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 Reports and Commentary from the Investment World

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Volga Gas Plc


Volga Gas Plc (VGAS:LSE)

Volga Gas is an independent oil and gas exploration and production company.  It was incorporated in England and Wales in July 2006 and  is listed on the London stock exchange.

We have been aware of the company and its huge potential for some time, but it has achieved some significant landmarks this year that bode well for its future.

The company virtually eliminated losses in the first half of 2009 as the  revenue started to roll in.  Loses before tax in the six months to 30 June 2009 narrowed to $0.22m from $5.03m in the first half of 2008. Revenue catapulted higher to $3.37m from $0.11m a year earlier, as the company started production at its Uzenskoye field.

‘The results of our production have enabled us to report a first period of positive EBITDA [earnings before interest, tax, depreciation and amortisation] and positive operating cash flow - an important milestone for our company,’ said Mikhail Ivanov, chief executive officer of Volga Gas.

The company has an experienced management team and are well connected within Russia.  Mr. Ivanov served as director of Oil and Gas Investments at Baring Vostok from 2005 to March 2007. He has over 14 years experience in the oil and gas industry which includes 10 years working for the Schlumberger Group, as a Field Engineer in Siberian Russia and concluding as a Business Development Manager, based in Moscow.

The company is debt free and had cash of $14.6m on hand at the end of June. The company remains well capitalised and is therefore able to progress towards testing the the sub-salt potential of its licences.

Volga Gas has started drilling its first deep sub-salt well on its highly prospective but challenging Karpenskiy licence in Russia. Drilling has reached 1,180 metres towards a target depth of 5,200 metres and is continuing through a thick section of salt. The salt creates unpredictable drilling conditions and full well results might not be known until next year. The rewards of success here could be huge: the well is targeting almost 2 trillion cubic feet of gas and over 60m barrels of gas condensate.

Volga Gas Plc has 100% interest in two Russian companies, Pre-Caspian Gas Company ("PGK") and Gasnefteservice ("GNS") which hold four licenses to explore for and produce oil and gas in the Volga Region:

PGK is a Russian company and holds three 25-year exploration and production licenses:

Karpenskiy license covering about 4,180km² in the Saratov region in the Volga area of Russia   There are two identified sub-salt structures on the license area which have already been subject to substantial exploration activities. Two supra-salt oil fields were discovered recently at the license block and put on production.

Pre-Caspian license which PGK won at government auction in October 2006.  The Pre-Caspian license covers 1,437km2 and is approximately 50km from the Karpenskiy license area. A deep sub-salt structure similar to ones found on Karpensky block was identified. The drilling is to start here in 2011.

Urozhainoye-2 license which PGK won at government auction in September 2007. The license covers 354km2 and is located approximately 15km to the north of the Company's Karpenskiy Licence Area and is in close proximity with up to 30 gas/condensate/oil fields.

GNS is a Russian company which holds the  20-year Vostochny Makarovskoye license covering 17.8km² in the Volgograd region.  Vostochny-Makarovskoye gas-condensate field is already being developed.

The Company is focusing its immediate efforts on proving the reserves in the Karpenskiy license area and developing the Vostochny Makarovskoye license area.  The Company will also continue to seek out under-valued gas and condensate reserves in European Russia where it believes that it can readily access Gazprom's unified gas supply system ("UGSS") and serve local demand. 

Organic Growth
The Company currently has significant exploration and development acreage.  Volga Gas intends to generate revenue by developing its current fields and putting them into production and to contain costs in the exploration, development and production of gas on its current licence areas by retaining contractors appropriate to the  complexity of the project.  For example, PGK is negotiating to enter into turn-key contracts with international contractors with extensive experience of managing the
exploration and appraisal of complex reservoirs such as Karpenskiy sub-salt structures, while GNS will engage local contractors to exploit less technically demanding fields such as those found in the Vostochny-Makarovskoye Licence Area.

Opportunistic Growth
The Company intends to utilise management’s local knowledge and experience to identify, acquire and exploit undervalued gas assets in Russia. Acquisitions of licences will be pursued on an opportunistic basis, either through government auctions or through corporate acquisitions, if the Company believes such assets are undervalued, create synergies with existing assets or can yield greater value through the use of the latest technology.

The Company intends to focus on ensuring that produced gas will have the most effective route to end-customers at the highest possible netback sales price.  To achieve this, Volga Gas has focused on acquiring licence areas where it believes that it can readily access the UGSS operated by Gazprom, as well as serve local demand.

Volga Gas Plc has a market capitalisation of  £165.074m - so this is a junior explorer and producer. This is a speculative investment and not for the faint hearted. Having said that, its prospects look good and the potential reserves it is sitting on are massive. It should benefit from its synergies with the giant Gazprom and any upside to the oil price will also give these shares a boost.
Buy Volga Gas Plc (VGAS:LSE) up to 200p


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.