on iii20 Mar 2014 13:47
DAVY view today - interesting bloodinthestreet
DAVY VIEW Petroneft’s equity placing ensures that oilfield operations can continue according to plan in 2014 and provides financial space to complete a major farm-out in the coming weeks. This imminent validation and financial restructuring after the completion of the deal point to a watershed in the group’s fortunes. We think the stock should outperform materially on this news.
Equity placing at 5p and additional debt drawdown
A total of 62m Petroneft shares were placed at 5p per share, raising $5.2m of new equity. In addition, Arawak, a current lender to the group, has increased its facility from $15m to $16.5m. The combined amount of $6.7m will ensure that supplies and material can be brought into the field before the Siberian winter roads become impassable; river crossing will no longer be possible after the first few weeks in April (in Western Siberia, frozen ground conditions in the winter are typically used to transport goods).
The placing will also be used to repay $2.5m in debt to Macquarie and provide working capital until the farm-out deal is completed.
Farm-out status and value
It has been Petroneft’s intention to farm-out and/or re-finance for some time. This now looks to be close to completion, with the group guiding a matter of weeks as an appropriate time frame for completion. Details are limited but it appears that, in return for a share of Licence 61 (we currently assume 50%), a large international oil and gas group will provide funds sufficient to retire Petroneft’s debt (currently at $28m gross), provide for an element of working capital and also commit to funding a Licence 61 programme.
Kick-starts the investment case
The farm-out will extinguish all debt and will, equally importantly, facilitate the re-start of Block 61 exploration and development programmes. Apart from the immediate intention to complete the Arbuzovskoye Field development and start the Tungolskoye Field development, there are still multiple opportunities to pursue elsewhere in Licence 61. The farm-out means that this can take place, and the placing ensures that there is no halt in activity levels.
After a difficult few years, we think that Petroneft has reached a turning point and that this will be reflected in share price performance; we therefore reiterate our ‘Outperform’ rating.
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