Regal Petroleum's primary assets are two large gas and condensate fields in Ukraine - the Mekhediviska-Golotvschinska (MEX-GOL) field and the Svyrydivske (SV) field located in the prolific Dneipner-Donets basin in the north east of Ukraine. Regal is the operator of the assets and there are currently 5 production wells on the assets. Secondary to this, but still significant, are two large exploration blocks in Romania, the Barlad and Suceava Blocks, where Regal holds a 100% and 50% interest respectively. Regal Petroleum also has a 25% non-operated joint venture in Egypt with Apache Khalda Corporation LDC, where an exploration well tested positively for oil in September 2007 and was tied in as a producing well in June 2008.
Being a shareholder in Regal Petroleum certainly keeps you on your toes. The company which has recently been rebranded, refinanced and well resourced appears to be leaving its colourful past behind though and the next twelve months should see production increase rapidly from its key assets in the Ukraine. So far the development is proceeding to plan but the market value of the company has sunk to less than the value of its cash reserves.
Regal floated on AIM back in 2002 when it was led by Frank Timis. Massive hype regarding a potential billion-barrel find in Greece saw its shares soar to over 500p. The well turned out to be non-commercial and the shares slumped. Then the company was involved in an ownership dispute regarding its Ukrainian licences. The shares fell again but the dispute was eventually resolved in Regal’s favour at the end of 2006.
Timis resigned from the company in the middle of 2005. He’s still the company’s largest shareholder however, owning a 12.5% stake. Since Timis departed there have been a number of management teams at Regal. The previous incumbents were keen to attract an experienced partner as an operator for Ukraine. Two memoranda of understandings were signed, the second one with Shell in November 2007.
Shell was due to pay $50m for a 51% stake in Regal’s Mekhediviska-Golotvschinska ('MEX-GOL') and Svyrydivske ('SV') gas and condensate fields plus the first $360m of capital expenditure. But some shareholders felt this was undervaluing their potential and wanted Regal to operate the fields itself. So a new management team was installed, led by David Greer, who had himself spent 28 years at Shell working all around the world in challenging assignments as well as being Shell’s Global Director of E&P Projects.
Within days, Shell had withdrawn and Greer set about transforming the Company and raising the funds required to make a start on its own development plans. Regal raised £80m in January of this year and a further £20m in July to secure two brand new rigs for 5 years. These will be able to drill deeper and more quickly than the rigs traditionally used in the Ukraine.
External interest in Regal’s assets has continued. In April the company said it was early-stage discussions with potential partners but nothing was finalised. Meanwhile the share price soared to 300p. Then in October the company denied rumours that Shell had approached the company regarding a takeover. Press stories mentioned 300p as the take-out price but investors appeared doubtful. The shares only touched 125p before the rumour was quashed.
So what’s in the Ukraine that has caused some much corporate commotion? The MEX-GOL and SV licences lie about 200km east of Kiev and gas was initially discovered there in the 1960s. The fields were partially appraised over the next couple of decades before Regal took an interest in 1999 and then a 100% 20-year production licence in July 2004.
Since the fields were first discovered over 20 wells have been drilled. A handful of these have been in production for a while and in 2007 their output averaged around 1,000 barrels a day of oil equivalent. This year production has declined steadily to around 500, according to a recent Regal presentation. Following an extensive 3D seismic programme, one new well (MEX 103) and two work overs (MEX 102 and GOL 2) have recently been completed.
MEX 102 exceeded expectations and is producing nearly 1,200 barrels of oil equivalent a day. This should mean Regal will hit its year-end production target of 2,000 barrels per day. Two more new wells (MEX 106 and SV 58) will spud soon and an additional work over (GOL 1) should also be completed in the near future.
The initial development plan includes 15 new wells, split equally between the two new rigs and a third that is close to being secured. In total, around 70 wells could be drilled and peak production is estimated at 50,000 barrels plus in 2015-18.
The wells will take several months to drill, even with the new rigs, and could cost in the region of $20m each according to some analysts. A new gas processing plant with ten times the current capacity is being planned and could cost a further $100m, taking the total development cost to around $1.5bn. The current plant’s capacity is 25 million cubic feet and 1,250 barrels of condensate per day. The gas is taken via a 13km pipeline to the main Kursk/Kiev Majestral pipeline.
A reserve report was produced by Ryder Scott in 2005 and estimated proven and probable reserves for MEX-GOL and SV at 169 million barrels of oil equivalent. An updated report is expected around the middle of next year. The gas lies between 4,800m and 6,000m below the surface and the 2005 report only examined the shallower ‘B’ sands. Including the deeper ‘T’ sands could increase the reserve figures considerably, with some analysts reckoning both reserves and estimated peak production could double.
Following Regal’s July placing the company had net cash of $174m. At the time of writing this is greater than its market capitalisation but it looks like all this cash and more could be spent bringing the Ukrainian portfolio into full production. A farm out to share some of the development costs looks like the most likely way forward.
Although the focus is very much on the Ukraine, Regal also has interests in Romania and Egypt and these should also be included in the updated reserve report scheduled for next year.
In Romania Regal has a 100% interest in the Barlad licence and 50% in Suceava. At Barlad, a shallow well was successfully flow tested at 3.7 million cubic feet of gas per day in December 2007 over a 5m interval. A second larger interval of 13m did not flow and a follow up appraisal well was plugged and abandoned last month. Regal had been planning two further wells if the follow up proved successful but is now likely to be reassessing its plans.
At Suceava, where Regal is partnering with Aurelian Oil and Gas, a gas discovery of 0.9 million cubic feet per day was made last year which was to be tied into production during 2008. However, no further plans for this licence have been announced since.
In Egypt Regal has a 25% interest in the East Ras Budran concession. The ERB-A-1X well was tied into production in June of this year and was initially producing around 1,100 barrels of oil a day. Two subsequent wells found no hydrocarbons however and were plugged and abandoned.
While not for the faint of heart, Regal’s prospects look far more favourable than the share price is currently suggesting. The new management team has delivered to date and if a suitably deep-pocketed partner can be secured and initial production targets are hit, the market may soon reconsider its valuation of the company.
Being a shareholder in Regal Petroleum certainly keeps you on your toes. The company which has recently been rebranded, refinanced and well resourced appears to be leaving its colourful past behind though and the next twelve months should see production increase rapidly from its key assets in the Ukraine. So far the development is proceeding to plan but the market value of the company has sunk to less than the value of its cash reserves.
Regal floated on AIM back in 2002 when it was led by Frank Timis. Massive hype regarding a potential billion-barrel find in Greece saw its shares soar to over 500p. The well turned out to be non-commercial and the shares slumped. Then the company was involved in an ownership dispute regarding its Ukrainian licences. The shares fell again but the dispute was eventually resolved in Regal’s favour at the end of 2006.
Timis resigned from the company in the middle of 2005. He’s still the company’s largest shareholder however, owning a 12.5% stake. Since Timis departed there have been a number of management teams at Regal. The previous incumbents were keen to attract an experienced partner as an operator for Ukraine. Two memoranda of understandings were signed, the second one with Shell in November 2007.
Shell was due to pay $50m for a 51% stake in Regal’s Mekhediviska-Golotvschinska ('MEX-GOL') and Svyrydivske ('SV') gas and condensate fields plus the first $360m of capital expenditure. But some shareholders felt this was undervaluing their potential and wanted Regal to operate the fields itself. So a new management team was installed, led by David Greer, who had himself spent 28 years at Shell working all around the world in challenging assignments as well as being Shell’s Global Director of E&P Projects.
Within days, Shell had withdrawn and Greer set about transforming the Company and raising the funds required to make a start on its own development plans. Regal raised £80m in January of this year and a further £20m in July to secure two brand new rigs for 5 years. These will be able to drill deeper and more quickly than the rigs traditionally used in the Ukraine.
External interest in Regal’s assets has continued. In April the company said it was early-stage discussions with potential partners but nothing was finalised. Meanwhile the share price soared to 300p. Then in October the company denied rumours that Shell had approached the company regarding a takeover. Press stories mentioned 300p as the take-out price but investors appeared doubtful. The shares only touched 125p before the rumour was quashed.
So what’s in the Ukraine that has caused some much corporate commotion? The MEX-GOL and SV licences lie about 200km east of Kiev and gas was initially discovered there in the 1960s. The fields were partially appraised over the next couple of decades before Regal took an interest in 1999 and then a 100% 20-year production licence in July 2004.
Since the fields were first discovered over 20 wells have been drilled. A handful of these have been in production for a while and in 2007 their output averaged around 1,000 barrels a day of oil equivalent. This year production has declined steadily to around 500, according to a recent Regal presentation. Following an extensive 3D seismic programme, one new well (MEX 103) and two work overs (MEX 102 and GOL 2) have recently been completed.
MEX 102 exceeded expectations and is producing nearly 1,200 barrels of oil equivalent a day. This should mean Regal will hit its year-end production target of 2,000 barrels per day. Two more new wells (MEX 106 and SV 58) will spud soon and an additional work over (GOL 1) should also be completed in the near future.
The initial development plan includes 15 new wells, split equally between the two new rigs and a third that is close to being secured. In total, around 70 wells could be drilled and peak production is estimated at 50,000 barrels plus in 2015-18.
The wells will take several months to drill, even with the new rigs, and could cost in the region of $20m each according to some analysts. A new gas processing plant with ten times the current capacity is being planned and could cost a further $100m, taking the total development cost to around $1.5bn. The current plant’s capacity is 25 million cubic feet and 1,250 barrels of condensate per day. The gas is taken via a 13km pipeline to the main Kursk/Kiev Majestral pipeline.
A reserve report was produced by Ryder Scott in 2005 and estimated proven and probable reserves for MEX-GOL and SV at 169 million barrels of oil equivalent. An updated report is expected around the middle of next year. The gas lies between 4,800m and 6,000m below the surface and the 2005 report only examined the shallower ‘B’ sands. Including the deeper ‘T’ sands could increase the reserve figures considerably, with some analysts reckoning both reserves and estimated peak production could double.
Following Regal’s July placing the company had net cash of $174m. At the time of writing this is greater than its market capitalisation but it looks like all this cash and more could be spent bringing the Ukrainian portfolio into full production. A farm out to share some of the development costs looks like the most likely way forward.
Although the focus is very much on the Ukraine, Regal also has interests in Romania and Egypt and these should also be included in the updated reserve report scheduled for next year.
In Romania Regal has a 100% interest in the Barlad licence and 50% in Suceava. At Barlad, a shallow well was successfully flow tested at 3.7 million cubic feet of gas per day in December 2007 over a 5m interval. A second larger interval of 13m did not flow and a follow up appraisal well was plugged and abandoned last month. Regal had been planning two further wells if the follow up proved successful but is now likely to be reassessing its plans.
At Suceava, where Regal is partnering with Aurelian Oil and Gas, a gas discovery of 0.9 million cubic feet per day was made last year which was to be tied into production during 2008. However, no further plans for this licence have been announced since.
In Egypt Regal has a 25% interest in the East Ras Budran concession. The ERB-A-1X well was tied into production in June of this year and was initially producing around 1,100 barrels of oil a day. Two subsequent wells found no hydrocarbons however and were plugged and abandoned.
While not for the faint of heart, Regal’s prospects look far more favourable than the share price is currently suggesting. The new management team has delivered to date and if a suitably deep-pocketed partner can be secured and initial production targets are hit, the market may soon reconsider its valuation of the company.
By : by Stuart Watson; http://www.proactiveinvestors.co.uk/companies/news/3880/regal-petroleum-the-dawn-of-a-new-era-3880.html
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