Disagreeing with the Boss – Ruspetro would not be a buy at 60p
I note that your esteemed editor was hoping to buy shares in Ruspetro at sub 60p on Monday following the company’s shock profits warning at 6.30 PM on Friday 3rd January. He was denied as the shares never got that low – they are now 63.25p. But I think the boss may yet get his chance… My helpful suggestion is that he declines to take it. This whole company stinks.
A reminder – On 19th November the company published a bullish trading statement saying that output was 7,853 bopd and that it was on track to hit 10,400 bopd by the calendar year end. Good news all round. Fill your boots. Congratulations to my fat accountant, Evil Knievil who was long (oops!). But then on January 3rd ( a day when few folks were working) the company announced at 6.30 PM (when even those folks were on their fifth pint at the pub) that output was actually 6,540 bopd and that it continued to “experience slower than anticipated production growth due to additional modifications required to surface field equipment and curtailed well completions in December.” It blames “technical challenges in stabilising condensate from hydrocarbons produced.”
The shares were at 83.5p at the market close on Friday valuing the company at £278.4 million.
The bull case of your esteemed editor is based upon the idea that the company has reserves of 1.5 billion barrels of oil equivalent. He explains:
If we take $1 a barrel as an absolute rock bottom valuation this gives a gross company worth of $1.5bn. Knock off the net debt of $310m and you get to $1.19bn – 2.6 times the current equity value. Taking only the actual proved reserves of 183m barrels and applying a realistic $5 a barrel valuation to this, gives a share value adjusted for net debt of around 113p per share. This ascribes no value to the “probables” – a situation which is pretty unheard of aside from in the unique situation that is Syria and GPX.
Okay. But I would point out 4 caveats.
1. Such a rapid turnaround and the timing of the warning means that the management are either incompetent or slipper or both. Right now they have fewer friends in the City than there are members of the Jimmy Savile fan club! This stock will not get a “fair rating” for its assets for a long time.
2. I do not count probable reserves based on Siberian estimates so let’s stick to the 183 million proven.
3. This company has lifting costs per barrel of c$15 but it’s after pipeline, tax, royalty sale value is just $22 per barrel for oil and $44 for condensate. It largely produces oil. As such given its steep PLC costs, interest costs etc valuing this company at anything more than a £2 per proven barrel is generous.
4. This company is running out of cash. It has net debt of c$310 million and cash of (perhaps) $30 million. At current output levels it is making a tiny operating profit but capex runs at $30 million a quarter. Do your maths. This company need refinancing and the market is not going to be doing that at anything other than a very steep discount given the slippery management’s dire track record.
As such, on my maths the shares are probably not ones that I would even consider buying until they were well under 45p. My detailed analysis can be found HERE http://tradingresearchpoint.co.uk/2013/01/06/ruspetro-a-shocking-profits-warning-what-is-fair-value/
I see that the shares are sliding again today. You will soon get a chance to buy at less than 60p . Do not do so.
Tom Winnifrith started his career as an oil equities analyst and now writes for 10 leading websites in the UK and US. You can get alerts on all of Tom’s pieces by following him on twitter @tomwinnifrith and you can find links to all of Tom’s articles or the articles themselves on his blog
www.TomWinnifrith.com
Editor Note – I am always happy to let the market be the ultimate arbiter of whose right and wrong. For the record, we have picked up some in our Titan funds today at 63p