Regal Petroleum shares sky-rocket on takeover talk

Regal Petroleum (LON:RPT) shares rocketed 50 percent higher on London’s AIM market, after it confirmed growing speculation that it had become a bid target.

The Ukraine operating oil and gas junior said it has received a number of takeover approaches. It is now in preliminary talks, which may lead to the sale of company.

Regal has had a rather bumpy time of late following the departure of chief executive David Greer and ongoing problems with the environmental ministry in the Ukraine, which has led to the shutdown of its operations there.

The company began a strategic review of its business at the end of September.

The stock has had a very strong run today with a 6.5 pence gain, up around 50 percent to an intraday high at 19 pence.

Regal’s statement, and the ensuing rally, was prompted by an article in The Times, which cited speculation that an un-named Australian firm was interested in buying the company for up to 22 pence per share. 

However analysts reckon that interest could also come from within the Ukraine itself and possibly from Konstantin Zhevago, the influential local businessman who is the major shareholder in Ferrexpo (LON:FXPO), with a 51 percent stake.

Zhevago already has links with Regal through his energy trading business, which helped it negotiate a deal to sell gas output from the Mekhediviska Golotvshinska (MEX-GOL) and Svyrydivske (SV) fields.

The Ukrainian businessman is Europe’s youngest billionaire. Aside from Ferrexpo, Zhevago also owns a large conglomerate, the Finance and Credit group - which includes one of Ukraine’s largest banks as well as engineering, transport and pharmaceutical interests.

Some reports suggest that Regal may be simply bought by another explorer in the region, purely for its contracted rigs and it liquid assets. 

However Regal has built significant resources in Ukraine and whilst it has hit a few snags along the way, these assets must surely warrant interest in their own right.

Indeed, a recent report by Goldman Sachs highlighted the value of the MEX-GOL and SV gas fields. Goldman said that MEX-GOL and SV have high potential, emphasising that the ‘B-Sands’ horizon has 151.3 million barrels of oil equivalent of audited reserves 

The major investment banking group concluded that whilst the near term uncertainties posed too high a risk for a ‘buy’ recommendation, a takeover bid would provide an obvious driver for the stock.

“We believe that the size of the asset is such that it could attract a bid from a larger company with sufficient capital to unlock the potential,” Goldman said.

“A bid for the company or its assets is the most obvious material driver for the stock.”

On 5 November Goldman initiated its coverage on Regal with a ‘neutral’ rating, but it set a twelve month target at 18.5 pence per share.

The company had been working to enhance its operations at the Ukrainian gas fields throughout 2010, before it suspended operations earlier this month – pending the results of the strategic review.

Through the review Regal wants to find ways to optimise production and strengthen its balance sheet by reducing costs and contractual exposures.

Regal has already started to implement this strategy, having agreed to sell its wholly owned Barlad concession in Romania to Chevron (NYSE:CVX) for US$25 million. The conditions of the sale and purchase agreement are expected to be met by 31 December.

In addition to that, Regal is currently in discussions with Saipem over the future utilisation of the two drilling rigs operating in Ukraine with over three years contractual term remaining.

No plans have been made for the use of the proceeds from the sale of the Romanian asset pending the outcome of these discussions.