Ruspetro - Speculative or Too Risky?

http://www.ruspetro.com/
Ruspetro Logo
 
Ruspetro (LSE:RPO) has had a nightmare IPO and there are a number of reasons why investors have turned their back on the company. It's ridden with debt, has underperformed all the market indexes, and has disappointed on a corporate front as well. The company, which is a Russian focused oil and gas explorer and producer, listed in early 2012 with an IPO price of 134p/share. The company, that is backed by a number of high-profile Russian backers has performed dismally since, with a current share price of just 29p giving Ruspetro a market cap of £96.7m. If nothing else, the share price collapse has shown up a number of brokers with RBC Capital markets, Merrill Lynch, Goldman Sachs and Credit Suisse all having share price targets (at one point) in the triple digit zone - Credit Suisse retained a 333p price target last August. With there also being 333m shares in issue, Ruspetro looks to improve on its performance or suffer long-term damaging consequences. This is one of the higher risk ~£100m companies you can find.


From the chart above we can see that since it's IPO, Ruspetro has had a rough time. Initially, those who bought at the 134p IPO price had the potential to make very large profits, with the shares topping out at 230p. That equates to an approximate 72% profit within a few months - an excellent result by any measure. However, the shares quickly entered a steep downtrend off of the highs. The channel was so steep that the shares bottomed at sub 15p levels within 12 months. The causes for the fall were mostly fundamental. The current situation is that Ruspetro has breached the shallower uptrend that was set off the low. The result is that I expect a re-test of the 25p level in the near future, and if this fails, the following target in 20p. If 25p holds, the case for a move back up to 40p remains. 40p has been previously strong resistance so that is a level to keep a close eye on. If bad news is continuously rolled out, a re-test of the major low should be expected.

On the other hand, the directors of Ruspetro have shown their confidence by putting a lot of cash into shares at levels higher than the current share price. In April,  the Chairman (Alexander Chistyakov) bought over £300,000 worth of shares at around 30p with former CEO Donald Walcott also taking over £200,000 worth of shares at a higher level of 42.5p. This is partially reassuring, but considering that the share price has fallen back since, it has done little to alleviate shareholders worries. Chistyakov's holding now totals approximately 57m shares meaning he owns 17% of the company. Looking at the institutions, they also hold a large number of shares with Henderson Global Investors among those involved.

courtesy of Professor of Death on flickr
The strong institutional backing is a double edged sword though. When the institutions are collecting shares they tend to boost the share price, as you would expect, because they are effectively buying in bulk. However, once on board, they can reduce liquidity and if they start to offload, the opposite effect occurs. Some of these institutions may also have rules regarding the minimum market capped companies they are happy to invest in, which can speed up any decline, or exaggerate any rise. In the case of Ruspetro, you only have to look at Friday's volumes to see that it is far higher than most of the volumes over the last couple of months. Combined with the very high volumes near the major low in March (when institutions are likely to have been buying), it is not unreasonable to expect the 6.5% drop on Friday to be carried forward, especially since a large auction trade pushed the close price up significantly.
Onto the company itself, there is actually a fair amount of fundamental data that is highly encouraging. Unfortunately, there is a lot that is bearish.

Before going into the company, there is one example of shocking management that took place. In the very first week of 2013 (i.e. not even a complete week with Bank Holidays) Ruspetro released a profits warning, at 6:30PM on a Friday. I felt this point had to be made. If they seriously thought it would go by unnoticed, they were wrong, and thus the share price fell sharply. In fact, the unusual timing and the fact that it was a profits warning made the announcement stand out, and that probably exaggerated the fall. Disregarding from that very poor decision from the company, let's look at the fundamentals.

Ruspetro's operations are based onshore in West Siberia where the company houses a huge 1P and 2P asset base. This is clearly the bullish part. Proven reserves total 234 million barrels of oil equivalent, with Proven and Probable resources of over 1.8 billion mmboe. Roughly 92% of that 2P figure is condensate or oil with the rest in gas, so it obviously it is a very valuable and huge resource. As we all know, Russia is a major hydrocarbon region, so there are good transport links and strong governmental backing. The one issue that all Russian hydrocarbon companies face though, are the extremely harsh weather conditions. Ruspetro has admittedly made steps towards becoming a regionally recognised company, with production levels rising from ~670 boepd in 2009 to ~4,640 boepd in 2012. I would argue though that these production figures are not particularly good, and actually most of the company's valuation is being given to the 2P resources. The company has recognised there is a significant gap between the market cap and the resource value. At the 1P level the company has valued the reserves at $1.16bn with this figure rising to $10.4bn at the 2P level.

To back that up you can look at two other (East European)/Russian Oil and Gas producers: JKX Oil and Gas (LSE:JKX) and Petroneft Resources (LSE:PTR). Starting with JKX, average production in H1 2013 stood at 9,040 boepd - JKX is valued at £115m. On the other hand, Petroneft produces 2600 bopd and is valued at £19.4m. Take note that that is barrels of oil, and not oil equivalent either. Based on that, you could even argue that Ruspetro is not undervalued on production alone. As I have said though, there are other factors to consider. Petroneft has 2P reserves far lower at 131 million barrels whilst JKX had 2P reserves of 93.8 million barrels of oil equivalent in 2012. The 2P figures even dwarf those of Dragon Oil and Exillon Energy. Those figures make Ruspetro stand out - if it can get the 2P resources into te 1P category, and then producing, there is a chance of a major re-rating. The reality is that the company seems unable to even start to boost
production.

Looking at the H1 2013 results, Ruspetro noted: "With no development drilling currently taking place, production is expected to decline gradually in the second half of 2013 from July's average production rate of 4,394 bopd". Considering that H1 average production was around 5450 bopd, this really does not bode well, and realistically sub 4,000 bopd levels are on the cards. This was probably the facet of the HY report that damaged investors confidence the most. With a new CEO at the helm (Tom Reed), investors expected an improvement in the company's performance, but were left disappointed. The issue is not with the company's resource base - that is excellent, the issue is with production rates. Without increasing these incrementally, what hope is there to generate a better share price performance. The company has a large debt to service £248m, and whilst it doesn't mature until 2018, it remains that the company is making marginal headway towards bringing that level down. You can also compare that to JKX who have long-term debt at around a tenth of that.

Being realistic, I reckon the management already know that production has tailed off further in August. Don't forget that average H1 production was far higher than the July average. The impact will not be fully felt during the H2 results either, considering the change has effectively come part-way through H2. The full effects of this will therefore be felt in H1 2014, hopefully when the company has restored higher production rates. Currently gas production is being restricted due to a lack of processing facilities - that means that gas is being flared off (effectively wasted).

The poor production rates are even more disappointing since one of the 2012 objectives was to generate production rates of 10,400boepd by year-end 2012. That was not achieved. However a lot was achieved during 2012. Firstly, Well-head revenue per barrel rose by 24% to $24.50. That contributed greatly to a 97% increase in revenues, and with the MET relief being implemented, that will aid revenues again. Production was up 82% Y.O.Y with increases in the 1P and 2P resources.

A quick financial comparison can also be made across both company's HY results.

 
From this you can draw three conclusions. Either JKX is undervalued, Ruspetro is overvalued. From an operating perspective Ruspetro has failed to make a positive impact on investors. It is losing money quickly when a large debt needs to be repaid. In terms of revenues, there is a light at the end of the tunnel though. "The tight oil MET [Mineral Extraction Tax] relief recently passed into law will provide a significant contribution to cash flows starting from 1 September 2013, increasing well head revenue per barrel to US$39.10 from US$22.40 at a gross price of US$100 per barrel". That should mean that the H2 revenues should be stable for Ruspetro, even in spite of the production decline. What will be key, is how far the production decline will offset any cost reduction from the law.

The company has recognised there is a significant gap between the market cap and the resource value. At the 1P level the company has valued the reserves at $1.16bn with this figure rising to $10.4bn at the 2P level. To attempt to rectify this, the company is undertaking a strategic review that will try to identify the best method of both exploiting and retaining the value of these assets. A lot of CAPEX will be required to exploit the resources, money that Ruspetro does not have, so in my opinion, the best move would be to complete a farm-in with a regional expert oil company. The resources speak for themselves, the fiscal environment is improving and ultimately there is a lot of profit for a farm-in partner to make, if they are cash ridden. This makes the acquisition of an interest an attractive proposition, and perhaps a likely outcome considering the strength of Ruspetro's board within the Russian oil industry.

There was a major disappointment regarding the company's finances early in the year when Ruspetro attempted a massive $350m bond issue in order to repay loans from Sberbank and their largest shareholder. This failed and the whole bond idea was scrapped

courtesy of freedigitalphotos.net
Successes during 2013 at Ruspetro have been few and far between, but they did navigate their way out of the financing issue. Firstly with the Sberbank debt I alluded to earlier. This was done in April and, as well as taking a 3-year extension, included a 2 year interest holiday (i.e. no interest paid until mid-2015). CFO, now CEO Tom Reed commented: "This new arrangement with Sberbank enables the Company to fully focus on monetizing our gas reserves and developing our oil business. Sberbank's support has been invaluable to Ruspetro throughout our history, and this transaction again underlines their commitment to and confidence in the Company and its management team. "  To add to this, Ruspetro's largest shareholder Limolines Transport agreed to extend its debt repayment date from May 2015 to May 2018.

More recently, in August Ruspetro announced a $30m deal with Glencore which involves them supplying a minimum of 1200bopd to Glencore per quarter. "This facility enables the Company to reinvigorate appraisal and development activity in the field, while strengthening the financial base necessary to prosecute our strategic process. We will now re-address some of the geological challenges we faced in 2012 with a more measured approach, improved sub-surface modelling and horizontal wells. In parallel, we continue to work on the monetization of our gas assets and finding the right strategic partner for our oil field. "

Unfortunately, Ruspetro is exactly the sort of share I 'wouldn't touch with a bargepole' at the moment. The company's financial position is dire, it has lost a lot of investors credibility and production is declining. However, even applying a discount for the company operating in Russia, the 2P resources are very attractive and if these can be monetised then the company will be in a better position to pay off its debts. Until production is ramped, and there is a clear outcome to the strategic review, I see no attraction in holding Ruspetro shares. Yes, the mineral extraction tax relief will significantly help the company, but I am not convinced it will mitigate the production fall in the long-term. This is an extremely speculative company. Normally I would be inclined to put a sell tag on Ruspetro, but for the sheer amount of resources it has and the unclear technical picture below 25p, I will stick with a No Rating tag. I can see this falling further before any pick-up in any circumstances and there is better value in the market. I'm not convinced Ruspetro shares are worth owning at the moment.

6 comments:

  1. WOw, they really are taking a biscuit with that 6:30 RNS. Had to check myself. UnBELIEVABLE

    CraigJ

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  2. Those 2P figures for JKX vs RPO are very interesting in that they say that production is valued at far more than resources. If RPO can only convert a little amount of their resources into production they could rerate big time. In for the ride, but at a tiny % of my portfolio

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  3. in at £1 aaaarrrrrrrrrrrrr

    ReplyDelete
  4. Excellent review, you saved me from topping up (current avg 35p).
    Any chance of doing PGR?

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    Replies
    1. Thanks - I'll add PGR to my watchlist, but it is too volatile at the moment for me to want to take a deeper look.

      El1te

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