RusPetro makes progress

Since listing in London in January at 134p, shares in Russia-focused independent oil producer RusPetro have performed strongly - they reached 237p in early April and, while they have dropped to 156p now, RusPetro boasts impressive prospects. It's well-placed to turn moribund Russian oil fields into outperforming assets through the application of modern exploration and recovery techniques.

RusPetro's management has already had success with that business model. Chief executive Don Wolcott was senior vice president of production and reservoir performance for Yukos Oil Company - that has since been dismantled, but was formerly one of Russia's largest oil companies, and while there he helped double production in five years and quadruple flow rates.

Using best-practice western techniques that aren't yet common in Russia - including hydraulic fracturing and water-flooding - Mr Wolcott's team is making great progress. In fact, a trading update last month revealed that RusPetro had boosted production at its Krasnoleninsk licence in western Siberia from 200 barrels of oil per day (bopd) in 2008 to over 4,000 bopd by end-2011. RusPetro plans to drill 24 new wells this year, too, and to increase output to 10,400 bopd. Moreover, a third-party report has suggested that Krasnoleninsk could eventually produce 300,000 bopd - backed by current proven and probable (2P) reserves of 1.55bn barrels.

Bank of America Merrill Lynch says...

Buy. We believe RusPetro's reserve base is being materially undervalued by the market. After completing a 27km sales pipeline ahead of schedule and under budget, RusPetro appears comfortably on track to meet or exceed targeted production rates for 2012's first-half. With four rigs now fully operational in the field, and a fifth potentially on the way, the full-year target of 24 wells also looks easily achievable. We expect a re-rating as management delivers on targets - RusPetro's shares previously traded on a very low implied enterprise value to 2P reserve ratio of 85¢ a barrel and and we value the shares at 431p.

Rennaissance Capital says...

Outperform. Early results from RusPetro's innovative field development techniques are encouraging and the shares should de-risk with further development. While several Russian independents have struggled over the last decade to deliver on their targets, the scale of RusPetro's asset base and management expertise should enable the company to be successful. Moreover, monthly operational updates should provide regular catalysts for share price movements. While we forecast a small loss for 2012, RusPetro should turn cash-flow positive next year and EPS of 1¢ is forecast for 2013. Our price target is 750p, based on an average of three valuation models - discounted cash flow, current trading multiples and historical merger and acquisition multiples.