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Clearly I do not get every share tip correct. I apologise when I am wrong and am attacked for being smug when I am right. C’est la vie. Over 12 years at t1ps my average gain per tip over 241 share tips was 42.7% but folks always remember the losers. Again c’est la vie. So I nor brace myself to be attacked for smugness in talking about one I have called bloody brilliantly: AIM listed Leyshon Resources (LSE:LRL). On my Nifty Fifty website I tipped this in late October at an offer price of 11.5p. Six weeks later I suggested selling half at 24.75p (bid price) and so my readers are in for free. Today I told them to reinvest their gains at 24.75p by buying again. And this is why at 13-13.25p the shares are a buy.
Underpinning this company is net cash which – even after drilling two gas wells in China is worth about 10p a share. That means that Leyshon’s gas assets are valued by the market at just over £7 million. That is far too low.
The company has acreage on the Eastern fringe of the prolific Ordos gas basin in Central China. The results of its second well (ZJS6) were announced today and Leyshon stated: “positive initial results have indicated that about 80 metres of cumulative potential pay interval has been intersected across 15 potential pay zones.”
The well is located seven kilometres from the first (ZJS5) well, with both part of an initial three well programme designed to explore and test the potential for commercial gas production in an unexplored 380 km2 central depression area that appears to show good continuity with a neighbouring discovery.
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Target formations were intersected at shallower depths than predicted and a production casing string has been installed – this to provide “multiple” opportunities to conduct flow tests on selected potential pay zones. Analysis of logs and samples currently remains ongoing – with flow tests expected to commence in mid-March and continue until late April/early May. The company added that “as in the case of ZJS5 some intervals may be tested for flow without stimulation i.e.: without fracking. Whilst it is obviously beneficial for zones to flow initially without stimulation it is expected that eventually all zones will require some stimulation over the course of their production life”.
This statement comes after the shares having slumped 18th December when, regarding its first well, the company announced that “tests have confirmed that stimulation will be required to produce commercial flows”. In other words Leyshon almost certainly has a commercial prospect. In China it can sell gas at a fixed price and its acreage is very close to a pipeline infrastructure. That the gas may require stimulation to be extracted is not a prospect-ender.
Even on a mammothly risk weighted basis a valuation of £7 million for what is odds on to be a commercial prospect looks far too low. And there is clearly further excitement to come. Dependent on “favourable results” from the current testing and seismic programmes, the company’s 2013 exploration programme is expected to include “a number of wells in addition to the current three well programme”. Leyshon added that the 2013 programme is scheduled to commence in mid-February, initially focusing on identifying the optimum location for a third well through the acquisition of further seismic data and interpretation of information from the first two wells.
If Leyshon goes ahead with additional wells it will not be doing so by betting its entire ash pile in it. It would only do so in the basis that a State owned company exercises its option to pay $16.5 million and refund most of the historic drilling costs in return for gaining a 40% equity interest in the project. That would clearly be good news.
To gauge the cautious approach of MD and 12% shareholder Paul Atherley have a look at a discussion I had with him HERE back in August. Atherley is going to husband the case carefully. That makes this look a very attractive risk reward play. I called it perfectly last time, now it is time to do so again. Buy.
Tom Winnifrith writes for 10 leading UK and US websites. To receive alerts on all of Tom’s articles follow him on twitter @tomwinnifrith
Tom is also one of the panel of 15 top tipsters, bloggers and analysts who between them send out one free share tip each working day for the new ADVFN service onefreesharetip.com. Thousands of investors have already signed up to receive these market moving share tips. To make sure you do not miss out sign up HERE.
