Petroneft Resources - Producing a future?

http://petroneft.com/

Petroneft (LSE:PTR) is an Irish registered company that is involved with exploration and development of assets in Russia that was established in 2005. Petroneft has suffered over the past couple of years, with its share price substantially dropping from highs of over 70p to less than a tenth of that. Subsequently, it only has a market cap of around £27m with 416m shares in issue.

Tomsk Oblast
The company’s assets are located within the West Siberian Oil Basin and are surrounded by the likes of Gazprom and TNK BP – clearly these are big names in the industry. The basin is over twice the size of Alaska and has temperatures of around -20 Celsius all year round. The sub-zero climate is proven to cause delays though, as roads and other transport facilities become iced over, preventing or severely disrupting access to some fields. Within the basin, Petroneft has two separate licenses entitled License 61 and License 67. License 61 was acquired in May 2005 whereas License 67 was acquired for $1.39m in December 2009. Below is a picture from Petroneft about their current prospects/acreages.


Petroneft has steadily been growing its revenue in recent years from .51m to $5.16m to $29.03m in the years ending December 09, 10 and 11 respectively. Clearly this is some feat with revenues rising substantially between 2010 and 2011. Moreover, revenues are further expected to increase with forecasts at $52.32m for the year ending December 2012 and $84.17m for the year ending December 2013 (digitallook.com). Notably though, Petroneft’s pre-tax loss has fallen significantly from $6.15m in 2009 to $16.42m in 2011. This is due to change though in the year ending December 2012 as they are expected to post a small pre-tax profit of $2m – the first in their history since listing.

So what exactly has happened to Petroneft in recent months? In February the drift began after the share price slumped over 35% following the company reporting that production levels were far below expected. During the period, highs of 3000 bopd were achieved, but had since fallen to 2300 bopd well short of the company’s 5000 bopd Q1 2012 expectations. This came as a shock to investors who were disappointed since a primary goal of the company was to maintain and slowly increase production levels. The decline was reportedly due to fracture stimulation (fracking) failures at some of their wells in their Lineynoye field. For those unaware, ‘fracking’ is when small explosions are created underground to crack the rocks and allow them to release the trapped hydrocarbons. Reasons given were higher than expected decline rates and the issue of water clean-up after fracking. However, the company further noted that other wells will be converted to water injection wells to restore pressure and help boost production rates over the next six months. Since this was announced in February, this is supposed finished in July. The 5 well fracking program that was due to take place was subsequently postponed. Following the announcement broker Fox Davies commented that short term the news will depress the stock, but should help it in the longer term. Fittingly, the share price plummeted towards 9p.

Then, in May, Petroneft issued a further update – the signing of a $15m loan & the announcement that production as now stable at 2200 bopd. The loan is secured against Petroneft’s 50% stake in License 67 and will be paid as a lump sum at the end of the loan period. Interestingly, this loan is with Petroneft’s partner in License 67. Having analysed the news, it appears to be positive considering Petroneft should be able to repay by May 2015 hence not endangering its license stake. You cannot rule out debt being a tad of a problem at Petroneft, as it already has a $30m debt facility with Macquarie. Perhaps, this adds a bit more risk to the company. Also in the release, they mentioned that10 new production wells will be drilled with the first of which will produce from Q3 2012 so a bumped up production rate is expected.

In April they released another reserves and operations report, this much more positive. 2P reserves increased 36%, P1 reserves increased 50% & production was still stable, but up at 2,300 bopd. Any rise on this news was small and insignificant with Davy Brokers labelling the share price movement as ‘punitive (punishing)’.

In June the final results for the company were released. Overall production was reported at an average of 2200 bopd for June exclusive of wells temporarily shut-in for pressure transient testing. The company also said ‘The Arbuzovskoye No. 1 discovery well is now in production and has been producing with an electric submersible pump at a rate of about 350 bopd since mid-May 2012. So far it has shown essentially no decline and a water cut of less than 2%. This is comparable to the best wells drilled at Pad 1 at the Lineynoye oil field, prior to fracture stimulation, and is in line with the excellent test results achieved on this well when it was first drilled in November 2010,’ as well as ‘It is expected that a drilling crew will arrive on site at Arbuzovskoye in the coming weeks to commence drilling new production wells, the first of which we expect to bring into production in Q3 of this year.’ The group are also exploring farm out or asset purchase options to further the company after a year of ‘disappointing productivity’.

Since the first of the production problems, the share price has collapsed by approximately 50% - on the face of it, this appears overdone considering the new production wells and recompletion of existing ones in Q3 should re-boost production rates and lift the share price back up. The inherent risks are of further problems at their wells including the failure of fracking programmes although even without the recompletions the new wells will boost production. Perhaps the best policy for trading Petroneft is to examine their next operational update. If production begins to rise, the risk is greatly reduced as it proves the methods employed by them are working. Nevertheless at sub-7p the shares look cheap and the boosted revenue and gentle emergence of profits in the coming years should help the share price recover.



Last of all from a technical point of view the picture is rosier. The shares have bounced off an all-time low and have broken out of the downtrend following the February drop. A recovery should precede a period of consolidation.

6 comments:

  1. A good clear concise post about ptr

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  2. Thanks. Oddly enough id already invested a small amount in ptr, this has been a useful clarification of a number of points

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  3. am in at 10p but u know ur stuff ,nice 1 i might make some money 1 day. the aex 1 is very good as well

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  4. another one of my Stocks bought at around 9 pence . Excellent articles and another source to aid my research.

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  5. Would it be unusual if each of the 10 new wells each produced 350 bpd. How close are they to the first drilled well.

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  6. spot on this week Elite Trader for PTr - must take note of your ideas more often.

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