Victoria Oil & Gas: Fundamentals & Valuation Summary

A coverage in the scotsman and UK analyst (which contains some of the valuations above!). A reply from the Daily Mail and an email from the company.




scotty1 - 29 Dec'05 - 15:21 - 17084 of 17146


UK ANALYST 29/12/05

Buy Victoria Oil and Gas at 121p
Says Rob Cullum of Trendwatch.co.uk
In mid-November, a tiny oil company called Victoria Oil & Gas rocketed to the top of the leader-boards, more than trebling in value in days.

Why? This is the key paragraph of their resource statement:

"Resources of half a trillion cu ft of recoverable gas have been confirmed by independent specialists D&M from discovery Well 104 at the Company's West Medvezhye gas and condensate project. The project is located in the Yamal Nenetsk Region of Russia, a region which contributes around 20% of global gas production annually.".

Half a trillion cu ft of gas sounds astronomically and unimaginably huge. To give some idea of the scale of the find, it's bigger than several well-known North Sea gas fields put together and is believed to be the biggest discovery of natural gas by any AIM listed company.

Well 104 was the first well to be sunk in the project zone. Victoria has just completed the raising of its stake in the project from 74.8% to 100%..

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News of the discovery came as a complete surprise to the market. Victoria has been listed on AIM since July 2003 and had done little to excite investors since then. So just what do we know about Victoria?

We know that it was founded by former employees of Yukos, the collapsed Russian energy group built up by Mikhail Khodorkovsky, the imprisoned Russian oligarch.

It was established to build a portfolio of investments in the oil and gas sector, with particular emphasis on projects in Russia and Central Asia.

With the benefit of hindsight perhaps we should have expected something like this. Russia and the Central Asian Republics account for some of the largest hydrocarbon deposits in the world. Oil production in the Kazakhstan, Azerbaijan and Caspian Sea region, has doubled during the last ten years and is expected to double again by 2010. Russia has the world's biggest reserves of gas - nearly twice as big as second-placed Iran - and is the world's biggest producer and exporter. The Yukos people probably had excellent 'inside knowledge' of the most promising projects.

As North Sea gas production declines, Russia will step up exports to the UK. Within a few years, Russia is projected to supply 10% of the UK's gas requirements.

Is it too late to buy into Victoria? Have you missed the boat? No I don't think so - though there are some vital risk caveats, discussed later in this piece. At least two analysts to our knowledge put the fair-value price of the shares at 300p or more. One puts it at 360p a share.

If you're interested in the calculation, it goes something like this. D&M, the respected independent assessors, put the range of probable gas reserves at East Medvezhye at between 92 billion cu ft (the 'low' figure, below) and 2.3 trillion cu ft (the 'high' figure), with the 'expected' value at 0.5 trillion, as already mentioned. Assume that Gazprom pays its going rate of $40 per 1,000 cu metres (about a third of the free-market price). The gas is valued like this:

Low:
92,000m cu ft = 2,600m cu m * $40/1000 = $104m = £62m.

Expected:
500bn cu ft = 14,000m cu m * $40/1000 = $560m = £329m

High:
2.3trillion cu ft = 64bn cu m * $40/1000 = $2,560m = £1.5bn

Now let's be really conservative, ignore the 'high' figure and take the average of the 'low' and 'expected' figure. That gives a valuation of £200m or about £2.50 a share.

And that's only for West Medvezhye. That isn't Victoria's only asset. It has 35m barrels of recoverable oil at Kermokol in Kazakhstan, where it's targeting production of 4,000 barrels of oil a day within 3 years. That alone is worth just under 1 pound a share. Looked at in that way, West Medvezhye is in the share price for about 20p rather than 2.5 pounds

Having said all that, there is still a truckload of risk attached to this company. You only have to look at other well-known oil fiascos such as Ramco (water where it thought it had oil), Regal (a rogue chief executive) and First Calgary (couldn't find a partner) to understand that the risks are not merely theoretical.

One risk is its need to raise more working capital in an equity funding. Indeed, it has just announced that it has successfully raised 13.1m pounds in an institutional placing. That's good news - except that it means that existing shareholders have their original shareholding diluted. The institutions will always get first bite of the cherry before the private investor gets a look-in. Nevertheless, any dilution can be more than countered by the removal of uncertainty over the funding. This has contributed to the share price rise over the past few days. Another positive factor is that the shares were 2.5 times oversubscribed, an indication of the strength of institutional backing.

There are bigger risks than dilutive institutional placings. Perhaps the biggest is that the only buyer of Victoria's gas is the Russian state monopoly Gazprom, more used to operating in a Soviet-style economy, as BP has already found to its chagrin. The price that Victory will get for its gas is whatever price Gazprom dictates. Reforms are under way at Gazprom, catalysed by the fact that talks begin next year on Russia's possible accession to the World Trade Organisation. Without reforms, it's unlikely that Russia will be allowed in.

Fortunately, Victoria is said to have a good relationship with Gazprom; and the gas - always assuming that it's commercially viable to extract - can easily be plugged in to Gazprom's pipeline infrastructure. Victoria's chairman, Kevin Foo (who is also managing director at Celtic Resources), says that Gazprom's pipelines are only half full, and that Gazprom needs more gas to fill them.

Perhaps the gas will be difficult to extract, or the reserves will turn out to be a lot smaller than originally estimated.

But then again, given that we only have the results from a single well, the reserves could well turn out to be even more astronomical that the current estimate of 0.5 trillion cu ft. Given the prolific nature of the area, the maximum expectation could be nearer the high estimate of 2.3 trillion.

Victoria is now drilling two more wells at West Medvezhye, the result of which won't be known until the spring of next year. If the news is good, the shares should rise sharply, since it mitigates some of the risk. If it's bad, you could lose money.

If you're a widow or orphan, don't buy this share. But if a holding in Victory will form a relatively small part of your total investment portfolio, and you're prepared for a roller-coaster ride with the possibility (we'd put it no higher than that at this stage) of serious profits. then BUY.

Key Data
EPIC: VOG
NMS: 10,000
Spread: 122p - 125p
Market Cap: 100.8 million pounds

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kirkuk - 29 Dec'05 - 16:50 - 17131 of 17160


This is a copy of an email I received from DM on 15th Dec after I made representations to them about the article by GF. It was also verbally confirmed to me that indian3 was technician mentioned.

Dear M,

Thank you for your correspondence regarding the shares of VOG which I have investigated thoroughly. I am now in a position to tell you that I have completed a full inquiry into the events of Dec 8th and 9th in relation
to this matter.

I have concluded that there was certainly nothing untoward relating to the publication of the article which appeared in the newspaper on Friday Dec 9th.

Information which led to the writing and publication of the piece in Geoff Foster's column only came into our offices after the market closed on Thursday Dec 8th and several hours after there had been some significant trades.

The author - who holds no shares of any kind - and our City Editor stand by the story and their decision to publish the information it contained. As the Mail was being printed, however, a technician chose to post details of that story on the Advfn website.

The person concerned has been reprimanded, given an official written warning and his access to such websites has been removed. However, I am confident that the person concerned was not involved in the trading of VOG shares himself or through any third party.

His motive was to add what he thought would be a helpful contribution to the debate which was clearly already taking place on the bulletin boards.

The Daily Mail subscribes to the PCC Code of Conduct relating to Financial Information which we take extremely seriously.

I am therefore extremely grateful to you for drawing this situation to my attention and giving me the opportunity to investigate. Despite my satisfaction that in this case there is no cause for further action, I have used it as a reminder to all our journalists and support staff both inside the paper and at our print sites.

I am most appreciative for your assistance.

Best wishes for Christmas and a prosperous New Year,

Yours sincerely,




Charles A. Garside,
Assistant Editor


KEV921 - 29 Dec'05 - 16:51 - 17132 of 17163


Late but under the circumstances who cares...............

Dear Mr xxxxxx

I am sorry for the late reply to your email, but I hope that you had a very merry Christmas

Further to our announcement of 19th December, you may have seen today that the Company has been successful in raising around £13.1m with institutions and other investors through the placement of 16.85 million shares at a price of 78p. The placing was 2.5x oversubscribed and the company will use the proceeds to finance the operations at its exciting West Medvezhye gas and condensate project in West Siberia and the Kemerkol oil field in Kazakhstan.

I hope that this information has been useful. If you have any further questions, please do not hesitate to get in touch and have a very happy New Year

Best regards

George Donne
General Manager