Aurelian - Bargain Buy

http://www.aurelianoil.com/
Aurelian (LSE:AUL) is looking like a very cheap option now. Over the last year the share price has slumped but negative sentiment appears to have hammered Aurelian into unexplainable low territory. Aurelian is a European based exploration and production company - its share price currently stands at just 7.50p/share. Its 52-week low was made at 7.00p/share recently with its 52-week high at 26.50p/share. Aurelian currently has a market capitalisation of ~£37m and has 494m shares in issue.


As per the chart above the share price has suffered massively since peaking at near 100p in early 2011. Over the last year the share price is down over 83%, 61% of which was over the last 6 months. However, current price movement looks more positive for a coming rebound. For example, on Friday, the share price peaked at over 8p, before settling back at 7.5p, but a late spurt of buying near the close almost pushed it up to 7.8p. At this historic low, sellers will eventually dry up in the hope of a future recovery hence any positive news should act as a very good foundation for gains and a halt to the downtrend. Any significant change in sentiment should mark a medium/long term bottom. The price has not followed wider market movements, hence there is significant room for upside from the current 7.50p level.

Before getting into the company's operations its interesting to see the structure of the holdings of the company. Aurelian's top four shareholders hold a massive ~69% interest between them. Therefore the company is fairly illiquid and any good/bad news has a far more significant impact on the share price. Also, in the case of a possible takeover offer, it will be them who can majorly decide whether it goes ahead or not. Taking into account the top nine shareholders, they own collectively 89.32% of all the shares, plus there are a variety of even smaller shareholders such as FIL Limited and Ingalls and Snyder who own between 1-2% of total shares. According to Reuters, 90.87% of total issued shares are held by institutions. This proves a massive vote of confidence in the company despite the share price fall. Also, Reuters notes that there has been a net gain in terms of shares held by institutions over the last three months, whilst the share price has dropped. Some of these institutions including Barclays also have short positions totalling many percent so the closure of these should lead to an uplift in the share price, which should be coming soon since the drop recently has been very sharp.

Aurelian listed on the AIM market in 2006 and has since built a portfolio of prospects in Central Europe. These assets are located across four countries ; Poland, Slovakia, Romania and Bulgaria through 29 licenses covering 4.5 million acres. These countries have stable governments, and have relatively unexplored basins using new technology. This combined with low development costs means that they are attractive places to operate in.

The Carpathian Basin is named after the Carpathian Mountains
For Aurelian, Bulgaria acts as the non-core asset with 30% & 18% interests in two areas (one that has since been disposed of). In Bulgaria they are partnered with JKX Oil and Gas (LSE:JKX) and other non-UK firms. In Poland Aurelian has interests in over 20 licenses with interests ranging from 25% to 100%, the average of these being 66.8%. In Slovakia they have a 50% interest in three areas and in Romania an average 39% interest in two areas. Consequently, Aurelian's pre-tax loss in 2011 was 8.65m euros due to their wide focus on a  variety of prospects. Aurelian has identified a range of potential farm-down candidates particularly in their Polish licenses to reduce working interests to better balance their portfolios.
Many of Aurelian's licenses lie within the Carpathian Basin. This takes the form of a huge 'thrust belt' structure which spans across Slovakia, Romania and Poland. The Carpathian belt is the sixth largest in the world. To date, a massive 14 billion barrels of oil have been discovered along the belt with current unfound potential upside of 2.4 billion barrels. The little seismic that has been conducted over the area enhances the possibility of increasing this figure. As a result of the long history of oil and gas activity in the region there is a good infrastructure of pipelines and a strong service industry. Also, the COS of prospects over Aurelian's licenses is 19%. Whilst this is a typical wildcat figure, the low costs of drilling make exploration here interesting. Below is a link to a comparison of this basin with another. http://www.aurelianoil.com/media/38053/area-2-table.pdf

The main cause of the low COS is as follows: Acquisition of seismic in the Carpathians is a challenge. The terrain is rugged and access is difficult for large vehicles. In addition the variation in surface conditions can make it difficult to acquire good data and significant effort is required to optimise the combination of source and receivers to geological features. Extensive processing is often required to identify and remove side effects. Finally when a structure is mapped in time, conversion to depth can be problematic. The Carpathians are the surface expression of massive earth movements which have resulted in large blocks of rock of different properties being thrust over one another. Extensive processing is required to convert from time to depth and place the blocks in the correct position to each other. Here we will benefit from the industry’s extensive experience in other areas of the world and the techniques and processing software that are available to us. Nonetheless, the value of these assets look to be secured through a farm-out or sale of them which i'll refer to later. There is massive potential here. For example in one license - Bieszczady - P50 prospective resources total 954bcf, of which 239bcf would be attributable to Aurelian. This would be over ten times higher than their current contingent resources in the license.  PLUS there is a mean estimate of 21.25mmbls attributable to Aurelian. Elsewhere in the basin, at Karpaty East, there is an estimate of 277bcf of which 80% is for Aurelian. There are plenty of other prospective resources also.

Aurelian's other asset lies in Poland in the Southern Permian Basin. These are found in the 'Rotliegendes and Zechstein carbonate plays in central and western Poland'. Resources found in this basin are both oil and gas, but there is also a potentially large deposit of shale gas found in structural traps in the Prusice license. Ultimate recovery [by all operating parties] to date in the Rotliegendes is estimated as 211 tcf. This proves the highly prospective nature of the area. This is where the bigger potential lies.
 In one of the licenses here - Poznan East - lies the Siekierki prospect. As per their website: The Siekierki structure is an asset of world class potential with up to 4.0 tcf of gas estimated to be in place in the main structure and a mid case estimate of 2.0 tcf GIIP, which RPS have attributed an NPV10 of €345 million net to Aurelian. Through this it is easier to see why so many institutions are interested in Aurelian and enhances the fact that its very cheap fundamentally. Three initial wells have been drilled attempting to exploit this prospect, Trzek-1, 2 and 3. Trzek-1 was drilled in 2007 and encountered a 90m gross gas column which tested at 2.5mmscfd which hinted that the location was certainly not the 'sweet spot'.
 
In 2010, Trzek-2 was the first MFHW (Multi-fracced Horizontal well) to be drilled in Poland. It encountered a 100m gas column with approximately 1,380m of gas throughout the horizontal section. A second MFHW, Trzek-3, was spudded in January 2011 on a separate structural high in the Siekierki structure, and a 142m gas column was encountered with approximately 1,060m of gas throughout the horizontal section. 

Despite the identification of large gas columns, the Trzek-2 well also encountered poor gas flow rates amounting of half of the expected rate. A small amount of formation water was also flowed. Disappointingly, the Trzek-3 well also flowed sub-optimal rates of around 3mmscfd, but these have now been implemented into a regional model which has suggested that the fracture stimulation used was not effective. It was the Trzek-3 disappointment that caused the share price to plummet in September 2011 especially since estimated bcf were less than half what was predicted. The reaction to this news does look over-exaggerated though as the initial resource estimate was not exactly mind-blowing. The drop was probably more to do with a lack of understanding about the geology that may have scared investors away.

A follow-up well called Krzesinki-1 then made another 65m gas discovery which also successfully flowed gas. However, only 10-20bcf GIIP was said to be discovered which was rather disappointing. It is this Siekierki prospect that will be of significant interest to medium/large oil and gas companies who may be better placed to deal with geological tests it presents.

Aurelian has released only a handful of RNS' over the nine months of 2012 so far so this may be part of the reason why the share price has drifted - some investors may feel that not enough is being done to turn the company around.

The first RNS concerned Aurelian being given two new licenses in Poland . They gained 100% interests in the Prusice and Wetlina concessions. At Wetlina a gas discovering estimated at 40bcf plus 25mmbl has already been noted.

"These awards enhance our portfolio in each of our two Core Areas with attractive prospects to mature with low cost work programs and risk profiles. The presence of hydrocarbons is well-established both regionally and locally within each of the new concessions. In addition, our 100% equity position gives us control over the execution of the exploration programmes. Prusice also gives us low cost entry to an emerging shale gas play which aligns well with our technical and operational expertise. We will be looking to bring partners into both blocks to fund the work programs."
It will be interesting to see who Aurelian can attract to the two licenses, and to identify what sort of scale these partners operate on. The next company news came in early February and is perhaps the most important of 2012 so far. It highlighted the strong cash position of Aurelian, its attractive prospects and the lack of this being reflected in the share price. Consequently, the BOD appointed 'Greenhill and Co' to assess options going forward for the company. The company even went as far as saying that the options will include a potential merger, sale of assets or sale of the company. If any of these come to fruition a significant share price rise is likely, but obviously dependant on the conditions. For example, if Aurelian sold their Siekierki asset interests they should get a very attractive price, running up into at tens of millions of euros, but more likely far larger amounts. If the company merged the BOD and merging company would know they would have to tempt the II's through providing attractive terms, and any sale of the company would have to come at a good premium (at least 80%), but this may lead to a takeover battle due to the very depressed nature of the shares.

In late February a minor announcement that the right to operate in Block 308 (in Poland) has been extended by three years was announced. In March an operational update was released. A drilling contract for the provision of rigs was signed, the Polish Sosna-1 well was to spud in mid-April and Iman Hill had been appointed to deal with the Siekierki asset. A bout of portfolio management had also taken place with two non-core licenses being disposed of and a re-negotiation to reduce the work commitments in one other being pursued.

The final results were then released confirming the difficult nature of 2011 for Aurelian.  A greater operating loss was released. However, as said earlier, Aurelian had substantial cash at year end amounting to 63m euros and little/no debt. In my opinion this makes a takeover of the company quite likely before the end of 2013. Whilst this cash amount will have deteriorated since it still highlights the cheap nature of the shares.

In late April a further operational update was given with the confirmation of the Sosna-1 spudding. 3.1mmbls would be net to Aurelian if successful with a cost of circa 2.4m euros. They were also awarded a 100% interest int he Kotlarka license in Poland. Kotlarka is adjacent to the 500 BCF Bogdaj-Uciechow gas field and is prospective for the Rotliegendes and Zechstein plays. Also,
As previously advised, Europa Oil & Gas (LSE:EOG) has withdrawn from the EIII-1 Brodina licence in Romania. Aurelian has agreed with continuing partner Romgaz to split the former Europa equity in order to move forward as a 50% Aurelian, 50% Romgaz Joint Venture, subject to NAMR (the Romanian regulator) approval. Under this agreement, Aurelian increases its equity share by 16.25% and Romgaz by 12.5%.

Aside from a CPR report with updated reserves, only one further update has been announced which was in early July. This means that another update is likely to be imminent as it has been over two months since the last RNS. The July RNS also disappointed and whilst oil was discovered it failed to flow due to the presence of brine in the wellbore. This further casued the share price to slide. Aurelian also said that a suspended Romanian well would be plugged and abandoned.

As previously advised on 1 February, the Board of Aurelian has appointed Greenhill & Co to review the Company's strategic options. This strategic review is on-going and encompasses a wide range of options for the Company including the sale of assets, farm-ins, or the merger or sale of the Company.

 
Whilst Aurelian has many assets it has had a string of disappointing updates regarding many of their drilling operations. Very little good news has been released over the past year. The clear route for share price appreciation is through two methods. The first is the success at any of their wells - this would lead to a change in sentiment. Secondly, the monetisation of some of Aurelian's assets through any of the methods mentioned earlier would provide a signal to investors that the BOD is serious about creating shareholder value (remember 90% of the shares are owned by IIs). At the current share price the shares look excellent value, and personally I think that they look a good takeover target for majors especially considering many of these already operate in Poland (including ENI, Exxon Mobil, Total etc.). Aurelian should also be releasing their next financial results in coming weeks. Definitely worth investigating.

Some pictures courtesy of freedigitalphotos.net

9 comments:

  1. did a bit of my own research adn your right, it looks good.

    thanks once more, jj

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  2. Excellent article and in depth research, I'm still in here at a much higher price than current SP, all the items you mentioned are the reason I invested in the first place, just hope they can turn the corner and head Norh again, confidence in the BOD has been severely dented for me, will take an almighty jump in SP to restore it, just be glad to get back to break even at the moment, cheers for the blog much appreciated.

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  3. Aurelian's forward plan for the next 18 months, as presented at the AGM, seemed to suggest a net spend of around €100mm and yet they only have €63mm in the bank ? Surely they should be focussing their efforts far more instead of adding new acreage. Also is it finally time they gave up on Sikierki, a case of good money after bad...

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  4. Until the company proves they have cracked the Siekierki code, the terms for a farm out will likely be unattractive.

    The strategic review, initiated 01 Feb 12 has been running for 7.5 months. This is absurd for a company the size of Aurelian and suggests an absence of offers of appropriate value, or absence of realism from the BoD. Goodness knows what Greenhill is billing for doing managements' job for them. A clear out at the top would be high on my list of suggestions to get the company moving forward.

    The lack of progress this year has been a great disappointment.

    Cracking the code for Siekierki or hitting TD with Bieszczady II will be required to effect a significant rebound.

    Pretty good summary blog. Would point out that ExxonMobil are pulling out of Polish Shale gas exploration though.

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  5. terrific article as always

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  6. excellent compressed overview on the company, makes the picture clear and simple.

    i bought in from the top - 80s, i saw a huge potential in it. still do, still holding. have a mercy! :)

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  7. Bloomberg says Kuwait Energy is in talks with one of Aurelian's major shareholders, Kulczyk Holding SA, about starting to drill in Poland.

    Could this be a takeover of Aurelian, a sale of its Polish assets, or a joint venture brewing?

    http://www.bloomberg.com/news/2012-09-18/kuwait-energy-considers-drilling-in-poland-puls-biznesu-reports.html

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  8. Fabulous review. Well researched and apposite timing with possible positive movement in AUL at last.

    Time for you to branch out now your repuation is growing and look at a gold miner.

    May I suggest AAZ. Producing 50,000oz this year and still valued at under £50m. All the sums are mind boggling but I'll be interested to see what you make of it.

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  9. Merger as you said.

    odd drop today.

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