Imperial Energy - Potential FSU Oil Giant

Aton Note from 4th Dec not put on here before though similar to their note of 1st December.

Highlight for me is that there will be a more detailed breakdown of the 528mn bbls into P1/P2 reserves for Block 80.


Books 528mn bbls of new 3P reserves; reaffirms target production of 25mbpd in two years

Imperial Energy Corporation (IEC) provided a very positive operational and corporate update on Friday. The press release issued by the company highlighted the impressive results of a recently completed DeGolyer & MacNaughton (D&M) reserves study on IEC's Block 80 in the Tomsk Region, and reiterated reasonable near-term production targets from the assets already under development.

According to Imperial, D&M's report attributed 528mn bbls of oil reserves in the 3P category to Block 80's single most valuable target - the Kiev-Eganskoye oil field. In addition, 108mn bbls of resources were confirmed at five other targets located within the block's boundaries, with the potential to further elevate the total. Imperial's current reserves estimate, performed by TRACS, is 228mn bbls of 2P reserves at five fields (excluding Kiev-Eganskoye).

While the reserve auditors did not further sub-classify 3P reserves into proven and probable categories, we believe there is a very high probability IEC's overall 2P reserves would increase markedly as well.

On the exploration and production side, multiple oil shows were reported by IEC at its blocks 69, 70, and 86, with ten prospects scheduled for drilling in 2007. Imperial reiterated its target of producing at least 25mbpd by end-2008, which we view as reasonable given the company's prolific reserves base with upside from exploration potential. Pipeline construction is on track to connect the company's multiple prospects in the region - on time and within budget.

In addition, the company has formed its own drilling venture, RIG (Rus Imperial Group), with three rigs scheduled for delivery and installation in late 2007. The procured equipment will be helicopter-moveable, which is essential given the underdeveloped road infrastructure in the area. The own servicing company should help lower drilling and exploration costs and reduce operating risks from untimely or poor performance by third-party service providers. Also, according to many local operators, the Tomsk Region is experiencing a shortage in quality service providers, which has increased drilling costs. Thus, one's own servicing company may not just lower costs, but serve as a source of additional income.

Imperial also announced its plan to move its shares to London's main board, and to begin reporting its financials according to IFRS standards from 2006 onwards. This should raise the company's profile and improve share liquidity and financial transparency, all of which should be positively received by the market.

We value the company based on its proved and probable reserves (2P), so the latest reserves announcement has no immediate impact on our valuation. We note, however, that the initial appraisal of Block 80 will most likely ultimately lead to a significant increase in the company's 2P reserves, possibly as early as spring 2007, when IEC's development plan is finalized and the D&M report on the company's assets contains a proper 1P/2P breakdown.

The stock reacted positively to the news, closing at $14.4 on Friday, up 1.5% from Thursday. The shares have experienced a strong rally in anticipation of the announcement, rising 25% in the last ten sessions.

Our recommendation for IEC is Buy, with an end-2007 fair value of $25.2.