2010 Share Comp - Write-ups

Company name : Urals Energy
Website : http://www.uralsenergy.com/
Share epic : UEN
Shares in issue : 179,648,549
Current price : 7p - 7.5p

Urals Energy Public Company Limited, a Cyprus-based holding company admitted to trading on the AIM, is an independent oil company with its operating assets located in Russia. Urals Energy’s main exploration and production operations are in Timan Pechora and on Sakhalin Island.

After a period of the shares being in suspension whilst it divested some of its assets to resolve debt issues (discharge of $630 million debt).

It is now positioned to recommence development programmes on two producing fields, Arcticneft and Petrosakh.

UEN’s Petrosakh asset is a vertically integrated oil complex, incorporating upstream, mid-stream and downstream activities. Acquired at the end of 2004, it has seen only maintenance and some development input from the firm, largely because UEN was concentrating money and effort on the newer acquisitions.

UEN acquired 97.2% the Petrosakh properties from an Alpha Group subsidiary (Alpha Eco) in Dec 2004 for a consideration of $45m. Production from the two reservoirs (the older (Miocene age) Borsky and the younger (Paleocene) Pileng reservoir) at Petrosakh’s onshore field, the Okruzhnoye, has fluctuated in the past between 2,000 and 5,000bopd. DeGolyer & MacNaughton Dec 07 study estimated total proved, probable, and recoverable OOIP (unrisked possible & probable) onshore reserves at Petrosakh could amount to almost double this 1P+2P +3P (74mmbls) estimation to about 130mmbbls.

UEN acquired 100% of the Arcticneft properties from Lukoil and an affiliate in July 2005. The final consideration, after a series of negotiations and settlements amounted to $38.5m.

Production comes from two of the three block delineated multiple small reservoirs on the Peshanoozerkoye Field and has fluctuated in the past round 1,300 to 1,500bopd. Current production amounts to ~950bopd, while field life is expected to last for about another 32 years. The reservoirs are constantly pressurized, by water injection wells (of which there are three in operation) so as to maintain cumulative output of the entire field at more or less steady rates. But there is also room for much further development, as not all the horizons or even reservoirs have been fully explored, activities which can lead to a possible production output reaching 3,000bopd.

The current reserve count stands at Proved (1P) ~22 Mmbls, Probable (2P) –21Mmbls. Therefore the 3P count is approximately 43Mmbls, with Possible (unrisked) resources (P50) – 20.5Mmbls. (However P50 (possible) figure is arrived by inclusion of a mostly gas bearing prospect within the license area of 49.1Bcf (equivalent to almost 9Mmbls) but as there is no local market, what little production there is consumed by UEN for own electricity generation needs
Average daily total production for the period, six months ended Junes, is 4,251 BOPD
Net debt was $33.3 million at 17 December 2009

The Company operates its Russian holdings and directs the management of their operations through its Moscow subsidiary, OOO Urals Energy (a Russian limited liability company). In addition, the Company maintains its head office in Nicosia, Cyprus.

Good stuff cyberpost, although might I suggest that people write up oil companies on the oil sector board and just post a link across? You're more likely to get informed comment over there. Just picking up a few things from someone who doesn't know the company at all :

the older (Miocene age) Borsky and the younger (Paleocene) Pileng reservoir
Err - Paleocene is about 4x older than Miocene. Paleo = "old".

Shares in issue : 179,648,549
Current price : 7p - 7.5p

For those who can't be bothered to work it out, that's a market cap of £13m, plus $33.3m debt to Petraco - is there any other debt? Out of interest, what's the story with all these massive historic debts, with that much money swilling around a Russian company, there must be quite a story....?

But say that's $55m EV, for assets that cost $83.5m. Even assuming they were conned by the vendors (probable :-) ) that's an interesting start.

Oil in place is pretty meaningless, and you seem a bit confused about the exploration upside but it sounds pretty minimal. Proven & probable reserves are what are interesting, which if I read you right is 43mmbbls. For an EV of $55m, that's less than $1.30/bbl.

Which is quite attractive on the face of it, but then you are looking at Russian taxes and low-pressure wells. That 32-year field life may sound great, but it decimates the NPV of the reserves as much of the revenues are so far in the future. You don't say much about what kind of money they're making from products, although normally in Russia it's the way to go rather than selling crude where netbacks can be of the order of just $8/bbl or so. So the per-barrel values will always be low.

That said, they're probably cheap, and the funding structure gears up the equity so that eg if the EV returned to what they paid for the assets, the shares will be a 3-bagger. On the other hand I'm not quite sure what the trigger for a revaluation would be, other than a gradual dissipation of the smell from the mega-debt jiggery-pokery.

Hi Hallucigenia

thanks for the response.

The debt situation pre suspension is pretty hard to grasp. As far as I know a lot of the big assets had massive debt secured on it (via a big Russian financial institution). The collapse in general market conditions compounded things and the company were cornered (I think the creditor effectively calling in their capital) - and so UEN were in the mire and on their knees. If the debt issue wasnt sorted then it would have been curtains for shareholders - their biggest creditor would have just taken UNE lock, stock and barrel. Fortunately it was sorted.

They still do have to renegotiate and restructure the remaining debt with another creditor. However, I understand they are themselves creditors for a similar amount from another entity - how easily that debt will be recovered is another matter.

As for the technical side of the oil in place and recoverability - thanks for the corrections. I am no oil techy so appreciate the low down.

I should have put a big caveat on this stock. It is dealing with Russian assets and the market has woken up to not attaching big valuations to such companies (like they did previously) after experiencing such shocks in the past (eg TMAN, SBE etc). This for speculative money alone.