Exillon: too good to ignore

The most obvious recent catalyst for a re-rating of Exillion's shares had to be March’s independent reserves update, produced by consultants Miller & Lents, which increased Exillon’s proven & probable (2P) oil reserves by 96 per cent to 520m barrels. As a result, the peak production rate projected by the reserves auditor increased by 43 per cent to 90,000 bopd, although analysts think that 50,000-54,000 bopd is a more realistic assumption. The main point is that Exillon had been hoping to double its 2P reserves within three years, but managed it in one.

Robert Rethys, an analyst with European emerging markets specialists Wood & Company, is sceptical about how effectively Exillon will be able to bring the additional 2P reserves into production. Nevertheless, he is in the process of updating the investment house's reserves modelling and valuation of 242p a share. And the shares would look cheap enough on the current 39 per cent discount to book value, but that discount does not even account for the surge in reserves or any future exploration upside, which could be significant. Preparations have been made for an ongoing drilling campaign involving 17 wells in Western Siberia, and another six in Timan-Pechora.

Further glad tidings came at the end of the first quarter, when Exillon revealed that it had finally met production guidance following a protracted delay. Exillon achieved a 2012 exit-rate of 17,000 barrels of oil per day (bopd). In addition, the completion of infrastructure has doubled capacity in Western Siberia, while facilitating a dedicated export route for its Timan-Pechora energy sales, rather than the more expensive haulage option. Infrastructure developments have been relatively straightforward as the company's assets are located within established oil production regions, but were essential given Exillon’s aim of driving output by 4,000-6,000 bopd annually between now and 2018.

Operational improvements aside, the company would certainly have welcomed a recent decision by Russia's Finance Ministry to ditch a proposal to increase the tax on crude oil production, although the whims of the Kremlin are an ongoing source of uncertainty. The share price of Exillon was also weighed down in the early part of this year by a dispute involving attempts by dissident shareholder Worldview Capital Management to reshape the Exillon board after making accusations over corporate governance failings. A majority of shareholders subsequently backed the existing board, and share purchases by Worldview were referred to the Financial Services Authority.

Exillon's capital commitments are front-loaded during the year, but better-than-expected cash generation resulted in a cash balance of $109m (£70m) at the end of March (net $8.7m) and it's unlikely that any additional funding will be required before 2014/15. Exillon has expressed a preference for debt financing (a $100m credit line is in place), so shareholders' interests won't be diluted.