Regal Petroleum - Has its potential been overlooked?
For those that don't know it, Regal Petroleum (LON:RPT) is an AIM-listed E&P business focused on gas field development in Ukraine. In addition the Group has oil and gas exploration assets in Romania and Egypt under appraisal.
Yes, I know, it's good old Frank Timmis' company (Google the name if you dont remember). Still, Regal is one I've been monitoring for a while now, basically since David Greer took over at the company. Greer has a top class CV at Shell ending with being CEO and project director for Sakhalin 2. As such, he knows a thing or two about deep drilling and gas. Following a lot of buying today, we now have a decent chunk of Regal.
So what's the story? Well, RPT is, as the graphs show, a big underperformer, almost halving since September against a markedly higher sector. This is all down to a number of factors, all too evident from a review of the RNS's since October - lots of mechanical problems well problems, political uncertainties (Ukrainian elections). Why am I buying? Essentially, the results on SV-58, RNsd yesterday showed that their jet perforation technique has succeeded with an improvement in flow of 100%. In my opinion, this removes a significant part of the doubts that the market has had over commerciality of the 2P reserves (c170MMBOE) in the B sands. At the current price, it simply seems too cheap compared to the NAV.
By way of catalysts, there are three wells testing over the next month - SV-61 and the MEX106 and SV-66 wells will start testing the deeper T & D sands from the end of this month. Note that there isnt any reserves attributed to the T&D sands at the moment. This work, with the success of the jet perforation intervention will, I feel lead to a revised CPR with potentially very significant upside. Estimates I've seen put a figure around the 350mm boe figure based on the B & T sands but excluding the D sands.
The company's own development plan is for up to 95 wells with a plateau production level of 40k boepd in 2015. Up to this point, with the unproven commerciality, this has been widely ignored by the market. A major attraction of the Ukraine is the high gas price (doubled to c $7.5 over the last two years) and attractive fiscal regime. These are corporate taxes of 25% and royalties of roughly 20%, though this reduces to about 10% for gas from deep intervals - below 5,000m.
For clarity, bearing in mind the problems of certain other operators in Ukraine (Cadogan), RPT has 100% of the licences and a 20 year production licence (from July 2004). The validy of the licences were confirmed by the Ukrainian Supreme Court in Devember 2006 so there should be no scope for Cadogan style nasties.
RPT hasn't had the best of luck with the start of its programme but things do now appear to be turning in their favour. The company is well funded following earlier fund raises and can press ahead with its development and appraisal work. As such, I see there being scope for a very significant gain over the next few weeks. Longer term the lessons learned with the first few wells will be incorporated into future roll out. The company has brought in state of the art rigs so it has been able to drill the wells a lot faster than would be the case using the old Ukrainian rigs. The plans envisage bringing in a third or fourth rig as plans develop, thus speeding up the development programme. As with all things, as the company gains confidence with its drilling, it should see drilling costs reduce from c$20m at present to $15m or less.
I've not commented on the company's other two assets. These are two blocks in Romania (containing shallow discoveries 500m to 1500m) and a 25% stake in Egypt, East Ras Budran, with Apache that has a discovery. I'd categorise these as "nice to have" but not material to the main story at this stage. Regal are prioritising activities in the Ukraine.
Further Reading
It's well worthwhile checking out the investor presentation from the analysts trip to Ukraine in October 09.
Disclosure of Interest: The Author holds shares in Regal Petroleum
Disclaimer
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33 comments
Still hanging in here with some of my original purchases (averaged at just under 60p).. Though about getting out at 13p, 16p and then at 23p, sold 50% at 26p and will retain the rest until the bitter end.
JPGH
Hmmm, All of a sudden a raft of announcements on holdings and what appears to be a heavy buying period - would hate to say "raid" but the SP is now some 13% up at over 32p so somethign is afoot.
The Times had speculation concerning an Oz outfit allegedly sniffing around at 22p. At that level, JKX must be at least having a look. Not sure what length rig contracts they have, but I assume they could use one of Regal's rigs in Ukraine on their own licences.
Regal has not been overlooked by some potential bidders which explains the improvement. Exciting time for holders.
http://www.investegate.co.uk/Article.aspx?id=201011250904177967W
You couldnt make it up
Another Ukraine Update and yes, yet more down hole problems:
Thankfully we bit the bullet and sold our remaining holdings at 18p on the 7th. Small crumb of comfort given the loss on this pile of cack.
Perhaps Greer can get a new job as a psychic?
http://www.dailymail.co.uk/money/article-1316735/Regal-shares-royal-Greer-quits.html
The curse of Timis ....
The economics have never worked for me, and I assume that Jkx Oil & Gas (LON:JKX), no choirboys in the Ukrainian jungle, came to a similar conclusion when they jumped across the border to a classic conventional gas reservoir.
We'll see, JKX haven't given up on tight deep gas, there should be news in October on the latest Rudenkovskoye well, where they've drilled a horizontal section
What price a Shell deal now? Have queried the economics of deep tight gas in Ukraine since forever, a view which was mildly positively amended as Ukraine deregulated gas prices a few years ago.
Some 300km, which in FSU (sic) gas terms is a hop , skip and a jump wells are being drilled in Volgograd and Saratov which produce 200mcm/d at $3mm per well. RPT are drilling $20-30mm wells (being generous once/if they figure out how to complete them) and producing not more than 100mcm/d.
The economics have never worked for me, and I assume that Jkx Oil & Gas (LON:JKX), no choirboys in the Ukrainian jungle, came to a similar conclusion when they jumped across the border to a classic conventional gas reservoir.
I thought for a while that Regal Petroleum (LON:RPT) were going to prove my thesis wrong. Delighted that they have not - albeit my rewards will be a glass of wine in celebration of money not lost, rather than a being able to announce a significant short position.
With apologies for the appallingly mixed metaphor on JKX.
Well that's not at all what we wanted to see. Sorry for anyone caught up in the farce.
Well done for getting out when you did db. Sadly we didn't. We held on hoping that the problem was not with deliverability but combination of bad luck and cock ups.
Clearly Greer's gamble on new gen rigs and completion techniques haven't worked and thankfully he's fallen on his sword (or risked being pushed on to it).
So where are we?
New man at the helm, sale of the Barlad concession brings cash up to $80-$90m, so the price is at a small premium to cash and there is the production income as well.
The main problem they face is the three year agreement with Saipem over the two rigs. Iirc they are commited to a $40m min spend but can subcontract so will be looking at all options and discussing with Saipem.
So what to do? Looks limited on the downside (famous last words) but what will the new team do? Interesting situation. Flog off Ukraine assets (incl rigs subcontract)? Then what do they do?
Time to ponder our position me thinks.
Another update today. I have annotated the previous post to highlight progress (or rather, lack of it)
(i) Mex-120 and SV-69 wells are both nearing target depth. Then will perforate/frac, then on test, then on production by September. So 4 to 6 weeks before any results from these two.
MEX-120 - Production rates are showing a decreasing trend that has not yet stabilised; a well test on 22 September 2010 recorded a flow of 78 boepd
SV-69 - Completion, testing and hook-up operations are expected to be concluded by early November 2010.
(ii) Across both fields (Mex & SV) the company’s total field production rateon 20 July 2010 was 1,930boepd (barrels of oil equivalent per day), consisting of 262,330m3/d (cubic metres per day) of gas and 46.1m3/d of condensate.
2,126 boepd (286,245 m3/d gas and 54.0 m3/d condensate) for the June to September 2010 period.
(iii) Additionally, an intervention is planned for SV-61, to investigate and repair a number of mechanical issues which are believed to have prevented the well from producing.
A work-over was conducted ... production testing scheduled to begin on 30 September 2010.
(iv) At SV-66, which was brought online to the production facility in June, the company said it has experienced a marked performance decline compared to the high initial production rates. Regal said that the “abrupt decreases and increases in both wellhead pressures and flow rates” being experienced are consisted with conditions associated with a mechanical blockage.
A coiled-tubing intervention to remove an obstruction at the base of the production tubing was completed. tested on 26 September 2010 at a rate of 246 boepd
(v) Elsewhere the MEX-106 work-over intervention, to resume a perforation and test programme is currently underway. The operations in MEX-106 are expected to take 20-25 days, and subsequently the well will be tested and brought back online to the production facility.
back online on 9 September 2010, and although production logging has confirmed a gas contribution from perforations of the T-2 sand at 5,620m, the D-sands do not show any evidence of inflow. The well has not yet been tested through the well test facility. ... The ultimate performance potential of the well remains unknown. The current estimated production rate for MEX-106 is 156 boepd
(vi) MEX-103 will benefit from new Stimgun mini-frac equipment, which was not previously available on completion in 2008. According to Regal, the work-over aims to “maximise the chances of penetrating past the near-wellbore zone, to provide improved connectivity with the B-20 reservoir which is productive in adjacent wells in the immediate vicinity".
Work-over complete - no mention of improved production rate
(vii) Production testing on MEX-102 is plannedfor August 2010. The testing is designed to ascertain whether the change in the pressure of the producing B-23 reservoir will now allow the production ports - installed in the completion during 2008 - to be opened in order to re-introduce condensate-rich B-20 gas into the production stream.
They can't.
So the operations seem to have been taking ages and the ends results have been poor. Price now down 23%
db
<no position - sold out at small loss earlier in the year>
It seems that the question posed by the thread header has now been answered.......given that the shares have fallen by two-thirds in the last 6 months.
http://tinyurl.com/Regal-July-23-Ops-Update
Regal Update from 22 July, summarised nicely by Proactive Investor website and reformatted by me below.
(i) Mex-120 and SV-69 wells are both nearing target depth. Then will perforate/frac, then on test, then on production by September. So 4 to 6 weeks before any results from these two.
(ii) Across both fields (Mex & SV) the company’s total field production rateon 20 July 2010 was 1,930boepd (barrels of oil equivalent per day), consisting of 262,330m3/d (cubic metres per day) of gas and 46.1m3/d of condensate.
(iii) Additionally, an intervention is planned for SV-61, to investigate and repair a number of mechanical issues which are believed to have prevented the well from producing.
(iv) At SV-66, which was brought online to the production facility in June, the company said it has experienced a marked performance decline compared to the high initial production rates. Regal said that the “abrupt decreases and increases in both wellhead pressures and flow rates” being experienced are consisted with conditions associated with a mechanical blockage.
(v) Elsewhere the MEX-106 work-over intervention, to resume a perforation and test programme is currently underway. The operations in MEX-106 are expected to take 20-25 days, and subsequently the well will be tested and brought back online to the production facility.
(vi) MEX-103 will benefit from new Stimgun mini-frac equipment, which was not previously available on completion in 2008. According to Regal, the work-over aims to “maximise the chances of penetrating past the near-wellbore zone, to provide improved connectivity with the B-20 reservoir which is productive in adjacent wells in the immediate vicinity".
(vii) Production testing on MEX-102 is plannedfor August 2010. The testing is designed to ascertain whether the change in the pressure of the producing B-23 reservoir will now allow the production ports - installed in the completion during 2008 - to be opened in order to re-introduce condensate-rich B-20 gas into the production stream.
(viii) The company noted that it is also awaiting delivery of wellhead compressor packages, for the SV-10 and MEX-3 wells. The installation of the equipment is expected to enhance production, and the work-over is planned to be carried out before the end of Q4 2010.
see also http://tinyurl.com/May-Update-JPGH-post
So added another mere 200 bopd producton since 5th May, another mechanical blockage, this time on SV-66 to add to Mex-106 blockage (followed by fishing operation) from May 5th update. SV-61 was highlighted in May 5 update and I cant understand why in last almost 11 weeks litlle has been done to recifty this (I realise a rig has to be demobilised and remobilised back here but....get the blood finger out chaps.
JPGH - holding....still.
I was having a re-read into this latest RNS and I am still trying to work out what to make of it. Obviously this kind of news is not good. However, there is no cessation in their operations....
_The Company is in ongoing dialogue with the Ministry of Environmental Protection and the Ukrainian Government in relation to these matters, during which operations continue as normal._
I also note that Regal has stated...........
_ that the legislation in question was of a procedural rather than an operational nature._
http://www.lse.co.uk/ShareNews.asp?shareprice=RPT&ArticleCode=d6m6ur0u0n7jwpc&ArticleHeadline=UPDATE_1Regal_in_talks_with_Ukrainian_govt_shares_fall
What worries me is the fact the order was dated on 30th March and the letter was received 21st May. So either the Ukrainian Ministry are trying to pull a fast one or there was some sort of Administrative mix up.
Is there any chance of the Ukraine claiming Regal assets? Is this a prelude for something worse or a storm in a teacup that will blow over? Does anyone know of any other oil company that has had the same experience dealing the Ukraine government? I'd be interested to hear from other holders.
Regards
Stuart (still holding but a lot less confortably)
I was enjoying today and then this update turned up !
http://www.investegate.co.uk/article.aspx?id=201006281200023361O&fe=1
I cannot believe the time lag is acceptable, I'm out and have learnt my lesson.
Reo
Broker report from First Energy:
Highlights:
db
Alphaville comment on Merrill Lynch's view of the news. Cant say I disagree:
Bounce today on Ukraine news http://www.investegate.co.uk/Article.aspx?id=201006070700181388N.
However, a lot remains to be sorted:
Also not mentioned by Regal but they have 50% in a Romania field with Aurelian who today announced http://www.investegate.co.uk/Article.aspx?id=201006070700191501N Only 2BCF but should be on production Q4.
db
Cheers for posting that db
A truly excellent result fro RPT, flow rates way above what anyone had expected and completely validates the B sand strategy. Some evidence of Greer's more conservative background in the RNs with all the caveats but if these results are anywhere near repeatable numbers then there is no doubt whatsoever that the reserves are commercial (very commercial) and thus the shares look massively oversold at current levels.
Only real surprise is the somewhat muted response in the market.
Cheers
D
Bizarre but RPT have now released their own RNS relating to the Romanian update.
Bizarre in that it seem to have spurred the SP up by 4p, doubling the gain on the day so far.
So, a small 2 bcf well adds the same as a massively higher production from the SV-66 well? hmmm, who said markets were sane?
Mirabaud have also come out with a similar comment to Merrill Lynch and also highlight the newsflow due over Q3. Critically, if the improved flows on SV-66 show that they have "cracked" the secret of completions then the future should be vry positive for RPT.
Interesting development with Cadogan Petroleum (LON:CAD), I wonder if this might bring some attention to Regal Petroleum (LON:RPT) .
http://www.investegate.co.uk/Article.aspx?id=201006041206360961N
Reo
It seems to be another day of downward pressure - not sure if it has become a 'play thing' for traders to make a quick 10% or something more sinister - I hope not. From previous release I assume SV66 results are looming.
Reo
I find the volatility to be amazing it dropped circa. 10% in a blink this morning. I guess there is still a large seller out there but it does seem strange when Seymour Pierce has a recent buy rec. and target of £1.80.
Not just today but yday as well. Good volumes too. About time the value was recognised. Sub 40p was even more of a no brainer imo.
RPT seems to be making an orderly upward march in a negative market today - I assume it is the realisation it is considered cheap in this price area.
Darron
p13 is fine. Its just to show lurkers (and to remind myself) what RPT are actually doing pictorially in Ukraine.
I also want to get a handle on what wells are producing what, whether old (GOL, MEX) or new wells (SV, MEX).
RPT is cheap but then so are many others with better PR and less sticky mud after last 2 weeks.
JPGH
Mixed Bag here. "Tight" reserves in Regals case can be misinterpreted here. It's all about sustaining a decent production rate per drilled well. Currently at the 2000-2500 bopd levels from
Also
(i) SV 61 failed to maintain production. For wells costing > $20m a pop, this is not good.
(ii) Current Production (excl. Mex 106 which at the time was offline to enable fishing operations
(iii) Production & Drilling:- new wells soon to come into production include SV66 (drilled, currently being perforated priro to testing) followed by SV 69, Mex 120 (spudded on April 12, at 2600m as of May 3 i.e. drilling rate > 110m per day which is very good).
Darron, can you add slide 13 (details field development plan) to header? http://www.regalpetroleum.com/uploads/WebVersionRegalAnalystsSitePresentationOctober2009(1).pdf
(iv) Ukraine Gas Price
JPGH - well underwater here
JPGH
Do you want just Page 13 or the whole presentation?
Somewhat frustrated with RPT but cant help but feel its cheap down here.
Update from Regal on Reserves and operations.
Reported Recoverable Reserves and Resources (as at 1 January 2010): B-SANDS ONLY
Remaining Proved
Remaining Probable
Remaining Proved + Probable (2P)
Remaining Possible
Remaining Proved + Probable + Possible (3P)
P50 B-Sand Prospective Resources (Unrisked)
40.9 MMboe
110.4 MMboe
151.3 MMboe
102.4 MMboe
253.7 MMboe
151.9 MMboe
4.9 MMbbls condensate
12.9 MMbbls condensate
17.8 MMbbls condensate
12.3 MMbbls condensate
30.1 MMbbls condensate
17.3 MMbbls condensate
203,776 MMscf gas (36.0 MMboe)
551,827 MMscf gas (97.5 MMboe)
755,603 MMscf gas (133.5 MMboe)
509,798 MMscf gas (90.1 MMboe)
1,265,401 MMscf gas (223.6 MMboe)
761,483 MMscf gas (134.6
MMboe)
Hmmm, interesting. It seems that the Germans are coming....
SEB Asset Management keen to take up the slack with their holding rising significantly, now topping 4.1%.
On ADVFN Regal BB, old favourite Frank Timis is rumoured to be selling out so another reason for downward pressure on SP.
I bought in at 70p but added more at 60p so got the timing wrong.....twice!!!
No excuses for that
JPGH
Hi Guys
Well, the timing couldnt have been much worse could it?
Apologies for not commenting on the Russian deal - been away on business for a few days.
Far as Ive seen, most of the analysts covering the stock have cut NAVs by 10% to 30% to reflect the very generous cuts that the Russians have offered - I had expected them to play a bit harder and get a higher price (but lower than previously) but obviously they are playing the political long game. Id imagine that the Russian comapnies, who have been pushing for a greater presence in the Ukrainian O&G sector will be much more welcome now and looking to pick up cheaper assets?
Results out today.
I'm working through my thoughts on the results and the market reaction. On first glance the news looks good - solidly financially with much increased revenues. Pushing for increased cashflow via the shallower plays (where most of the reserves are (as booked) seems very sensible. The shallow wells can be drilled a lot quicker than the deeper T&D wells. Still will be interesting to see what the test of these does provide.
Cashflow and finances are strong so capex remains easily fundable. Seems to be very cheap still in terms of the discount to NAVs and yet the price keeps falling. Would appear that Timmis wants out and isnt too concerned re the price. Obviously not happy at getting knocked back on the flotation of his latest vehicle in what 3 jurisdictions?
Will consider further and post any thoughts.
D
Hi Guys,
After doing some research, I also bought a few of these recently (at 72p). Looks like we got our timing wrong.
Since then, the shares have taken a beating on high volume, which I assume is primarily down to the Ukranian gas discount deal with Russia.
Here is a snippet of Merrill's view, courtesy of FT Alphaville :
Darron, after our chat on where potential "unouted" value may currently lie in LSE stocks I did some DD on RPT and bought a sizeable chunk for me and Mrs JPGH SIPPs.
Will do some publishable research on this over coming week, work permitting.
One potential risk for me is that I recall John Maudlin inone of his newsletters last year ciitng Ukraine as an economic basket case. Would there be trouble down the line if RPT dont get paid for gas sold to local gas company?
JPGH