BULL POINTS:
■ Near-term gas production from Cameroon
■ Substantial power generation opportunity
■ Russian oil and gas resources
■ Financed drilling programme
BEAR POINTS:
■ Ongoing Kazakh legal wrangle
■ Poor investor sentiment
Victoria Oil & Gas listed on Aim five years ago with the strategy of exploiting oil and gas opportunities in the former Soviet Union. However, its major prospects now lie south of the equator in a major energy development project in Cameroon, the first phase of which will see the company supply gas to a growing industrial market that is heavily reliant on imports for its fuel.
The company controls 60 per cent of the Logbaba gas and condensate field in Cameroon. This lies beneath Douala, Cameroon's largest city and major port, which hosts the country's primary industry. Logbaba was discovered in the 1950s by Elf. Four exploration wells all encountered natural gas (one flowed so strongly it caused a blowout and flowed uncontrollably), but were not pursued as Elf was searching for oil rather than gas. Logbaba then remained dormant for decades because no market for gas existed in the region. However, all that has now changed. The field is ideally placed to feed both Douala's industrial market and, more importantly, Cameroon's growing demand for electrical power more widely.
The first phase of the Logbaba project will see Victoria pipe gas directly to Douala's industrial users, which currently import liquid fuels at around double the cost at which Victoria will be able to supply gas. With fuel conversion costs in the order of $25,000 (£14,700), industrial users should achieve payback in under half a year. Victoria has already signed letters of intent with potential customers representing 8 million cubic feet of gas per day (mcf/day), around half the estimated market size of 15mcf/day. This market is expected to expand as Cameroon industrialises. Thirty-year agreements will fix the gas price at a favourable $16/mcf for five years.
| VICTORIA OIL & GAS (VOG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 3.65p | MARKET VALUE: | £ 27m | |
| TOUCH: | 3.55-3.75p | 12M HIGH / LOW: | 13p | 2.5p |
| DIVIDEND YIELD: | nil | PE RATIO: | na | |
| NET ASSET VALUE: | 35¢* | NET DEBT**: | 3% | |
| Year to 31 May | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (p) |
|---|---|---|---|---|
| 2005 | nil | -1.25 | -2.04 | nil |
| 2006 | 0.17 | -1.15 | -1.21 | nil |
| 2007 | 0.37 | -1.32 | -1.17 | nil |
| 2008 | 1.73 | -1.17 | -0.70 | nil |
| % change | +363 | - | - | - |
NMS:50,000 BETA:1.47 *Includes intangible assets of $100m, or 35¢ a share ** excludes equity fundraisings post period end (see text) £1=$1.70 | ||||
The first of two development wells should start drilling in September, adjacent to the Elf discoveries, and Victoria has raised around $25m this year to help finance these wells. The proximity of the field to its customers (3-15km) greatly reduces the costs of building pipelines, such that the total cost of processing and transmission infrastructure is estimated at just $12-15m. First revenue, potentially $1m per week, is targeted in mid-2010.
Once Logbaba is in production, Victoria will drill beyond its core area, hoping to prove that the gas-bearing sands extend over a larger area than has been explored so far. However, Logbaba's biggest potential comes from servicing the huge demand for power generation. Around 90 per cent of Cameroon's electricity comes from ageing hydroelectric plants, which the government wishes to replace with a gas-fired power station in Douala. This could require 75-100mcf/day, for which Logbaba would be the natural and only supplier.
Victoria also retains interests in Eastern Europe, including the West Medvezhye licence in Siberia which lies close to Gazprom's vast Urengoy field. However, ownership of the producing Kemerkol licence in Kazakhstan remains mired in legal wrangling and this has badly affected investor sentiment.
