It may not be to everyone’s taste in music, but Aerosmith’s rock has proved a winning bet for Faroe Petroleum. Shares in the oil and gas explorer surged after it said that it had discovered significant volumes of gas and condensate at a prospect in the Norwegian Sea that its geologists had named after the American band.
Somewhat disappointingly, Aerosmith — which lies at a depth of 3,932 metres — has been renamed Hades since then by OMV, the operator, while another prospect, Zappa, even deeper at 4,223 metres, has been called Iris.
The results of both did not disappoint, however. Hades is estimated to contain between 19 million and 113 million barrels and Iris between 19 million and 132 million barrels. Taking a mid-point of those estimates, that would put Faroe’s 20 per cent share of the potential resources at more than 28 million barrels. Set against the company’s existing reserves of 98 million barrels and resources of 79 million, they are sizeable finds.
Faroe Petroleum was formed in 1997 and has been run since 2002 by Graham Stewart (himself a rock musician), who led its listing on London’s junior market in 2003. The company has exploration, appraisal, development and production licences in Norwegian, British and Irish waters, although the lion’s share of its present production and prospects are in Norway.
Alongside the latest drilling successes was an announcement that DNO, the Norwegian oil and gas company, had agreed to buy a 15.4 per cent stake in Faroe from Delek in what it called a “long-term strategic shareholding”. The surprise deal was priced at 125p a share, a 15 per cent premium to the average share price over the previous month, and delivered a further vote of confidence in the company.
Faroe is well regarded in the industry for its record on discoveries and financial management. It survived the oil price collapse without falling into debt. Its net cash is $75 million.
Faroe reported production of 14,349 barrels of oil and gas a day last year, but has plans to more than double that to 35,000 barrels a day within five years via a series of development prospects, the largest of which is Brasse, off Norway. Funding these developments is likely to mean that Faroe builds up debts, in a marked shift from previous form, and last year it issued a $100 million bond. However, probable liabilities are at a manageable scale — Faroe has undrawn debt facilities lined up and at present higher oil prices are generating healthy cashflows from its existing assets — and it has plenty of options to sell parts of its portfolio.
“We always make sure we have more than enough capital to handle what lies ahead,” Mr Stewart said. If all goes to plan, he added, by the early 2020s Faroe should generate enough cash for a “strong likelihood” that it could pay its maiden dividend.
As well as the production growth plans, there are near-term drilling prospects that provide potential over the year ahead if Faroe can follow up yesterday’s successes. It is drilling an appraisal well and has three more exploration wells lined up this year, all off Norway.
Naturally, there is always luck involved. Faroe reckoned that its odds of success were only one in four on each of the Hades and Iris prospects. However, Mr Stewart said: “We are finding we are having a very high success rate, something like two out of three wells work for us. That is an extraordinary high hit rate.”
The latest news lifted its shares to 117½p, a 12½p, 12 per cent rise, but most analysts believe that they will climb still further and DNO’s decision to buy at 125p a share, agreed before the results of the wells, endorses this view.
ADVICE Buy
WHY Strong track record, good development prospects and potential upside through drilling
Topps Tiles
Trading has been topsy-turvy at Topps Tiles in recent years. The retailer is struggling because of weak consumer confidence and a slowdown in the housing market, both of which have added a dull finish to its performance.
Britain’s largest supplier of tiles and other flooring is regarded as a bellwether of consumer sentiment and its latest results suggest that it has been caught up in the same gloom that is creeping up on the rest of the retail sector, as cautious consumers cut back on big-ticket purchases or renovating kitchens and bathrooms. Add to that the slowdown in housing transactions, which have barely moved for 12 months, and the signs mainly point south for the company. Its directors accept that the business is facing challenges amid “a softening of the underlying market”. Yesterday it reported a 2.2 per cent drop in comparable sales for the second quarter, sending the shares tumbling by more than 13 per cent to 69¾p.
But there is no need to despair just yet. The retailer has been preparing a strategy that looks promising. Central to its plan is to gain more trade customers, more consistent and predictable with their purchases, leaving the business less exposed to the sporadic demand of high street consumers. In 2014, Topps began a loyalty scheme for trade customers, attracting 55,000 members. It has also strengthened its commercial business by striking deals with bars, restaurants and hotels.
It is sensible for the company to pivot away from retail customers. It would be unwise to take for granted that the property market will return to the buoyant levels of the past few decades.
The company is also facing price competition from Tile Giant and Tile Mountain. The latter, in particular, has been investing heavily and, apart from one shop in Stoke-on-Trent, it is run online so does not have to absorb the fixed costs of a 376-strong store estate. To combat price competition, Topps has been focusing on a premium offer, opening boutique stores with design consultation labs in the southeast. It is also refurbishing its shops. The strategy is considered an innovative, which inspires confidence in the company.
ADVICE Buy
WHY Performing well in the face of significant challenges
