Victoria Oil & Gas plc Could Offer 300% Upside As Production Rises

22nd Nov '13 by Roland Head

5 comments 7481 reads

I remain a fan of Victoria Oil and Gas (LON:VOG), despite the series of delays and problems which have dragged its share price down to 1p territory over the last year.

The firm's recent announcement that production has now reached 2.9mmscf/d should mean that it has reached operating cash flow break even, according to Chairman and interim CEO Kevin Foo, but what are the company's shares really worth?

Victoria Oil & Gas is not a regular exploration and production company, whose value varies with every turn of the drill bit.

It is -- currently, at least -- a straightforward energy production and supply business, focused on producing gas and selling it, through its own pipeline network, to businesses in the Cameroon city of Douala.

On that basis, it seems reasonable to value it on earnings and cash flow, with a little extra thrown in for the value of its reserves.

Results provide earnings clues

The firm's 2012/13 results, which were published on 25th October, indicate that production of 4.8mmscf/d would translate to net monthly revenues of $1.8m. Set against this, Victoria says its monthly cash burn is $1.1m, providing operating cash flow of $700,000 per month.

Next year's target is 12mmscf/d, which by my calculations would result in net monthly revenue of $4.5m, or $53.9m over a 12-month period.

Victoria's 2012/13 accounts showed total costs (finance, SG&A, etc) of around $22m, which would mean that sometime in the next 12-18 months, the firm could move to a situation where it is on course to deliver a pre-tax profit of around $32m.

Assuming there is no further fundraising or dilution, this would equate to earnings of 0.7 cents per share, or around 0.44p, which would place Victoria's current share price on a forward P/E of less than 3.

300% upside

In my view, if Victoria's business continues to grow, and the firm can convert positive cash flow into profits, an eventual P/E multiple of between 8 and 10 would be reasonable.

Looking ahead to the 2014/15 financial year -- when I believe that Victoria's investment in Cameroon will really begin to bear fruit -- I think that earnings of 0.4p per share, and a share price of 3.5p - 4.5p, is a realistic target, offering patient investors the potential for 300% gains from today's share price.

What's more, this target price discounts…

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TMFMayn

22nd Nov '13

hi roland

possibly the best headline i have ever read on this site :-)

my thoughts after a quick skim

i am not entirely sure of the $1.1m burn rate. i think it adds up if you look at the $8m operating loss from H2, but there has been substantial capex in the past that has exceeded the depreciation charge, so I wonder if that is accounted for in this $1.1m figure. i would perhaps double up the H2 figures to get a feel for the underlying historic situation, as H1 saw a lot less revenue and cost than H2.

Obviously main issue is the target of 12mmscf/d -- VOG expected in May it would be supplying 3.6-4.8mmscf/d by the end of 2013, but so far has 2.9-3.3 depending on how you read the last statement. The take up does seem slow and 12mmscf/d does seem ambitious for 2014.

Balance sheet is not ideal for me, with cash and debtors I think equalled by debt plus creditors. personally i would like to see a lot more surplus cash to help back up the market cap and for emergency operational purposes.

all that said, VOG does look very interesting as it seems to have a supply monopoly in the town. and there is all that russian resource there as well. many thanks for the pointer.

Mayn

Roland Head

Hi Mayn,

Thanks for your comments. I agree that lack of contingency cash and failure to deliver (again) are the biggest risks here, although in fairness some of the delays in customer take up have apparently been due to customer-side delays, rather than VOG's problems.

It's probably also fair to say that VOG's management chronically underestimated the scale of the cultural/educational challenge they faced in introducing a whole new type of energy supply and infrastructure to incumbent businesses. However, I take this week's Presidential visit and local operating company name change as a sign that local political and business leaders are now getting behind the project, which is cautiously positive.

VOG is hoping that a 4.3 mmscf/d contract to supply a 20MW power station will come to fruition in the next few months; this could make a material difference and tip the balance in terms of cash flow.

I take your point about the balance sheet, but I think that H2's higher operating costs and rising revenues should gradually balance out, as more customers come online and VOG gets to grips with laying pipeline more efficiently, which has clearly caused them a lot of grief this year.

Roland

flyinghorse

8th Jan '14

A decent update this morning,with cash from RSM and generators released from customs:
http://www.victoriaoilandgas.com/news-rns-announcements/2014-01-08/commercial-developments-gaz-du-cameroun

FH

frogtiper

23rd Feb '14

I have held this stock for years because the story is good.

Whitbourne

19th Jun '14

Interesting to look back on Roland's article six months later, with the benefit of hindsight. Victoria Oil and Gas (LON:VOG) is a really difficult company to value, I find. You cannot assume a constant margin and it is not clear which costs are fixed, which are variable (the main one is royalties on the gas produced) and how much of the cash is going out in Capex which is building out the pipeline network and will come to an end. The pipe-laying issues have been fixed, which is a real credit to Chairman and acting CEO Kevin Foo and his team.

In my view a good rule of thumb is that everything is taking a year longer than predicted. So while it may be true that "Next year's target is 12mmscf/d" I would have thought this is too optimistic. As Roland says, customers are taking their time. So, for example, the next big customer is a cement plant. The pipeline is built, but commissioning is around 6 months late. Not the company's fault, just life (especially, life in Cameroon).

BUT the key landmark in my view is that the Cameroon venture is now cash-positive. So there will be no more of the damaging dilution that so affected the share price in 2012 and early 2013. And this will gradually repair the balance sheet, which as Mayn says was pretty tight at the time of the last results.

In summary I agree with Roland that this is a good entry point (I bought some more yesterday) and the 300% target is realistic. But it will take a year or two to get there, I'd predict.

The next catalyst and the reason for posting now is the promise of a "comprehensive production and operations update" before the end of the month. I could see this having an impact on the share price as people start to do their own calculations of likely production and cashflow along the lines above. The most recent RNS (giving notice of the promised update) is here: http://www.investegate.co.uk/victoria-oil---38--gas--vog-/rns/genset-connections-and-thermal-update/201406120700284485J/

Victoria Oil & Gas plc Could Offer 300% Upside As Production Rises

Results provide earnings clues

300% upside

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Roland Head

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