Regal Petroleum plc

Hydrocarbon assets in a geo-political warzone isn’t high on desirability – especially one that doesn’t pay dividends. Regal Petroleum plc owns licenses to operate in three gas fields in eastern Ukraine – the MEX-GOL, SV, and VAS fields. Together there are over 60m barrels of oil equivalent (MMboe) in proven and probable (2p) reserves lasting until 2038 at least.

The company is AIM listed and there’s less than 10% public float. It generated profits before taxes of GBP 17m in the recent past (with equivalent cash flows) and sells for a paltry valuation of GBP 49m at recent prices of 15.3p per share. This amounts to less than the net current asset value per share (a proxy for liquidation value) – mostly comprised of cash of GBP 53m.

Half of the substantial cash balance is held in Ukraine currency, which is subject to substantial devaluation. The balance, however, is held in US$ in British banks.

The current valuation doesn’t count the substantial oil and gas production assets reported at a book value of GBP 45m. The fair value of the gas fields, however, was calculated as $311.1m on June 2018 using fairly conservative assumptions when natural gas prices were at $2.97/mmbtu. Prices are $1.57 today. Halving the value still leaves over GBP 120m in fair value underground.

There are very few liabilities including decommissioning provisions of under GBP 4m.

Management are on the prowl for further Ukraine gas assets – a smart move considering the government’s priority in reducing dependence on Russian supplies. They purchased a smaller company for $8.6m on March 24^th with a license to operate a gas field with reserves of 38 MMboe – materially augmenting the company’s existing reserves.  

Gas is sold to a related party controlled by the main shareholder at a 2% discount to prevailing market rates for gas to account for the ‘regulatory burden’ it will face with the Ukraine government. In addition, the investor is exposed to all the risks that beset Ukraine, which is a current recipient of IMF aid to strengthen its banking system.

No asset is worth an infinite price, and even the most distressed assets are worth some price – however low. Shutting down the company’s operations would net the shareholder more than the current market price – and the company generates a substantial earnings yield that should provide an adequate safety margin for future declines.