Gamble of the week: Cleaning up the oil sector

The 2010 BP disaster in the Gulf of Mexico was a watershed for the oil/gas industry in terms of environmental protection. Legislation has been tightened and corporations have become far more aware of their responsibilities when it comes to offshore drilling.

The problem they face is that, by their nature, rigs and floating production, storage and offloading vessels can't avoid creating vast quantities of drilling waste, which can't be discharged into the sea. Disposing of such oily mud is expensive particularly as many rigs operate in hostile conditions and involves shipping the sludge for treatment at onshore sites.

This is where Nature's proprietary compact treatment units (CTU) fit in. They are able to decontaminate waste on site, using sophisticated processes developed by scientists from the University of Stavanger, Norway. The CTUs are compact, taking up little space, even on small jack-up rigs.

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These are still early days, but this could become a big money-spinner for the company. There are more than 1,000 offshore platforms working around the world. So far just four CTUs have been deployed in the field, creating exciting opportunities in the pipeline.

Nature also operates port treatment facilities in Rotterdam, Stavanger and Gibraltar that treat marine industry waste. Future sites will include Panama, the Suez Canal and Singapore.

Nature Group (Aim: NGR)

That said, it hasn't all been plain-sailing. The global slowdown in ocean freight has affected the number of vessels using the group's dockyard facilities. In May 2011 the Gibraltar site suffered a serious explosion and is still out of action pending planning permission to build a new processing plant.

To make matters worse, the insurers have so far refused to payout £3.5m owed to Nature in damages, albeit the board is fighting for full reimbursement. Fortunately, a further £3.9m of losses from third-party claims should be recoverable.

This incident has been the main reason for the shares heading south over the past 18 months, but they now trade far too cheaply on 8.5 times earnings. House broker WH Ireland is predicting 2012 revenues and earnings per share(EPS) of £18.1m and 3.1p respectively, recovering to £20.9m and 4.6p in 2013. I would value the group on a ten-times EBITA multiple. Adjusted for net cash of £1.2m, that delivers an intrinsic worth of 39p.

Nature is not without risk. It is a small-cap business operating in a huge industry while simultaneously trying to commercialise its cutting-edge CTU technology and resolve a major insurance claim.

All the same, the firm could soon become the go-to provider for the treatment of offshore sludge. The board is confident about the firm's prospects, with five of the directors snapping up shares in July at prices ranging from 26p-32p each. WH Ireland has a target price of 46p.

Rating: SPECULATIVE BUY at 26p (market cap £21m)

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more.