Aurelian Oil & Gas lifted as Arbuthnot weighs in with a buy recommendation and 84p price target

City broker Arbuthnot Securities this morning weighed in with a buy recommendation and 84 pence a share price target on Aurelian Oil & Gas (LON:AUL).

In a note entitled Pole Position, analyst Dougie Youngson said: “Aurelian’s key asset is the Siekierki gas field in Poland, which is currently under development and due to come on-stream in the fourth quarter of 2012. 

“Poland is presently taking steps to achieve gas self-sufficiency by shifting its dependence away from Russian imports. 

“We believe Aurelian is well-placed to capitalise on Europe’s strong gas demand whilst also benefiting from Poland’s beneficial taxation regime.”

Youngson’s “overall  target price” is 120 pence which has been “discounted reflect the implicit long-term risk of development to first stage production.” He has moved from having no recommendation on the stock.

In early trade Aurelian was changing hands at 57.94 pence a share, up 0.69 pence.

Youngson points out that the company is fully funded, having raised £127 million in the past 18 months, which allows it to embark on the appraisal and development of Seikierki.

Last week Aurelian revealed its Krzesinki-1 well was spudded on June 24 and will reach its target depth of 4,150 metres by early in the fourth quarter.

The structure being targeted lies on a trend to the north of a number of conventional fields developed by PGNiG and FX Energy. 

As such, Aurelian expects Krzesinki will also be a conventional well, so horizontal drilling and fraccing are not planned. 

The mid case net resources to Aurelian is 44 billion cubic feet with an “upside case” of 465 billion cubic feet.

Aurelian chief executive Rowen Bainbridge said last week: “Krzesinki-1 is an exciting prospect which, if successful, could add significant conventional gas to the existing 346 billion cubic feet net to Aurelian in the Siekierki tight gas project.

“We have now completed the refocussing of our business in Romania and look forward to moving ahead with the appraisal of Voitinel and our oil exploration activities in the Romanian Carpathians. 

“The exit of our Romanian non-core interests has been achieved at a value that we are pleased with whilst also providing us with further upside based upon future exploration success."

Krzesinki-1 is around six kilometres south-west of the company’s Trzek wells. 

It is part of the wider Siekierki tight gas field which has estimated reserves of 640 billion cubic feet of gas net to Aurelian under a mid-case scenario, according to the 2009 competent persons report. 

The  company estimates it can achieve annual production of up to 100 million cubic feet a day by 2016. 

In the press release announcing the spudding Krzesinki last week, the group also said the sale of the non-core Romanian assets to private equity investor Raffles Energy would allow it to redirect capital expenditure.

The initial proceeds from the deal will be €6.85 million, though there could be further payments linked to the future exploration success.

But for Arbuthnot, Aurelian is very much a play on Poland - rather Romania – and in particular the country’s desire to cut its reliance on Russian gas.

“Poland has huge gas potential with external evaluations assessing reserves as high as 105 trillion cubic feet,” Youngson points out. 

“The country is largely dependent on gas imports, with Russia its main supplier. 

“The Polish  government has indicated that it is reluctant to  continue on this basis, leading to a scenario whereby the government would rather pay higher  domestic gas rates in order to facilitate self sufficiency. 

“Poland also has a clear advantage in terms of its developed infrastructure, fiscal terms, and resilient economy while most of the surrounding countries are also clear importers of energy.”