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Volga Gas is an independent oil and gas exploration and production company focused on the Volga Region of western Russia and with a 100% interests in four licenses to explore for and produce oil, gas and condensate in the Volgograd and Saratov Regions. The share price has steadily recovered from a low of c.30p reached in Jan 2016 to the current c.55p, following an improvement in production operations. In our opinion the stock as fairly valued versus that of industry peers; however, we view the recent stock purchase by a Director of Baring Vostok Capital Partners as a positive indicator for potential share price performance.
In 2016, gas and condensate production benefitted from the completion of the VM field development, the capacity increase at the gas treatment facility at Dobrinskoye as well as the development of export sales channels for condensate, which enabled the VM field to maintain production rates despite disruptions to the domestic market for condensate. During the year oil production benefitted from the installation of electrical submersible pumps in some of the Uzenskoye wells, increasing production rates from 450bpd to 850bpd (Figure 1).
In 2017, the company will continue to benefit from the full year impact of capacity upgrades to the gas processing plant at the end of 2016 as well as potential additional production from a horizontal well planned to be drilled in 2017. A further increase to commodity prices in 2017 would also positively impact the financial performance of the company.
We believe the rise in the share price during 2016 from a low of below 30p to current level of c.55p adequately discounts the recent operational and pricing improvement. Indeed, we note that the Volga Gas stock trades at a P/B value of 1.03 which compares with a median value of 0.6 and an average value of 1.2 for comparable companies; hence we believe it is currently fairly valued (Figure 2).
We see two avenues of potential upside, both of them presenting a certain level of risk.
The first one is additional appraisal and exploration success in the Karpenskiy licence. The licence area contains a producing oil field discovered by the company in 2007 in a supra-salt horizon and exploration potential in other identified structures in supra-salt, intra-salt and sub-salt horizons. Volga Gas had good success in supra-salt exploration with 11 wells drilled since 2007 resulting in the discovery of commercial reserves in the Uzenskoye and South Uzenskoye accumulations. However, the first deep sub-salt well, Grafovskaya#1, spudded on August 28, 2009 encountered hydrocarbons but proved to be sub-commercial.
The second one is M&A, either with Volga Gas being the target in a consolidation play for oil and gas assets in Russia, or Volga Gas being an acquirer of assets in the region. It is part of the strategy of the Company to seek potentially value accretive acquisition of other oil, gas and condensate reserves.
Interestingly on 13 January 2017 Baring Vostok Investments PCC Ltd, a closed end fund advised by Baring Vostok Capital Partners which also advises the Baring Vostok Private Equity Funds that are founder shareholders of Volga Gas, bought 4.8 million shares of Volga Gas at a price of 49.5p (Source: RNS).
We believe such a stock purchase from someone close to the company is a positive indicator for potential share price performance in the relatively short-term.
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