According to City forecasts, Chariot Oil & Gas (LSE: CHAR) is worth 126% more than its current valuation.
The five sets of analysts that cover the company, Northland Capital, Westhouse Securities, finnCap, Jefferies International and Cantor Fitzgerald have an average price target for Chariot of 22p for Chariot’s shares.
But is this a realistic target?
Asset rich
Chariot is an asset-rich company. However, as of the yet, the oil minnow isn’t producing any revenue. The company is relying on farm out deals and share placing to raise cash.
Nevertheless, Chariot’s management is pursuing a low-risk strategy in the development of the company’s assets. This approach includes some useful farm-outs with larger partners.
Farm outs
Australia’s Woodside is Chariot’s partner in Morocco. Woodside has a 25% working interest in Chariot’s Rabat Deep prospect. Funds received from this farm-out have covered nearly all of Chariot’s Rabat Deep back project costs and Chariot is now looking for another partner to help drill the well.
The Rabat Deep JP-1 prospect contains an estimated 618 million barrels of oil.
Over in Mauritania, at Chariot’s C-19 license, the company has also de-risked the project and recovered back costs through a farm-out deal.
Chariot and its primary partner on the prospect, Cairn, believe that there are 588mmbbls of resource at the C-19 license. Once again, Chariot is currently seeking a drilling partner before it moves ahead. A number of other operators have recently made some impressive discoveries close to the C-19 licence improving its prospectivity.
Elsewhere, Chariot’s prospects in both Brazil and Namibia are moving ahead, and the company is seeking farm-out partners for the prospects.
Well-funded
Unlike many other small oil companies, Chariot is funded for the foreseeable future, giving it flexibility to seek out the perfect project partners. The company is debt-free and ended 2014 with a cash balance of $53,5m, after last year’s placing that raised $15m.
Moreover, Chariot has moved quickly to cut costs during the past few months in order to preserve cash while the price of oil remains depressed. As part of this plan, the company cut directors pay by 50% and CFO Mark Reid left the company. These two measures will save $1.5m in cash during 2015.
Asset rich
It’s clear that Chariot is an asset-rich company, which is attracting the attention of some major players in the oil industry. However, whether the company can capitalise on these opportunities or not is another matter.
Indeed, since coming to market during 2008, Chariot’s shares have lost 92% of their value as the company has struggled to move ahead. A number of exploration failures have hit the company’s share price hard over this period.
And with a cash balance of only $53m at the end of 2014, Chariot’s cash balance is the lowest it has been since 2011. Still, the company has enough cash to keep the lights on for the foreseeable future and additional farm-outs look to be just round the corner.
High risk, high reward
All in all, Chariot is a high-risk/high-reward play.
If the company manages to find partners to help it develop key prospects, Chariot’s shares could rocket higher. Although if management fails to negotiate any deals, there’s a chance the company could go out of business.
