Stock Pitch - Wentworth Resources (LON:WEN)

14th Oct '21 by Keelan Cooper

13 comments 4504 reads

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.

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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%.

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About the Opportunity:

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Rusty2

14th Oct '21

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.

yiannos1

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.

AnonymousUser1832355

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

davidallen77

fixed gas prices with wen so no moment in share price but production is at its highest ever.

drobs

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.

Phil Sprinks

15th Oct '21

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''

Share Hunter 61

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 !

Stop loss sorry !

Keelan Cooper

25th Oct '21

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

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!

16th Dec '21

Another excellent update today, have added to my position.

Key points for me:

Strong cash generation and cash accounts for half the capitalisation: Strengthening financial position with $24 million cash in hand
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

Growing demand: TANESCO announced in November that natural gas will be used to address a 345MW shortage gap of power to the National Grid to compensate for the lack of capacity from its hydro-electric power stations due to low water levels in
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

Increasing production and a long field life: 2021 average daily production is approximately 23% higher than the average
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

High Yield: Strength of financial performance enabled an increased interim
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!

17th Dec '21

Share buyback announced today too.

9th Apr '22

FY 2021 results out this week. Another set of excellent results. Won't repeat the content but points of note from the conference call:

Yield sits at around 8%
Cash at $22m (up from $17m a year ago)
Fixed price increased from $3.35 to $3.44. This is is adjusted in arrears based on US CPI so next year's rise will be greater.
Forecast production 75-85 MMCF per day; record production of 91 MMCF per day in Q1.
Ongoing gas demand growth in Tanzania and in wider Eastern Africa
Lowest carbon footprint of gas producers

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.

Stock Pitch - Wentworth Resources (LON:WEN)

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Keelan Cooper

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