Derek Pain: Hanging on for Northern to find black gold

No Pain, No Gain

The stock market can be a baffling place. Its attitude towards Northern Petroleum is an example. The full cycle oil and gas group has reported strong trading and according to one calculation is worth some £176m, equating to 185p a share.

Yet this year the price has slumped by nearly a third to, as I write, 66p, capitalising the company at £62.9m.

True, the world oil price has has fallen and Northern is finding its Italian adventure like walking through sticky spaghetti, but there seems little doubt that the group has — and will — move ahead.

Internet tipster Tom Winnifrith is a long-time fan. Arriving at his £176m valuation he points out that the group is sitting on £24.1m cash and putting a minimum price tag on its Italian, Dutch and English assets produces £92m. Then there is the stake in a highly promising oilfield off South America. A recent, unsuccessful takeover approach by Total, the French energy giant, for Wessex Exploration, which shares a 2.5 per cent interest in the field with Northern, in effect, priced the Northern involvement at £60m. And the online man stresses the Dutch, English and Italian operations could be worth very much more than he has slotted into his sums.

Clearly such a yawning valuation gap is remarkable. In the past five years Northern's shares have fallen almost remorselessly from above 200p. There have been some disappointments, but overall the group has performed well and deserves more investment attention. In its last year, production increased by 31 per cent with resulting revenue at €24.5m (£19.7m), up €9.5m, and pre-tax profits coming out at €6.2m compared with a €1.5m loss.

Still, it is often unwise to go against the stock market. It has a knack of anticipating events as the no pain, no gain portfolio has recently experienced. However, the portfolio, which recruited the oil group last year at 68p, is sticking with the shares. After all, the Dutch venture is progressing nicely and there is a strong possibility that the Italian authorities are waking up to the economic realities of the country's oil and gas potential, benefiting Northern's endeavours. In addition, that South American field appears to be a humdinger.

TEG, involved in disposing of organic waste, has joined the portfolio's casualties.

It is no longer up for sale, has announced a thumping loss and again called on shareholders to pump in more cash.

The strategic review that sought a buyer, or at least new investors, failed to produce any acceptable deals, and the loss, including one-off, non-cash exceptional items, comes out at £8m against £628,000. The open offer cash call, the second within a year, is aimed at raising £2m with shares on offer at 3p.

The company, rather ominously, states that, should new money not arrive "and there be further delays in the receipt of income from certain projects, the directors believe this will place the company in a position of significant uncertainty...".

Last year, the group, a recent recruit to the portfolio, raised £3.8m at 10p a share. At one time the price topped 120p but is now around 3.5p, valuing the business at £4.1m. The portfolio paid 8p.

One bright spot is that serial investor Peter Gyllenhammar has taken advantage of the decline to lift his stake to 5.1 per cent.

The portfolio cannot take up any new shares as it is restricted to its basic investment.

I am obviously disappointed at this turn of events and will probably dump the shares. Still, I will hang around for a while. There is, I feel, still a chance that bid activity will emerge.

One other constituent has been active. Avation, the aircraft leasing group, is raising £2m through one of those private placings.

As readers know, I am not particularly keen on such cash-raising exercises. I think all shareholders, as illustrated by TEG, should be offered the opportunity to subscribe. But in Avation's call, the cash is being raised at around the ruling stock market price.

It is not, as so often happens, a case of a privileged few being offered shares at a substantial discount and then able to book an immediate profit. Avation shares are around the 100p mark, against the 83.5p the portfolio paid in January last year.