Aurelian - write up

Hi,

I'm not sure if there are any active Aurelian followers on Stockopedia, but I have done a write up of the company below (also here: http://boards.fool.co.uk/Message.asp?mid=11840893).

---------------------

Executive Summary

Share Price - 33.75p
Shares in Issue - 339.5 million
Market Capitalisation - £ 115 million
Cash - € 51 million
Debt - None

Introduction

I have not really been following the progress of Aurelian and there has not been much written here, so I choose Aurelian as my entry for the Nicky Fraser 2010 share comp. After a couple of recent RNS's (a successful placing and an increase in contingent resources following a competent persons report) I thought they might be worth a closer look. This is my write up.

What do they do?

Aurelian is an oil and gas exploration and production company focusing on eastern European countries, including Romania, Slovakia, Bulgaria and Poland. Their acreage is focused in the Rotliegendes and Carpathian basins. Although currently a producer, the focus of this investment case is centred on the assets currently in the development and exploration phase. There are some high impact wells that are to be drilled on the next two years that could potentially transform the company.

I have split this write up into 3 sections :- Producing assets, development assets and the exploration assets.

Production asset

Aurelian currently produces gas from the Bilca field in Romania. It currently produces 3.5 mmscfd per day which generates circa € 2 million cash flow per annum. It looks like Aurelian will try to off-load this asset this year to focus more on its high impact development and exploration plays.

Core Development asset

Siekierki Field - Gas - Poland - Rotliegendes (AUL - 90 % working interest - operator)

The flagship project for Aurelian. This is a tight gas field that, following the CPR, is believed to contain, mid case, 346 BCF contingent gas resources (net to Aurelian). An appraisal well drilled here in 2007 produced gas but not enough to make the field commercially viable. Aurelian believe that by using horizontal wells with multiple fraccs that commercial levels of gas can be produced. Similar techniques have been used successfully in the neighbouring acreage of the Rotliegendes Basin in Germany.

Aurelian plan to drill a well in Q2 this year and this will significantly de-risk the prospect. This well has been fully funded and a Multi-Fracc Horizontal Well (MFHW) has already been contracted. According to the brokers notes there is a 70% CoS (see references).

Aurelian would need to find finance for the second well and for the gas processing facilities (probably via Mezzanine debt), but if the outcome of the first well is positive, this shouldn't be too much of an issue.

Moreover there could be significant upside to the contingent resource figures.

There has already been an agreement for sale of gas from Siekierki field:-

Under the Agreement prices will be set by reference to the published PGNiG S.A tariff price for
system high methane gas fuel (E-39,5 MJ/m3 ) which is currently PLN0.91/cm. At today's exchange
rate of US$0.35825 = PLN1.00, a tariff of PLN0.91/cm converts to a Polish Market Gas price of US$9.328/mcf.

http://www.investegate.co.uk/Article.aspx?id=200910260700143...

The first well is looking to produce 8-16 Mmscf/d. Taking a low-mid case number (10 Mmscf/d), this will be generating $93,000 per day and will provide Aurelian with some useful cash flow.

Core Exploration assets

Bieszczady - Oil - Polish Carpathians (AUL - 25 % working interest - non operator)

This exploration well is targeting 89 mmbbls oil net to Aurelian. There are two wells scheduled for Q4 2010 and Q2 2011. Two structures have been identified at 2000 and 4000 meters. This area is currently under explored and therefore the CoS will be quite low. Despite this, Aurelian has put a high priority on this block. Although not explicitly stated, it is implied from the presentation that the first well is funded. (see references - Aurelian Capital fund raising presentation for more details)

East Karpaty - Oil - Polish Carpathians (AUL - 80 % Working interest - operator)

Targeting 237 mmbbls oil net to Aurelian. An exploration well is planned for 2011. It looks like Aurelian will seek to further farm down this block further to cover the costs. There are two structures (Dolna upper and Dolna lower) that will be targeted and it is not clear if one well could target both. Cash is available for funding, however it is not clear if this well is included in the CAPEX for 2010/2011.

Svidnik - Gas - Slovakian Carpathians (AUL - 50 % working interest - operator)

Targeting 408 BCF prospective gas resources net to Aurelian. Another highly prospective block with other multiple leads as well as Svidnik. An exploration well is planned for 2011. Cash has been set aside for funding this well.

Non Core Exploration assets

Golitza Block 1 and 2 - Gas - Bulgarian Carpathians (AUL - 30 % working interest - non operator)

Two wells planned for Q2 and Q4 this year targeting 80 BCF in total (although this is for multiple prospects). The cost of these wells to Aurelian has been reduced by the farm-out agreement with Sorgenia. These wells have been funded but it is possible these assets may be sold off this year.

Summary

There is a lot going on in the next couple of years. For the sake of completeness Aurelian have further acreage not mentioned in detail above because there are no concrete plans to develop or explore them in the next couple of years.

- West Karpaty in the Polish Carpathians is believed to contain 193 BCF gas.
- Kalisz (gas), Cybinka (oil) and Torzym (oil) are all Polish exploration assets where seismic information is being evaluated (company estimates Cybinka and Torzym to contain circa 38 mmboe)
- Medzilaborce and Snina are blocks in the Slovak Carpathians that are seen to have significant exploration
potential (ground oil seeps have been observed).
- Brodina Block EIII-1, Cuejdiu Block EIII- 3, Bacau Block EIII-1, Suceava EIV-1 in the Romanian Carpathians
are categorized as non-core to Aurelian and may well be sold off in the coming years.

One thing that I like about Aurelian is they have clearly set out their strategy to develop the fields that will return clear shareholder value. Clearly more funding will be needed after the first drilling phase is complete but with so many assets, there is always the opportunity to farm down if exploration wells are successful or sell of other assets deemed non-core to raise further capital.

Funding

IMO Aurelian did a great job raising €39 million (at a price of 32 pence) given the current economic climate. So now they have €51 million (they had €12 million cash) as of the Feb RNS.

http://www.investegate.co.uk/Article.aspx?id=201001270700041...

In their 2 year drilling campaign, Aurelian thought they would need €44 million to fund the wells above and also complete further seismic activity. The horizontally fracced Siekierki wells are the most expensive ( circa €16-18 million per well). However other wells in the Carpathians cost between €6-8 million so the extra €7 million could be used to target an extra well.

In any case Aurelian look well set financially to complete the first phase of their drilling schedule.

Valuation

Aurelian has their own views on what they are worth after the CPR:

Aurelian now calculates a total risked EMV of €1.49 billion equivalent to £5.64 per share

http://www.investegate.co.uk/Article.aspx?id=200912090700318...

That share price equivalent actually falls to £3.82 per share after the equity placing.

Jeffries International broker report (see references) has a risked NPV of 104 pence per share and an unrisked NPV of 600 pence per share (again calculated before the latest equity placing and the latest CPR).

Clearly Aurelian has a lot of attractive assets. My calculations only take into account the blocks where drilling will take place in the next couple of years and only the core assets (leaving some upside potential from the non core assets if they are sold off and the upside from current wells being drilled). Even this cannot paint an accurate picture because it is almost certain that more farm downs will be needed (as well as possible further placings or securing mezzanine finances) but its a start.

Assumptions

$1 = £0.65
6,000 scf = 1 boe
CoS has been set at 15% for exploration wells.
$10 for each barrel in the ground has been assumed

Abbreviations
GUR - Gross unrisked reserves / mmboe
WI - Working Interest
NUR - Net unrisked resources / mmboe
CoS - Chance of Success
NRR - Net risked resources / mmboe
NPV - NPV $US/ boe
RNPV - Risked NPV (US$m)
RNPVS - Risked NPV (p/sh)

Prospect GUR WI NUR CoS NRR NPV RNPV RNPVS
Siekierki 57 90 48 70 33.6 10 336 65
Bieszczady 89 25 22.5 15 3.4 10 34 6.5
East Karpaty 237 80 190 15 28.5 10 285 54
Svidnik 68 50 34 15 5.1 10 51 10
Total 451 294.5 70.6 706 135.5

Even without adding in all the extra exploration acreage, the potential upside from current projects and their non core assets, Aurelian look pretty good value right now. There is certainly more than one value outer and they have the cash to drill the exploration wells. Two wells alone, if successful, could more than cover the current share price.

Management

Rowen Bainbridge (CEO) and Mark Ried (CFO) were appointed mid-last year along with David Walker as a non-executive director. These changes seem to really have made a difference to the strategy of Aurelian and focused the company on returning value to shareholders.

Reading through the last 2 years of RNS's and the financial reports, it seems that there was no real clear strategy at all. I find it a little odd the given all this acreage, the only producing well
asset is providing so little shareholder value.

I would welcome any comments here from long term shareholders as perhaps I am missing something.

SWOT Analysis

Strengths
- Large acreage with multiple company making targets
- Attractive royalty agreements in Poland (low tax rates also - 19% )
- Well funded for their two year drilling program
- Good strategic partners with Polish Oil and Gas Company (PIGNiG) as they have in-depth knowledge of the Polish Rotliegendes and Carpathian basins
- Clear corporate communication with excellent website
- Clearly defined strategy

Weaknesses
- Failure to commercially develop Siekierki Field could lead to large drop in share price
- Cannot currently generate significant cash flow from production

Opportunities
- Large potential upside from Siekierki Field
- Upside from acreage currently not in the two year drilling program
- Strengthening of the dollar will lead to greater NPV
- Selling non-core assets could generate extra revenues

Threats
- Complex geology in Siekierki Field could lead to a decrease in recoverable gas

Conclusions

Whilst certainly not being a one trick pony, I would feel a lot more comfortable investing in Aurelian after the Siekierki Field was further de-risked after the next well is drilled. Even so there is a lot of activity in the next two years to keep holders interested.

Disclaimer

Aurelian is my Nicky Fraser 2010 share comp entry

References

Presentations
http://www.aurelianoil.com/media/35253/maquarie_investor_pre...
http://www.aurelianoil.com/media/35340/presentation180110.pd...

Broker Notes
http://www.aurelianoil.com/media/33896/Jefferies%20231209.pd...

Foolish Analysis
http://boards.fool.co.uk/Message.asp?mid=11599999&sort=w...
http://boards.fool.co.uk/message.asp?source=isesitlnk0000001...
http://boards.fool.co.uk/message.asp?source=isesitlnk0000001...

Proactive Investor
http://www.proactiveinvestors.co.uk/companies/news/8379/aure...

Any comments welcome.

Regards

Stuart