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Paul Mumford snapping up Ithaca Energy

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Why Paul Mumford has been snapping up small-cap oil

As low oil prices continue to bite at energy-related stocks, Cavendish Asset Management’s Paul Mumford tells FE Trustnet why firms in the oil industry are still a viable investment.

By Lauren Mason, Reporter, FE Trustnet
Wednesday March 11, 2015

Mumford has a wealth of investment experience. Before becoming a fund manager in 1988 when he joined Glenfriars, he worked as an analyst for Norris Oakley Brothers and also as a smaller-companies expert at R Nivison.

As a result of this, he’s witnessed many market truisms first-hand.

“One of the reasons I think the oil price is going to recover is because it’s happened in the past,” he said. “Many years ago, I bought a number of companies when oil got down to $14 per barrel and I said to myself: ‘Do I take advantage of this by buying BP or Shell?’ And the answer was: ‘No, I’ll go for the smaller companies.’”

“The reason for going for smaller companies is because BP and Shell have got to have special discoveries just to replace the oil that they’re using up.”

Mumford contrasted this to smaller companies, where just a reasonable find can be completely game-changing in terms of both assets and income.

He said: “I prefer smaller companies because not all of them will go right, but the ones that do go right could go up ten-fold over a period. It might not happen for some five or 10 years, but who cares if you’re going to make that sort of money?”

Because of the risk involved with smaller stocks, Mumford has been strict on the criteria that he has adopted when choosing companies to invest in.

“I’ve avoided places like the Falkland Islands as it’s too remote,” he said. “I’ve avoided places like America where it’s just a completely different game. I’ve stuck to the North Sea where I understand what’s going on.”

“In a lot of cases, some of the shares I’ve bought have hedged their oil so that, for the next 18 months or so, they won’t have any particular financial problems. Alternatively, they’ve got sufficient production to get them a cash flow through which will see them through this sticky period.”

Ithaca Energy, one of Mumford’s favoured small-caps, has hedged 6,300 barrels of oil per day at an average price of $102 until 30 June next year.

“[Ithaca] is producing around 12 000 barrels each day, and it’s got an oil field coming into production next year which will give it another 16 000 barrels of oil,” the manager said.

“The share prices got whacked back because the second field has been delayed and people have been very disappointed about it.”

The company, which has a current market cap of £121.58m, is set to have a cash flow of over £330m when the second field comes into production.

“It’s astonishing value,” Mumford said. “But, the problem with it is the fact that it’s got debts of about $700m or $800m and I think these are going to peak at about $850m.”

“It’s got head room of up to $1bn so it is risky in as much as it has got this borrowing situation, but if I’m right and oil doesn’t come down much further, then it’s going to pay back those debts fairly quickly. Also, its average production cost is about $30 a barrel, so it’s got plenty of head room to make a profit.”