Victoria Oil And Gas: Bittersweet News

The news on 6 February that Victoria Oil & Gas had raised £23m via a placing was bittersweet. The arrival of institutions (including Credit Suisse and GLG) to the shareholder register, provides the company with a very solid financial footing. It adds a level of implied confidence, and has catalysed positive changes within the company. This has to be balanced against the dilution, which caused obvious discomfort to existing shareholders. We are adjusting our valuation to take account of the equity raise (which we assume in full), and lower production volumes in 2013. Our core NAV falls to 5.7p/share, which still represents long-term value.

Equity raise details
The company has raised £8.2m in the first tranche of placing, and requires an EGM to approve the necessary issue of shares for the final £15.3m (pre costs), slated for March 1. The placing was executed at a price of 1.6p (a 22% discount to the previous day’s close), and accompanied plans for the appointment of a new CEO, a strengthened board with new NEDs and divestment of the Russian exploration assets.

Positive changes and the start of a new chapter?
Victoria Oil & Gas has consistently missed production targets in recent months, disappointing investors, delaying the cash-flow breakeven date and straining the balance sheet. We hope recent developments are evidence of a new chapter. The recent reserved based lending facility (RBL) with SocGen and the funds from the equity raising, sees the company at a comfortable financial position, which will enable it to invest to open up a larger customer base in Douala – still critically short of energy. The new guidance of 12mmscfd by end 2013 (down from 20mmscfd), is more realistic. This is still a large increase from current levels of 2.8mmscfd, and requires power customers to join the company’s existing thermal users. However, the capital injection will allow the company to invest in new gen sets to accelerate this process.

Valuation: Long-term value
A preliminary valuation analysis to take into account is placing proceeds, equity dilution (we assume the EGM approves the second tranche) and lower production forecast that causes our core NAV to fall to 5.7p/share (from 9.2p/share). While the sequence of events has been frustrating for existing shareholders both in missed targets and placing dilution, the central investment proposition remains unchanged. The VOG has the resources to provide cheap, much-needed gas to an energy-starved city in a country with real GDP growth of around 5% (IMF). With the changes from the placing, it should have the capital, management and corporate governance to realise the value of its gas resources in the long term.

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