Victoria Oil & Gas: Fundamentals & Valuation Summary

Steve

Good post/reply which sounds very encouraging and thanks for sharing the info.

You may like to compare for confirmation of year end update from Equity research who along with other sources have also mentioned 103 news update is forthcoming!


Equity Growth Research - Smaller Company Review 7/12/2006


Victoria Oil & Gas

The fortunes of Victoria Oil & Gas (VOG) have swung wildly over the past year or so. From a low in November 2005 of 43p the stock soared to a peak of 266p/share on February 15, driven by optimism concerning the scale of VOG’s key West Medvezhye natural gas project in Western Siberia. Disappointing drilling results on Wells 104 and 106 in the Danniella Accumulation led to a sharp sell-off during the second quarter, which took the stock down to 68p. After rallying briefly to 106p in September, the stock dipped again to a recent low of 70/p. Wells 104 and 106 encountered hydrocarbons but these proved non-commercial. The problem was low reservoir pressure and insufficient hydrocarbon saturation.

VOG commenced drilling at Well 103 in June and in October confirmed the presence of hydrocarbons. The well has been drilled to 3,900 metres. Open-hole logs indicated three intervals totalling 55 ft of hydrocarbon-bearing sands between depths of 3,700-3,820 m. There are apparently strong indications of gas or gas condensate and there is the possibility of oil, given that nearby licences have produced oil from the same horizon. The horizons indicating hydrocarbons are either within or close to the Bazhenov shale, the source rock for the Nadym-Pur hydrocarbon province which hosts some of the largest gas and gas condensate fields in the world. Interestingly, the Russian independent, Nadymneftegaz, made a natural gas discovery in September less than 10 kms from Well 103.

Well 103 is being cased and will be tested in the coming weeks to determine reservoir productivity and volume. Testing will take a minimum of 90 to 120 days. A drilling update is expected by year end. According to the consultants, DeGolyer & MacNaughton (D&M), the prospective resources for the intervals being tested are 144m boe. In total, the West Medvezhye licence area is believed to contain 1.1bn boe comprising 5.1 tcf of natural gas, 247m barrels of condensate and 25m barrels of oil. This is a sizeable resource base, being almost 4X that of First Calgary, for example. Unlike First Calgary in Algeria, however, VOG has yet to establish any 2P reserves at West Medvezhye.

VOG has recently reported that it is moving its drilling rig from Well 103 to 105, approximately 22 kms to the northwest. Movement of all the necessary equipment to the Well 105 site should be completed by the end of the first quarter of 2007. Commencement of drilling is expected in the second quarter. Well 105 has been given the highest probability of success by D&M of all the structures that have been assessed in the West Medvezhye licence area. The drilling programme for 2007 also includes Wells 107 and 109, where the target depths are expected to be reached by year end.

On the commercial front, last September VOG announced a marketing framework agreement with EPI, a company planning to build a 210 MW power station in Moscow. This will require 15bn cubic feet of gas per year, all of which will be supplied by VOG for a minimum of two years, when West Medvezhye has been developed. The gas will be sold at prevailing domestic market rates for large endusers. EPI will arrange for the gas to be supplied through the Gazprom pipeline network. The significance of the deal relates partly to its scale and partly to the fact that VOG has been able to negotiate directly with the end-user rather than sell to Gazprom. These factors are believed to have resulted in relatively favourable terms for both pricing and pipeline access. Domestic prices are, however, below those of exports.

VOG joined the ranks of the oil producers in March 2006, albeit in a very modest way. Since March, production in the Kemerkol field in north-western Kazakhstan has averaged 70 b/d. Production has, therefore, been running considerably below planned volumes of up to 1,800 b/d. VOG argues that production has been heavily constrained by a lack of development finance. This is, however, expected to change following the £11.5m convertible bond placing in October. Significantly, VOG has also converted its subsurface exploration contract with the Government of Kazakhstan into a production contract. This will enable VOG to apply for an export quota in the KazTransOil pipeline system and, thereby, to receive higher export prices. VOG has a significant 2P reserve position at Kemerkol of 34m barrels.

Reflecting the potentially huge scale of the West Medveyhye natural gas interests VOG is arguably the most interesting of the FSU (former Soviet Union) focused and AIM listed oil and gas juniors. Conceivably, these could be as influential for VOG as the Mangala discovery has proved to be for Cairn Energy. In relation to West Medveyhye’s estimated resources, the fully diluted market capitalisation of £102m (9p/barrel of resources) appears decidedly marginal. The obvious drawback is that VOG has yet to convert any of its West Medveyhye resource base into reserves. Assuming a sizeable reserve position can be identified, perceived risks concerning ownership of Russian natural resource assets will probably tend to depress the valuation relative to many of its peers focused elsewhere in the world. Nevertheless, there is still plenty of scope for a surge in the share price should the W103 drilling results prove encouraging. Not surprisingly, a cautious view of valuation is currently being taken ahead of any news on drilling.