Saturday, September 23rd 2023

Regal Petroleum

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From struggling oiler to toast of the oligarchs – is Regal Petroleum worth a punt?

After years of weakness at the hands of geopolitical tension and a commodity bear market, Ukraine-focused oil and gas group Regal Petroleum has staged a major turnaround this year thanks to a series of impressive updates. With the business now being courted by a variety of billionaires and the market arguably failing to adequately price in last month’s vast reserves upgrade, is it worth a punt at 37.2p a share?

Regal is the 100pc-owner and operator of the MEX-GOL and SV fields and VAS field in Ukraine. These gas and condensate development projects are found on the Dnieper-Donets basin, from which most of Ukraine generated most of its gas and condensate production. As at the end of 2017, the company was producing around 2,800boepd from the fields, a 65pc jump year-on-year. So far in 2018, it has continued this growth by spudding and working over more wells and carrying out a significant resource upgrade.

What went wrong?

Being based in Ukraine means Regal, alongside its peers, was for a long time hampered by geopolitical concerns. Indeed, its shares dropped off considerably in 2014 following the stand-off between Russia and Ukraine over Crimea and struggled to recover from this for several years. Like all oil and gas players, until recently it has also spent much of its time fighting against an aggressive commodity bear market.

More stock specific unease came last November when, in response to media rumours, Regal confirmed that tax authorities had searched its premises in Ukraine. Despite the company maintaining that the raid was unjustified, and being cleared just days later, its shares ultimately faced a 13pc hit.

What has happened since?

Since the issue with the tax authorities, Regal has staged something of a remarkable turnaround, offering several robust operational updates against a background of improving commodity prices and geopolitical tensions. In January, its shares soared a whopping 90pc after it revealed that total daily production had risen from 1,700boepd to 2,800boepd over 2017 and that Ukraine’s government had cut oil and gas tax rates. This bull run then continued steadily for several months, with the firm reporting a successful drill at VAS and a workover at SV.

However, it was at the end of July that things really took off, with shares jumping 93pc to a record 40p. This lift was triggered by a major increase in hydrocarbon reserves and contingent resources at MEX-GOL and SV. Although Regal offered many significant data, the standout figure was an increase in 1P reserves from 1.9MMboe to 27.8MMboe. As it produces roughly 1MMboe a year, this effectively represented a 26-year upgrade. Meanwhile, probable reserves were upgraded from 11.7mmboe to 50MMboe.

Where could it go?

With a current c.£110m market cap, there is an argument that the market has not truly priced in July’s update. With an additional 26MMboe backing up its 1P reserves, Regal could really start throwing off some serious cash- and that’s not even considering the 2P reserves that could generate value in the future. The firm is also awaiting results from its VAS-10 well, which could prompt a production rise later in the year.

Backing up Regal’s operational strength is a $40m cash balance, which it expects to grow by $20m this year. What’s more, the business has no debt and decommissioned liabilities of just $3m in its balance sheet. Finally, on the macro side, it is likely to continue benefitting from climbing gas prices and stable oil prices.

Of course, it is important to note that Regal’s success is not a certainty – after all it operates in a cyclical market and a region prone to instability in recent years. With shares rising from 7p to more than 30p in less than a year, any commodity weakness, renewed geopolitical uncertainty, or failure to deliver could be harmful.

Regardless, Regal’s apparent strength has not gone un-noticed – the firm is well-backed by major institutional shareholders. For example, Energees Management, controlled by Ukrainian entrepreneurs Vadim Novinsky and Andrei Klyamko, owns a 54pc stake. Pope Asset Management also owns a 7.9pc stake.

The icing on the cake here came last weekend when The Daily Mail revealed that Ukrainian billionaire Victor Pinchuk had snapped up a 24pc stake in the firm. With Pinchuk previously losing out to Energees in a takeover bid for Regal, the news prompted speculation that is preparing for a second battle for control.

With the likes of Pinchuk, who once paid £10.3m for a piece of Damien Hirst artwork, now vying for controlling stakes in Regal as it continues on its growth path, could it be worth a punt?

In 2017 Regal Petroleum was the first in Ukraine to contract the MK30T complex from BTF-Koltyubing
The author does not hold shares but was remunerated to write the article