Aurelian Oil & Gas is cashed up and committed to horizontal drilling the Siekierki Gas Field

Carrying out a bit of light research into Aurelian Oil & Gas, and several things strike out immediately that makes this company rather unique looking. First and foremost, the company’s shareholder register jumps out of the page as it is quite a different mix from many other oil and gas juniors.

There are a few of the usual suspects, including Black Rock Asset Management (3.5%) , Blue Ridge Management (5.5%) and Integrated Core Strategies (5.4%) but the largest shareholder made one of my eyebrows rise – and that doesn’t happen very often! It is worth noting that Aurelian’s directors still hold around 10.75% of the company, and all participated in a recent fundraising, but the real eye opener is John Sainsbury - whose family owns around 15% of Sainsbury’s (LSE: SBRY). In a recent placing, Lord Sainsbury more than tripled his interest in the company to 18.92%. I am struggling to think of any other AIM listed company where he appears on the register. This is not the only uber wealthy individual on the register, with Kulczyk Investments, controlled by Polish billionaire Jan Kulczyk, holding around 7.7% of the company. There are two more notable names on the list too – Palo Alto Investors (11.95%), another US hedge fund, and Ingalls & Snyder (7.84%), a high net worth private client broker in New York. Tally up the names aforementioned, and you will see that approximately 71.5% of the issued capital of the company is pretty tightly held.

Which begs the question – why have two billionaires and a predominately US based group of absolute return hedge funds and high net investors piled into a small AIM listed oil and gas junior?

Natural gas is the answer. Lots of it.

Aurelian Oil & Gas can trace its roots back to Ramco Energy. Michael Seymour, who founded Aurelian, previously set up Medusa Oil - which was subsequently acquired by Ramco. When the acquisition was complete, Michael became exploration director of the combined group. However five years later, after a strategic review, he opted to branch out on his own again, and agreed to take Ramco’s Eastern European interests with him, founding Aurelian. Since then, several additional licences have been acquired and Aurelian has done a reasonable job of managing a prospective portfolio of oil and gas assets that range from early stage right through to production.

At present, the company’s heaviest weighting is in Poland, where it has built up a wide range of interests. Generally speaking, Aurelian tends to farm-out to partners once a licence has been advanced enough to warrant the attention of a drill bit. This has allowed the company to build a range of free carried interest in a number of prospects that will be drilled in 2009 or 2010.

However, the really big prize in Poland is the Poznan East and North Blocks which host the Siekierki Gas Field. There a multiple reasons why this project is a potential company maker for Aurelian. At present, Poland imports approximately 70% of its gas and you can probably guess where it comes from! The strategic importance of domestic gas supplies is very high on the list of all European countries, Poland included. Siekierki is no stranded gas play either, sitting in close proximity to Poznan – Poland’s fifth largest city. Siekierki is no walk in the park to develop, however. This is a ‘tight’ unconventional gas play which requires horizontal drilling technology and fraccing to enhance the change of successfully developing a commercial field.

The first well, which is due to spud later this year, will cost in the region of US$20 million to drill and will take around 6 months to complete. The gas is deep too – at 4000 metres - and while Aurelian has already completed a vertical well and 3D seismic, this is a high impact, high risk play. Hence Aurelian had previously anticipated farming down to a 40-50% interest to limit its exposure to the cost of the first well. A farm-out agreement was secured, but the partner pulled out after its own financing arrangements, rumoured to be Goldman Sachs, was pulled. Clearly this wasn’t great news for Aurelian, but the company is quietly confident that a new partner will be announced. As a substantial (up to 1 trillion cubic feet gas in place) gas development play in Europe, there would clearly be interest from a lot of integrated gas companies. Either way, Aurelian has expressed a determination that the first well will be drilled on schedule, even if the company has to self finance it. A competent person’s report completed by RPS in March 2009 valued Aurelian’s 90% interest at 140 pence per share based on 2C contingent resources (this report was delivered before the most recent placing).

Aurelian doesn’t appear to be a company incapable of funding a well like this either. Only last month the company raised approximately £11.5 million before expenses at 12 pence per share.

This was a pretty big chunk of shares, and undeniably some smaller shareholders were none too pleased about the dilution, but the fact that such a hefty amount was raised and that a significant chunk of the cash came from directors and Lord Sainsbury offers a certain amount of reassurance that Aurelian’s underlying value is recognised by the company’s supporters. With £14.5 million in cash compared to a market cap of £33.5 million, Aurelian is strongly positioned to fund the bulk of its commitments well into 2010. Only the financing question mark over Siekierki remains – if a farm-out can be completed, sentiment would be lifted considerably.

It is understandable why most of the attention at Aurelian is focused on Siekierki, but it is certainly worth noting that the company has a range of other interests and plenty of drilling is on the horizon. In 2010 drilling is anticipated at the Bieczszady licence in Poland (25% Aurelian) where 2D seismic is currently being processed. Also in Poland, drilling is planned in 2011 at the Cybinka/Torzym Project (35% Aurelian) once 3D seismic is acquired next year.

Well testing is underway on the Lilieci-1 gas discovery, Bacau Block (41% Aurelian), Romania with several other drill targets already identified. Aurelian’s only revenues also emanate from Romania on the Brodina Block (33.75% Aurelian) which is currently producing 3.5 million standard cubic feet per day (mmscfd); another well is planned in the second half of 2009 to test another structure. Aurelian is also active in Bulgaria; drilling is expected to occur in H1 2010 on the Golitza Block (Aurelian 30%).

Since Aurelian arrived on AIM, there has been no shortage of activity as the company built up a footprint in Eastern Europe. For most investors the really exciting bit will be drilling, and there is plenty of drilling planned over the next 24 months which should keep Lord Sainsbury and other investors on their toes.

The author is a shareholder in Aurelian Oil & Gas.