Derek Pain: Nighthawk sale looks a Jolly good deal to me

No Pain, No Gain
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The Independent Online

It has taken a long time but, this week, Nighthawk Energy finally completed the sale of a minority stake in its highly prized Jolly Ranch oil and gas field in Colorado. The initial share reaction represented a huge thumbs down. But it looked a pretty good deal to me.

The group, with a stock market capitalisation of £122m, is one of the most actively traded shares on AIM.

Unlike, the company I discussed last week, Nighthawk stock enjoys a heady turnover. More than one million shares a day is a frequent occurrence, while two or three million is not unusual. On the day of the Jolly deal, volume was nearly 22 million.

Build-up to the sale must have been a factor in the reaction. When David Bramhill, the group's managing director, revealed that sale talks were going on, the shares brushed 60p from a 20p year's low.

So astute short-term traders – and, perhaps, some City institutions that acquired shares at 20p in fund-raising placings – were tempted to cash in. In a few days the shares fell 20p to 40p – a far cry from the 116p once hit, but stockbroker Daniel Stewart is advocating a 102p target. The no pain, no gain portfolio alighted on the shares at 44p.

A Swiss-based, largely Italian-owned investment company called San Severina is buying the minority stake. It is paying nearly $11m each to Nighthawk and its 50 per cent US partner, Running Foxes, for a 20 per cent interest in the core 50,000 acres of the Jolly spread.

Twenty per cent options have been acquired on an additional 230,000 acres. If they are all exercised, the partners stand to collect an extra $29m each. They each retain 40 per cent interests.

The deal, negotiated when the crude oil price was nearer $40 a barrel rather than the current $60, puts a near $400m valuation on the spread. There is talk that an influential review could enhance the price tag even further.

The group's cash hunger should be satisfied, at least for some considerable time, although the cost of exploration is high.

Leila Reddy, an analyst at Daniel Stewart, expects another loss this year but has predicted a small profit next year. With the options, the Jolly deal is worth 47p a share to Nighthawk. It also has around 5p cash a share. The US adventure could, therefore, be in the equation at near to zero. A 102p target price is far from outrageous.

Jolly is by some distance Nighthawk's biggest operation. It has half-a-dozen other US developments, some of which could be used to realise cash. Upgrades can be expected at two other fields and there is also talk of a US share listing. San Saverina has a joint operation with AIM-traded Ascent Resources, a largely European focused oil group. As a result, Ascent will acquire 4 per cent of Jolly. is another portfolio constituent showing a profit although, like Nighthawk, its shares are a long way below their peak of 75p. Monday's results proved the doubters wrong. Profits emerged at £2.06m – in line with expectations – and the year's dividend was increased 5 per cent to 3.15p a share.

In addition, £887,000 of its cash pile is now being used to pay a special dividend of 2p a share. Not surprisingly, the shares quickly moved back to 37p with 360,000 traded; something of an active session for what is normally a quiet performer.

The extra payment is a consequence of the rather somnolent share action. The group has a share buy-back scheme, although chairman George Hardie says buying "a material volume of shares has proved impractical due to lack of market liquidity". As the group is in a "position to return additional funds to shareholders" it decided to opt for the dividend bonus.

In these cash-strapped times such a policy is highly unusual. The already high yielding shares, with the 2p enhancement, now offer a return in the region of a staggering 16 per cent.

Certainly, currently appears to be more than holding its own in a tough environment. Trading, although below the levels ruling for much of last year, is described as "stable". I expect profits this year to emerge near to those just announced.

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