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Cadogan Petroleum - Capital Network: Trading at Discount to Cash

Published: 13:08 23 Feb 2017 GMT

Cadogan Petroleum is an independent oil and gas exploration and production company with onshore oil, gas and condensate assets in Ukraine. The shares are listed on the main market of the London Stock Exchange and currently trade at a substantial discount to the value of net cash on the balance sheet. We believe a recent management change and refocussing of the strategy could lead to a rerating of the shares. However, the execution risk remains high and success contingent on executing the right deals in and outside Ukraine.

The Group’s conventional assets are located in both of the proven hydrocarbon basins in on-shore Ukraine: The Dnieper-Donets basin and the Carpathian basin. In addition to the above, the Group has a 15% interest in Westgasinvest LLC, which holds 9 licenses for unconventional activities in West Ukraine. Cadogan has built its diversified portfolio of assets through a series of acquisitions since December 2005. The Group also conducts trading operations, which include the import of gas from Slovakia and Poland and local purchasing and sales including the physical delivery of natural gas, and operate a service business which includes work-over, construction, permitting and other services provided for E&P companies.

In H1 2016 the Group held working interests in six operated, gas, condensate and oil exploration and production licences in the East and West of Ukraine. All these assets are operated by the Group and are located in either the Carpathian basin or the DnieperDonets basin, in close proximity to the Ukrainian gas distribution infrastructure. The Group’s primary focus during the period continued to be on the cost optimisation and enhancement of current production (Figure 1).

STRATEGY

The strategy of the company is to leverage the management team’s experience to source additional E&P assets to diversify Cadogan Petroleum’s portfolio both geographically and operationally with a focus to sourcing additional producing assets to cover general and administrative expenses and provide cash flow for exploration activities. In the meantime, management would like to complement the portfolio by acquiring high impact exploration and near term developments with upside opportunities.

Acquisition targets are onshore conventional assets located in the Middle East, Africa, Eastern Europe and Ukraine, Central Asia. The acquisition of a 90 % participating interest in Exploenergy (Italy) is a first step into this diversification process.

In Ukraine, the focus is very much to bring the business to a cash neutral position and possibly move to profitability through farm-outs and reentry of old wells to raise production above current level. The recent, re-entry of two old, oil wells fits into this strategy.

VALUATION

Cadogan Petroleum has a market capitalisation of c.$26m which compares with a net book value of $52m and a net cash position of $40m at 30 June 2016. The P/BV of 0.5x is in-line with the median valuation for similar companies. However, we believe that the disconnect between the market value of the company and the net cash position calls for a re-rating of the shares (Figure 2).

However, the execution risk remains high and success contingent on executing the right deals in and outside Ukraine. The potential negative impact of such risk is mitigated by management’s approach to cash neutrality, which puts the company in a more stable position that it might have been in the past.

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