Victoria Oil & Gas targets a place among the mid-caps as it plans to build on Logbaba's success

Victoria Oil & Gas' (LON:VOG) development of the Logbaba gas and gas condensate field in Cameroon is the first phase of a strategy to transform the group into a mid-cap operator in the next three years, according to chairman Kevin Foo.

Today, Victoria confirmed plans to pump first commercial gas later this year. This should occur at some point in the fourth quarter as customers in the Magzi Industrial Estate in the city of Douala are linked into the pipe network.

Nearing this crucial milestone, Foo and his team are already focused on the next stage of the company’s development.  

“A valuation of £400 million is considered mid-cap,” the Victoria chairman told Proactive Investors. “You get into that range and you change the whole flavour of the company. 

“You don’t get there by wishful thinking. You need to deliver cashflow and demonstrable profits. 

“It may mean acquiring suitably sized companies with outstanding reserve and production potential. We will look at acquisitions, though we have nothing firm in mind at the moment.”

Initially the company expects to sell 8 million cubic feet of gas per day, rising to 44 million cubic feet by the end of 2014, The Company believes demand could be even higher over the medium term and have sized the pipeline at 60 million cubic feet a day.

Even at 8 million cubic feet the project would be expected to generate more than US$ 50 million of revenue a year – which means the payback for the project will be a little over 18 months.

But as Logbaba ramps up it becomes “a little gold mine”, Foo admits. 

The company owns 57 per cent of the Logbaba gas and gas condensate project. 

Management’s internal forecasts estimate the net present value of the proved, probable, possible and prospective resources to be US$1.164 billion, based on a 10 per cent discount rate.

Meanwhile, Logbaba's current proved and probable reserves of 212 billion cubic feet are put at US$406 million net to Victoria and are sufficient to supply average consumption of 30 million cubic feet a day for the next 20 years.

Already it has 11 firm gas sales agreements with local industrial users at $16 per British thermal unit (BTU) and another 10 which are agreed commercially subject only to legal due diligence. 

The demand is there because alternative fuels such as heavy fuel oils, butane and diesel are significantly more expensive.

“If someone comes and saves you 30 per cent, says the price is fixed for five years and the supply is reliable, what are you going to do?” asks Foo. 

“It will take time to develop the market. But if you build it they will come.” 

Victoria hopes it can develop a track record for reliability that will encourage most of Douala’s potential local and blue-chip industrial users to make the switch.

The installation of high density polyethylene pipe will start before the end of this month, and will progress at a rate of 100 metres a day, though it may be possible to run at double that rate in “certain circumstances”, the company revealed.  

As the work is being carried out over the rainy season, the plan includes shoring the trenches deeper than 1.2 metres, while temporary drainage pipes and pumps will be used to ensure the roll out occurs unimpeded by the local weather.

Victoria has called a gas usage conference for July 5 to kick off the conversion of boilers used by local industry so they are equipped to receive the Logbaba gas.

“We have had delays, but we are very proud of the progress we have made since we started in January 2009,” the chairman says.

The plan now is to develop the Logbaba field, and passive seismic has revealed an exciting hotspot in to the north of the gas facilities at Logbaba.

However this is unlikely to happen before 2013, with Victoria’s near-term attention turning to the West Medvezhye project in Siberia, which has an independently estimated recoverable prospective resource of 5 trillion cubic feet of gas.  

The company has carried out passive seismic here too and has embarked on geochemical work to “see where next to drill”, Foo says.

In the meantime it will investigate whether it can squeeze “economic cashflow” from well 103. “Even US$100,000 a month pays for the overhead (at West Med),” the chairman adds.

The shares, up 0.13 pence or 3 per cent today at 4.37 pence, are down around 22 per cent in the year to day, valuing the company at less £100 million.

However this pitifully low valuation ought to unwind as Victoria turns on the gas supply taps in Cameroon later this year.

“There remain key challenges with the onset of the rainy season complicating the process,” warns says Andrew McGeary of City broker Northland.

“However, it is positive to see some of the major infrastructure work commencing in order to move this project to fruition. 

“This has always seemed a solid project with the key ingredients in place - ready industrial market on the doorstep (with fixed contract terms in place); a proven reserve; a supportive government; potential for upside in development of other markets. 

“With the fourth quarter targeted for first sales - providing the company can hit this deadline - shares should begin to see some of the inherent value reflected as significant cash flows are brought on stream."