This junior oil is ripe for a takeover offer.
Times are tough for small companies needing to raise funds, especially if they are high risk -- like small oil and gas companies.
A number of these junior oils look very cheap compared to their assets at the moment, and one that I have been watching for a while is Lansdowne Oil & Gas (LSE: LOGP), which is currently sitting on a very valuable asset but struggling to raise funds for new exploration.
(Incidentally, if you'd like some more share tips on companies that look good value at present, I'd recommend this free report, "Top Sectors of 2012", from the Fool's in-house analysts.)
Lansdowne's prize asset
Lansdowne has a 20% stake in the Barryroe oil discovery in the Irish Sea. When I first wrote about the company in March, Lansdowne's share price was around 48p. It's now just 35p -- so what's happened since then?
Well, initial testing results from Barryroe suggested flow rates of 3,500 barrels of oil per day (bopd) and 2.9 million cubic feet of gas per day (mmscfd). This was acceptable, especially as these flow rates were restricted by the test drilling equipment, so there was always a good chance that potential was much higher.
Four times faster
Since then, we've found out how much faster. In May, Barryroe operator Providence Resources (LSE: PVR) said it now expects that Barryroe will flow oil and gas at 12,500bopd and 11mmscfd - almost four times the flow rates in the test.
There's more good news, too. At the start of June, Providence announced the independent test results on the sample of oil it took from Barryroe. The oil was described as "a premium light (43° API), low sulphur, low TAN and low metal crude" -- in other words, it's a top quality crude oil.
What's it worth?
The most recent independent valuation of Barryroe's resources gives Providence's 80% share of the 58 million barrel Barryroe discovery a discounted net present value (NPV10) of $808m. Since Lansdowne owns the other 20%, its share is worth around $202m, or £131m.
Lansdowne's current share price of 35p gives it a market capitalisation of just £43m -- only 33% of the value of its Barryroe asset, leaving plenty of profit for a potential acquirer.
What's the catch?
Lansdowne's fundraising problems are serious and it needs a partner to continue exploring any of its other prospects. In the company's recent final results, the directors declared a "material uncertainty" over whether the company could raise sufficient funds "to continue as a going concern".
While this would normally spell disaster for a company, in Lansdowne's case it shouldn't. Providence has nearly completed its post-drill studies for Barryroe and already has an agreement with Royal Dutch Shell (LSE: RDSB) to buy the oil from the well.
Although further investment is needed to bring Barryroe into production, I have no doubt it will go ahead, generating strong cashflows for Lansdowne.
Takeover time?
We've already seen one opportunistic takeover recently, with The Parkmead Group (LSE: PMG) acquiring cash-strapped Deo Petroleum (LSE: DEO) for a song, just as Deo was on the verge of being able to start developing its best asset.
Lansdowne's current situation leaves it looking vulnerable to a similar takeover. Even with a typical 30% premium added on to the current share price, it still looks cheap alongside its share of Barryroe and its other prospects.
I'm very tempted to buy into Lansdowne, and may do so as soon as the Fool's trading rules allow me to. Why not leave a comment and let me know what you think?
Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free!
Further investment opportunities:
Roland owns shares in Royal Dutch Shell but does not own any of the other shares mentioned in this article.
