It's been a disastrous first year for RusPetro (RPO). The Russian oil developer's shares have lost over 90 per cent of their market value since last April as the company missed production targets time and time again. Now management admits that if additional financing is not obtained, it may "cast doubt" on the group's ability to continue as a going concern. We recommend investors stay on the sidelines or sell their shares, as downside risks still outweigh potential upside.
While RusPetro has enormous proven and probable (2P) oil reserves, the main challenge has been recovering the oil, as it sits in low-permeability reservoirs. This means the oil does not flow very naturally through the host rock, so the company must use expensive artificial methods such as waterflooding and fracking to get it moving.
Management has the technical expertise to do this, but they haven't executed on the strategy, partly because they switched the near-term focus to producing gas condensate due to higher margins per barrel compared with producing crude oil. That, in turn, is because gas condensate production benefits from much lower mineral extraction tax (MET) rates under the Russian fiscal regime. Perhaps, fortunately, the fiscal terms for hard-to-recover oil fields like RusPetro's are currently under a government review.
Standard Bank assigns RusPetro a risked net asset value of just 40p a share, having discounted much of the oil reserves until recoverability is proven.
RUSPETRO (RPO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 22p | MARKET VALUE: | £73m | |
| TOUCH: | 22-23p | 12-MONTH HIGH: | 237p | LOW: 20p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 54¢ | NET DEBT: | 186% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (c) | Dividend per share (p) |
| 2010** | 12.5 | -51.4 | na | nil |
| 2011** | 38.7 | -88.7 | -41.0 | nil |
| 2012 | 76.2 | -28.1 | -9.0 | nil |
| % change | +97 | - | - | - |
**Prior to listing £1=$1.51 | ||||
