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Derek Pain: Once in a while a busted flush bounces back

No Pain, No Gain

Occasionally a deeply distressed company confounds the stock market and stages a dramatic – and lasting – recovery. Northern Petroleum has achieved such a feat.

In the 1990s the group, with oil interests in Russia and even an internet involvement, was one of AIM's high-flyers. Then disaster. Suddenly, disintegration set in. As the old century ticked away the shares collapsed and Northern found it had the unenviable distinction of a debt pile more than three times its capitalisation.

Today Northern, with its shares at 126p, has a valuation of £90m. There is cash in the bank and, unlike so many of its peers, it actually makes money. Its major involvements are in this country, Italy and the Netherlands. Minor interests are in Spain and Guyane, the South American country closely related to France.

The transformation has produced a group that, stockbroker Blue Oar Securities estimates, has total assets worth some 620p a share. And internet tipster Tom Winnifrith has an ambitious 400p price target.

There has been some criticism that Northern has been rather slow developing some of its interests, particularly in Italy and the Netherlands. But in recent times it has forged ahead in both countries. In Italy its progress is likely to accelerate following the proposed takeover of a cash-strapped, Plus-traded company, ATI, where it already has a 37 per cent stake. An all-share deal valued ATI, which has 50 per cent interests in 16 Italian licences, at £11.3m.

Dutch production is expected to be ramped up this year and on the domestic front developments in and around Hampshire continue apace.

There has, perhaps not surprisingly in this environmentally conscious age, been local opposition to some on-shore developments. Managing director Derek Musgrove, the man behind the Northern revival, believes that today's more eco-friendly oil and gas projects are no longer blots on the landscape.

The group moved into this country's energy reserves in its early years. One of its interests is a 10 per cent stake in the Horndean field, an oil producer since 1988. It has since taken on other developments and only last week revealed it had been granted a further site near Havant that some estimate could contain 16 million barrels of oil.

Musgrove is not prepared to merely sit back and await riches from production, although such revenue is happily embraced. Much of Northern's expansion has been financed from trading assets. The last deal was the £7m cash sale of an interest in underground gas storage projects. A further £3m could be due.

The group's cash pile at the end of last year was around €35m (£30m). So it should have little difficulty funding its quite extensive developments in The Netherlands, the scene of most of its production last year, and Italy, where it holds more licensed acreage than any other group.

It is likely that 2008 profits, due to be announced in the next few weeks, will emerge at just under £1m, plus asset sales. Northern's shares (founder members of AIM) have had a strong run this year. They have been buoyed by a succession of exploration developments. Like others in the energy business the shares have been much higher, topping 200p a few years ago. Circle Oil, a group I discussed in February, has also so far had a fine 2009. Shares of this North African-focused group are near 32p, climbing from around 10p since the turn of the year.

And, it is pleasing to report, that Nighthawk Energy, the No Pain, No Gain portfolio's only exploration stock, seems to be coming to life. The shares are now about 43p, having slumped to near 20p. They have touched 116p.

The US-focused oil and gas group is also cashing in by unloading some assets. It is selling minority interests in its extensive Jolly Ranch field in Colorado. Details should be revealed in the next week or so – a little later than expected.

The real interest will lie in the amount the buyer pays. I hear that the deal could put a mouth-watering valuation on the Jolly project.

Currently, Nighthawk and Running Foxes, its American partner, share ownership of the Jolly spread. Each will be left with 40 per cent after the deal is completed.