fell by a staggering 72%.
Financials & Ownership
What is the record of growth & profitability?
Wentworth boasts an impressive track record of revenue growth from its production expansion over the last few years. The company is on track to produce 80MMscf/d of natural gas this year, which represents a 500% rise from the production levels of 2015.
However, profitability has been a lot more volatile, in part due to the reliance on high natural gas prices as well as the higher operating costs that the company previously recorded.
What is the state of the balance sheet?
The balance sheet is incredibly strong with over $21 million in net cash (as at 2nd Sep 2021), which is close to half of the market capitalisation of the company.
The current run rate of $1 million worth of cash added every month to the balance sheet highlights the significant free cash flow generation at current natural gas prices. If prices hold, the company could end up with over $25 million in cash by year end.
Is there evidence of historic share dilution or buy backs?
Yes, a fair bit of dilution in the past. It has issued equity in 2010, 2011, 2013, 2015, and 2017. It is unlikely that there will be much dilution moving forward due to the strength of the cash balance (unless acquisitions take place).
What is the ownership structure of the company and do management have stakes?
The company boasts a strong institutional shareholder register, with a material Norwegian and UK-based retail investor base. Fidelity, Vitor and AXA combined own over 30% of the company.
Management, however, own minority stakes in the company, all of which less than 1%.
Valuation
How does the relative valuation compare versus industry and sector?
The Oil & Gas industry as a whole looks attractively priced at this time, with brokers upgrading forecasts as oil and gas prices reach new highs. Wentworth looks particularly cheap on a free cash flow basis though, trading on a Price to Free Cashflow of 5.7 times, well ahead of the industry median.
Whilst the company doesn’t appear remarkably cheap when looking at the Price to Earnings ratio, if you take into account the current cash balance you can see the extent of the current discount. An Enterprise Value / EBITDA of 3.35 is one of the best in the entire UK market, let alone the Oil & Gas industry.
According to Auctus Advisors, should production rise to 130MMscf/d in the coming years then the NAV per share is estimated at 56p.
Trends & Catalysts
Are there any significant macro trends that the business is benefiting from?
Natural gas prices have just recently hit their highest point since 2005 in the UK and have already reached record highs in Europe. Supply disruptions from both Norway and Russia have contributed to these unseen price levels, and further demand is expected this winter as the global economy continues its recovery.
Source: The Economist
Are there any catalysts that could drive a rerating in the medium term?
Any acquisitions or updates regarding the field optimisation for Mnazi Bay could drive a rerating over the medium term. Furthermore, increasing natural gas prices as we head into winter could also provide tailwinds for the company's share price.
Risks, Threats & Hurdles
What are the biggest risks, threats or hurdles that the business may face?
Operational - Naturally, oil and gas production is one of the riskier activities for firms to carry out. The risks of a well leak, ground contamination, excessive pollution or an explosion makes investing in the sector much higher risk.
Contract risk - Wentworth Resources carries out most of its business with government owned or government led entities. In this, it is highly dependent on the stability of the government and maintaining good relations with it. Contracts signed with the government have also been declared as ‘long-term fixed price contracts’ by the company, which limits the upside exposure from natural gas price increases over the short term.
Single asset risk - The company is reliant on Mnazi Bay for the entirety of its revenues. Should anything happen in terms of production issues, or contract disputes, or a sharp fall in domestic demand, Wentworth would bear the full brunt of this.
Macroeconomic - Should the global economy's recovery take a hit, so will natural gas prices.
Geopolitical - Whilst Tanzania is one of the most stable African nations, it neighbours several volatile countries such as Mozambique, where there have been reports of terrorist attacks in the not too distant past.
Recent Trading & News
Summarise the most recent announcements, news and trading statements and market reaction to them?
Interim Results for 6 months ended 30 June 2021 - Record-breaking results, the highlights of which can be seen below.
Sentiment
What do the brokers currently think and are they upgrading estimates?
There is seemingly a lack of broker coverage for Wentworth at this time, although Auctus Advisors are bullish on the stock.
What is private investor sentiment at the moment?
Some of the community is frustrated at the cash balance not being used for acquisitions, whilst some private investors are perplexed as to why the shares are so cheap.
What would the person selling to us be thinking and who are they?
Private investors might be concerned about management ambition and might see better opportunities with more aggressive approaches being taken up by natural gas producing peers.
Summary
Bull Points - An incredibly strong balance sheet with close to half the current market capitalisation in cash, generous dividend policy with 8% forward yield, production rising at a time of increasing natural gas prices, strong relationship with joint venture partners and the Tanzanian government.
Bear Points - Susceptible to high levels of volatility due to dependence on natural gas prices, limited visibility over long-term production growth due to the company's single asset interests, riskier jurisdiction than other natural gas players, limited short term natural gas price exposure, poor share price liquidity.
Conclusion
Wentworth Resources presents a potentially high-risk high-reward opportunity for investors keen to gain some exposure in the oil and gas sector. As natural gas prices reach new records, companies like Wentworth may find themselves in a strong position to negotiate future contracts. This could deliver substantially higher levels of profitability for years to come, which may be being overlooked by the market at present.
The Stockopedia Investment Club majority voted against purchasing shares in Wentworth Resources at this time though. It seems that the perceived risks outweighed the potential benefits, but is this the right decision when the fundamental backdrop for natural gas prices is so strong?
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
13 comments
FY 2021 results out this week. Another set of excellent results. Won't repeat the content but points of note from the conference call:
I added again this week and have doubled my holding over the past 9 months . With a 14 year reserve life, yielding 8%, with some capital growth opportunity, this ticks all my boxes as I have previously intimated.
Share buyback announced today too.
Another excellent update today, have added to my position.
Key points for me:
at 30 November 2021 2021, after payment of both $2.6 million final dividend
for 2020 in July 2021 and $1.32 million interim dividend in October, an
increase from $22.5 million cash as at 30 June 2021
the dams and rivers of the catchment areas
As part of the plan, TANESCO intends to increase production by
fast-tracking maintenance of its natural gas-plants at Ubungo and expediting
the completion of the Kinyerezi I Extension Generation Facility
daily production rate in 2020, which was 65 MMcf/day - The average gross daily production rate from the Mnazi Bay gas field in
December 2021 to date has been approximately 102 MMscf/day and, as a result of
the stronger overall demand during 2021, the Company expects to achieve a
milestone average production rate for the calendar year of over 80 MMscf/day -
exceeding the high-end of the already upwardly-revised guidance from June
2021. The Company expects to achieve an annual average production rate for2021 of more than 80 MMcf/day, above the high-end of revised guidance for theyear and significantly above the average rate in 2020
dividend to be declared of of GBP 0.52 pence per share, 10% higher than the
2020 Interim distribution of $1.2 million
· Wentworth expects a 2021 final dividend of US$2.64 million in line
with the company's policy of a 1/3 : 2/3 split between the interim and the
final dividend - which would bring total capital returns for FY2021 to US$3.96
million. To me that looks like over 1.5p per share (and growing) PA, so around 8% at opening this am.
Also looking at carbon offsetting so building the ESG credibility too:
Immediate objective is for Wentworth to offset all scope 1 and 2 emissions
and partially offset scope 3 emissions by 2022
Wentworth's emissions footprint remains one of the lowest in the UK-listed
E&P sector on a scope 1 and 2 basis with an emissions intensity in 2020
of 0.42kg/CO2 boe (1,676.9t CO2 e)
Wentworth's priority is to take continuous action to reduce emissions as swiftly as possible with further progress made in 2021 on reduction initiatives to be outlined in the 2021 Sustainability Report.
Lot to like for me, Tanzania feels like a relatively safe jurisdiction O&G wise and they are having no issues with payments from the government, Gas seems to be pivotal to Tanzania aspirations and it feels like there is a decent amount of growth to come. Maybe not as exciting as an oiler spudding a well but this is a very decent income stock with scope for capital appreciation as the gas production increases lend to more cash and greater dividends.
Corrections welcome!
Stop loss sorry !
I think this was a mistake and I'm purchasing both this stock and Jkx oil and gas Monday setting a spot loss on it as i think these two stocks could go far over the next 6 months !
I believe there is a good case to buy and the 8% divi with the current cash pile underlines this. There are risks with many shares but here we can see what they are . The hazards require close monitoring consequently. I was surprised at the 13 voters deciding it was a no-go. I went and bought several thousand at around 22p. They are 25p this morning with my target of 30p+ I am positive of reaching it. signed ''The gambling Pensioner''
I view WEN as a relatively safe bet in the minefield that can be oil and gas investment. I also completely get that the risk profile would be outside most investors' appetite. The yield is appealing and I also believe we will see some capital growth simply due to the amount of cash being generated.
WEN have a lot of gas which can be extracted for a long time and natural gas is key in driving forward Tanzania's economic growth and aspirations, energy provision wise.
The fixed prices agreed with the government are a curse (0 exposure to current inflation) and a blessing (hedge to downside). The company is also very progressive in terms of supporting the local community and in terms of sustainability.
They have also strongly grown production in the last half - 65.4MM to 80.3MM. Cash also up from 17.8m to 21.5m in 1st 5 months of this FY.
Its not an O&G company I go to bed worrying about a bad RNS the next day.
I appreciate I probably have jinxed something there now.
fixed gas prices with wen so no moment in share price but production is at its highest ever.
The only upside to revenue would come from higher gas prices being set by the tanzanian Govt, but i think you've overlooked the buyback announced in December 2020 which does show a change in direction, further buybacks could come especially since the cash pile is so big, you forgot to mention it's almost as the same size as the revenue
Very good company indeed , but I believe ( hopefully I am wrong though ) that the selling price of natural gas is fixed with the Tanzanian government , so I do not see any benefits regarding the high gas prices.
Hi Yiannos1,
You are indeed correct. As mentioned in the article, the short-term potential upside from the higher natural gas prices is limited due to the nature of these fixed-price contracts.
What tends to happen is that when contract renegotiations take place, Wentworth Resources will be in a much stronger position to negotiate a higher level for the fixed prices. This would improve long-term profitability. However, successful contract negotiations are by no means a guarantee, and dealing with governments can be quite difficult!
Kind regards,
Keelan
Hello, Keelan, good pitch. I don't hold Wentworth Resources (LON:WEN), had a quick look and one thing that does put me off is the quoted spread is over 10% and mcap is only £44m.
Another oil and gas company roundly rejected by Stocko Investment club. Serica Energy (LON:SQZ) was pitched in March 2021 and rejected, share price is up around 80% since.
It would be interesting to know the reasons for not picking it.
Would any O&G stock every get picked or only the large cap ones?
May be worth a short survey of members.
Hi RayStraw,
Thank you for your comment. I'm glad you enjoyed the pitch!
The spread is indeed very large, although this is not uncommon in the micro-cap space. For anyone looking for a shorter-term trading opportunity, the spread might be too off-putting.
You do raise a valid point regarding Oil & Gas companies and the Stockopedia Investment Club. We frequently monitor our diversification, size exposure, and ranking rules, and a more adventurous Oil & Gas pick could complement the existing portfolio quite well.
I'll make sure to raise this point at our next meeting. It will be interesting to see if larger-cap opportunities in the sector may be preferred by the Investment Club moving forward.
Kind regards,
Keelan