Victoria Oil & Gas: 2012 Targets Have Slipped, Upside Potential Remains

The recent Victoria Oil & Gas (VOG.L) update highlighted the first production and cash flows from the Logbaba project and pointed to a revision of 2012 production guidance. Year-end targets have been revised from 8 to 5mmscfd. However, it still expects to approach 20mmscfd by the end of 2013 and the recently-announced confirmation of reserves should allow debt financing in Q412. The current share price represents a discount to our reduced core NAV of 9.2p.

2012 targets have slipped, but 2013 remain
The chairman’s letter illustrates the difficulties encountered in the first steps of production. First gas volumes of 1mmscd slipped from May to July and the company revised its 2012 production targets to 5mmscfd (from 8mmscfd). Initial teething problems are not uncommon and the company has kept guidance for year end 2013 at around 20mmscfd – a measure of its confidence in the ramp-up.

More customers should link up by year end
Four thermal customers are currently connected and a further 13 have signed Gas Sales Agreements (GSAs), which could increase demand to 2.5mmscfd by the turn of the year. Power generation should add a further 2.5mmscfd to this; three LOIs have been signed and the company is hopeful of further progress in the coming months. October will be a key month for sales increases and could bring cash flow neutrality.

CPR confirms reserves and points to upside potential
The CPR indicated a lower-than-previous estimate for 1P reserves (39 vs 47bcf), but included contingent reserves in the lower Logbaba formation that point to a considerable increase in 1P+1C reserves (72bcf vs 47bcf). This is good news for longer-term production at Logbaba and lays the groundwork for debt financing in Q412.

Valuation: Upside still to work for
Investors have been reluctant to price the company more fully, given the early difficulties it has had in generating sales. However, VOG is one of the few in this space with a proven asset base producing cashflows. Even with a reduced core NAV of 9.2p (due to delayed ramp-up and higher costs), we still see significant upside in the shares. We would stress that success in hitting near-term production targets will be crucial to gaining investors’ confidence in the longer-term strategy.

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