Jupiter Energy joins AIM with a busy schedule in Kazakhstan

Jupiter Energy’s (LON:JPRL) debut on AIM this morning kick-starts a busy period that should chart its transition from explorer to fully-fledged oil producer. 

The hectic schedule includes further drilling, a reserves upgrade and an equity fund-raising to finance its aspirations in Kazakhstan.  

The listing here in the UK brings the story to a wider and possibly more appreciative audience.

In doing this, it is hoped that Jupiter’s efforts to date may gain the recognition they have sorely lacked in Australia, where the company will continue to maintain a quote.

Jupiter is following a well-trodden path which has seen the Aussie oil firms such as Range Resources (LON:RRL, ASX:RRS) and Global Petroleum (LON:GBP) make the same journey.

In the case of the former, it is has been a spectacular success as Range has gained something of a cult following with investors here in the UK. 

Jupiter’s is a simple story. But unlike several other juniors currently operating in Kazakhstan it is also a success story.

So far it has drilled three wells and hit oil each time. The company owns the rather prosaically titled Block 31 in the highly prolific Mangistau Basin.

It drilled the J-50 well in 2009 and followed it with J-52 in 2010. The 2011well (J-51) is currently finalising completion and we should get flow rates soon.

The drilling of the first of its two 2012 wells (J-53) should begin later this month and will take around 60 days to complete.

Having four wells flowing should take daily production to around 1,500 barrels a day, according to chairman Geoff Gander. 

The aim is then to increase output to 4,000 barrels a day by 2015.

The completion of the J-53 well will be the cue to bring in an independent consultant, who will re-assess the company’s current proven and probable (2P) reserves base, currently estimated at 24 million barrels.

The hope is that this figure will rise to around 35-40 million barrels assuming a commercial discovery with J-53. 

It is at this point also that the group will most likely begin looking to put the four wells (J-50, 51, 52, 53) under a full production licence.  The initial Trial Production Licence is based on sales into the domestic market, although with specific government approvals sales into the export market are possible.

A full production licence stipulates a maximum of 20 per cent of oil is sold locally, which leaves the rest available to be sold into the higher-margin export market.

To bring the four wells into full production, the company will also require production facilities.

"We may look to reach agreement with a nearby production facility - which gets us into the game - and build our own facility at a later date,” Gander says.

“Due to the recent extension to our block we need to think carefully about where our own facility should be located and this requires us to carry out more exploration work in 2012 and 2013.”

The second well to be drilled in 2012 (J-55), which is likely to be spudded after the company has raised funds, will be drilled on this new extension area.

A 3D seismic survey has been shot over the area and the group expects to be in a position to reveal potential drill targets at some point in December.

The company also has a prospect in the north it is considering drilling.

“This is a riskier target but the upside would be significant,” Gander explains.

“It could be dry. But then it might have 20-40 million barrels. At a dry hole cost of US$2.5mln, it is something we must consider.”

The required capex to take Block 31 to self funding stage is estimated at A$40 million. However at the upcoming annual meeting the company is asking investors for permission to raise up to A$55 million. 

But as Gander points out, it “is just a generic approval”, which lasts until February.

“We have talked about a raise of A$30-50 million – the upper end of the range would also give us a bit of a war-chest for a potential acquisition,” Gander explains. 

The current share price of 58 cents is bound to be a frustration to Gander and the Jupiter team. 

It patently fails to reflect a realistic valuation of the oil in the ground - let alone the company’s prospects and the potential for a material reserves upgrade.

A back of the envelope calculation reveals the group’s current reserves are valued at around something like $2.50 in the ground, well below the market average.

Material progress and a more knowledgeable investor audience may help propel the share price higher. 

The Australian outfit Bell Potter Securities has a 12-month price target of A$2.42 a share.

Evolution Securities has also initiated coverage in the UK market with an initial buy recommendation and a seemingly conservative target price of $A1.06.

Bell Potter analyst Johan Hedstrom said: “The Kazakhstan discount remains excessive, particularly now that the concerns about regulatory approvals appear to have been allayed.”  

Evolution analyst Keith Morris said: “The current share price is asubstantial discount to our target price of A$1.06 (70p/share), which is based on 2P reserves only.”

The company is in a better position than most in that it has two influential and very supportive investors on the shareholder register.

One is Waterford Group, with a 30 per cent stake, while the other is SNG, or Soyuzneftegas, the Russian oil and gas investment company, which has 9.9 per cent of Jupiter.

SNG is headed by ex Soviet Energy Minister Yuri Shafranik.

Waterford, meanwhile, has an impressive track record in the Middle East, South America and, crucially, the countries of the former Soviet Union.

Waterford’s interest led to the appointment of Alastair Beardsall as the senior non-executive director of Jupiter, who brings with him a wealth of experience garnered in the sector.

Investors active in oil and gas will know Beardsall from Emerald Energy, which he built from an £8 million tiddler to a mid-cap that was eventually sold for £532 million.

Gander is confident he has laid the foundations for success: “Our strategy has not been about land-grab.

“We have taken a small block and are proving it up. As Alastair often says: 'We are small but perfectly formed'.”

“In this market we are a de-risked proposition, which counts for a lot. 

"And we have an excellent group of investors at the top of our register.  

“They understand the nuances of the Central Asian market and are taking a three to five-year view – both critical elements if you are to have success in this part of the world.”