AIM listed Urals Energy (UEN.L) is an independent oil company with its operating assets located in Russia. UEN is primarily engaged in oil and gas exploration and production in the Russian Federation and processing of crude oil for distribution on both Russian and international markets. The Company’s exploration and production operations are on the Kolguyev Island based in Timan Pechora and on Sakhalin Island. The Company’s ZAO Petrosakh develops the Okruzhnoye field on the Eastern coast of Sakhalin Island. The Company’s ZAO Arcticneft develops and operates the Peschanoozerskoye field on Kolguyev Island in the Barents Sea. The Company is producing on average approximately two thousand barrels of oil per day from Petrosakh and Arcticneft with 100% of production being refined in Petrosakh and 100% being exported in Arcticneft.
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On December 21st 2017, UEN published an update on its reserves, and on progress in drilling at the South Dagi licence on Sakhalin Island. UEN said it had spudded its first exploration well at South Dagi, adding that any oil production from the new wells will be transported by road tanker to the Company’s refinery at Petrosakh, a distance of 400 kms, which will increase the utilisation rate of the Company’s refinery. No additional investment will be needed to process both the heavy and light oils expected from South Dagi.
As announced on 15 June 2016, the Russian State Registered reserves of C1 plus C2, equivalent to 2P (proven and probable), on the South Dagi license area are 17.7m barrels, with C3 or possible reserves of 9.0m barrels. At shallow levels, the oil is relatively heavy (23.5 – 25.5°API), with light oil (36.5 – 37.5°API), similar to the oil at the Company’s Petrosakh operation, at lower horizons. As part of the Competent Person’s Report UEN said that Blackwatch Petroleum Services has estimated the mean total 2P reserves at South Dagi to be approximately 23.5m barrels of oil across six reservoirs. UEN Chairman Andrew Shrager said the spudding of the first well at South Dagi “is extremely important as it opens the possibility to increase the production at our Petrosakh refinery, thus continuing to take advantage of having the only refinery on Sakhalin Island.“
The potential earnings growth from UEN’s E&P activities had been identified by VectorVest stock analysis metrics as far back as August 2017, long before the January spike in the share price. Despite the sharp rise, UEN continues to score highly across all key VectorVest metrics – the GRT (Earnings Growth Rate) metric retains a forecasted GRT of 36%, which VectorVest considers to be excellent. Although the RS (Relative Safety) metric at 0.86 (scale of 0.00 to 2.00) is low, UEN scores an excellent RV (Relative Value) rating of 1.51 on the same scale. VectorVest now attributes an overall value of 166p for UEN, meaning that at today’s 122p the stock is undervalued. Overall, UEN will be most suitable for investors who can manage risk and understand position sizing techniques.
The chart of UEN.L is shown above in my normal format. The share rose strongly in price during January 2018 and subsequently retraced to test the previous resistance that was in place since October 2017. Presently the share is on a Buy recommendation on VectorVest and pushing on a 26 week high. Technical Analysts reading will note the large “cup and handle” formation that the share has charted over the last 9 months. This is a bullish pattern and with a close above the 26 week high, the probabilities favour a move higher.
Summary: Although the UEN share price drifted lower for the majority of 2017, the developments at the South Dagi oil prospect has seen shares double in value in a very short space of time. As I would expect with oil E&P stocks, the low VectorVest RS rating may see cautious investors look elsewhere, but nonetheless, UEN fundamentals, earnings growth and current valuation gap all add up to a highly attractive oil sector play at this moment in time. Buy.
Dr David Paul
February 27th 2018
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