Victoria Oil & Gas update on Siberian exploration cheers analysts

Victoria Oil & Gas (LON:VOG) cheered analysts today with a promising update on its exploration and development work across its West Medvezhye block in Siberia. Indeed some analysts believe the shares are significantly undervalued.

Victoria, through its wholly owned subsidiary ZAO SeverGas-Invest (SGI), holds a 20-year exploitation licence for West Medvezhye (West Med) covering 1,224 km2.

Located in Nenets region of Siberia, West Med is located in one of the most prolific oil and gas producing areas of the world and is adjacent to Gazprom's giant Medvezhye field that has already produced over 70 trillion cubic feet of gas.

Independent assessment in 2006 indicated West Med held total prospective resources of approximately 1.1 billion barrels of oil equivalent.

The latest phase of exploration work on West Med has involved integration of new data with previous seismic and well data to firm up prospects and leads that have already been identified.

Key initial findings include an estimated 400 million barrels of oil equivalent in-place in six features mapped by passive seismic and gas tomography surveys.

The continuing encouraging findings have led to the company commissioning a seismic reprocessing and geological modelling study for the prospect. The first phase of this technical work, which included reprocessing of 845 km of 2D seismic, was completed in June 2011.

Analysis of the reprocessed seismic data has begun and will incorporate the passive seismic and gas tomography results.

The results of the analysis are scheduled to be considered in a workshop in Tyumen, Russia in July 2011, said the company.

In addition to the subsurface technical studies, Victoria Oil & Gas has also started development studies to support commercialisation of prospective resources and exploitation of its first discovery in the West Med, Well-103.

These studies cover areas such as drilling and well engineering, as well as design work to establish costs and schedules for oil, gas and condensate production facilities and supporting infrastructure.

The company has also been looking into downstream and export issues with regards to future production from West Med.

Several routes to market for commercialisation are available, it says, including the Chircha railroad station, located within the southwest boundary of the licence, and the river port and loading terminal of Old Nadym are located 22 km away.

In addition, one of Gazprom's principal gas transmission pipeline's in the area runs along the eastern border of the licence and the nearest Central Gas Processing Unit is located 18.5 km from West Med.

Initial studies suggest an early production scheme for the Well 103 discovery could involve the sale of small volumes of crude into the local market with prices of US$60 per barrel achievable. This would be followed by full scale oil and gas development for export as the oil and gas export market is well established in this part of Siberia.

The results of Victoria’s preliminary development assessment work on the Well 103 discovery indicate first oil sales in 2015, subject to further refinement and screening.

While the West Med is looking promising for the company, Victoria’s principal focus has been the development of and commencement of gas and condensate production at Logbaba in Cameroon, scheduled for the fourth quarter of 2011.

Logbaba is located in Douala, the economic capital of Cameroon. The field was discovered in the 1950s and all four exploration wells have encountered gas.

The updated cheered Shahin Amini, analyst at  broker FoxDavies. He said it is “encouraging” to note that although its focus has been on the development of the Logbaba gas field in Cameroon, the company has made good progress with the data processing and technical work for the West Med asset.

“We believe that news flow and updates on the exploration, appraisal and the development of the prospects in this license area will become increasingly more significant for the market as Logbaba nears production and investors look for further upside in the company, “ he added.

Amini believes that with one discovery (Well-103) already in the bag, and six exploration prospects at West Med brewing,  a portfolio of opportunities is developing for the company,  with the proximity of already producing fields and export  an added bonus for prospects.

He added:  “From today’s announcement it is clear that the company has identified the main issues for the commercial exploitation and is managing these accordingly.

“We expect that the future expenditures in Russia can be financed from the proceeds of gas sales in Cameroon and don’t expect the company to raise new capital to fund the development of West Med over the next 12 months.”

FoxDavies’ valuation for the stock had already accounted for the development of 14.4 million barrels of oil equivalent at West, albeit at a commercial chance of success of 67%, which yielded a risked value of 1p per share using a net asset value (NAV) of US$3 per boe.

The broker is now also including a risked exploration value for 400 million barrels of oil equivalent of prospective resources with chance of success at 10%. This increases its total risked NAV by 3p per share to 16p per share.

Yet the company continues to trade at a significant discount to Amini’s core NAV of 7.7p per share, which is based on the Logbaba development project.

He is “confident” that the market discount will eventually correct, adding: “We see Victoria as a compelling investment which offers significant upside with limited downside risk.

FoxDavies retains it ‘buy’ recommendation for the shares with a target price of 12p.

Broker Northlands also welcomed the update saying that at its current valuation for the company it considers West Med as a ‘in for free upside’ for the shares.

It added: “Whilst detailed economics and a recoverable reserve figure may take a while, the honing in on the ‘in place’ estimate is encouraging whilst potential first oil sales in 2015 puts a timescale on monetisation.”

Westhouse gave the update the thumbs up too, saying given the resource potential, West Med “clearly holds great upside” for Victoria Oil & Gas.

“However, the work there still remains at a relatively early stage. The focus therefore remains on the group’s progress at Logbaba, in Cameroon, where we still expect first gas sales before the end of 2011,” it adds.

Westhouse reiterated ‘buy’ on the stock, with an unchanged target price of 7.4p.