Gamble of the week: An obscure Russian oil explorer

published 3 August 2012

RusPetro, the Russian FTSE 350 oil explorer, is relatively unknown in Britain. It only floated on the stock market in January, quietly raising £162m at 134p per share. However, investors should wake up to the returns on offer, or they could be in danger of missing out on something big.

RusPetro's assets are located in the established oil-producing region of West Siberia in Russia, where it owns three fields containing 1.54 billion barrels of proven and probable (2P) reserves. Here it is planning to drill around 100 wells over the next two years and build a 27km link to an existing oil pipeline for onward transport.

Current production is a mere 5,600 barrels per day (bpd), but the board is confident it will nearly double this to 10,400 bpd by December. By using modern exploration and lifting techniques, field recovery rates are expected to soar from 15% to 28%.

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That could mean big bucks. Not only should 2P reserves increase, but output could also rocket to 300,000 bpd by 2030. That would catapult RusPetro into the upper echelons of the FTSE 100. In July, the company said that it has put in place "the team, equipment, contractors and infrastructure required. The second half year is expected to see a pick-up in the rate at which wells are brought on-stream as the rigs gain efficiency and completion times decrease." RusPetro's application for a 50-year licence extension for the northeastern part of the field on the Polyanovsky block has been accepted and should be granted towards the end of the year.

RusPetro (LSE: RPO)

Of course, it won't all be plain sailing. Operating in Russia carries with it dangers of political interference and even possible nationalisation, if not under this government then perhaps under a future one. The company is also exposed to fluctuating oil prices, potential tax hikes, adverse foreign-exchange movements and concerns over environmental issues.

More positively, RusPetro has made a solid start on allaying concerns over corporate governance by having a free float (the proportion of shares that are publicly listed) of 40%. That compares well to many London-listed foreign companies, which only have a minimum 25% requirement.

The City expects RusPetro to move into the black in the second half of this year, with a return to full profitability by 2013. I value the firm's 2P resources at around 90 cents per barrel. Adjusting for net debt of $140m as at March gives an intrinsic worth of 230p a share.

Joint house broker Goldman Sachs has a target price 256p. Interims are set for 29 August.

Rating: SPECULATIVE BUY at 137p (market cap £440m)

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.