Académique Documents
Professionnel Documents
Culture Documents
Gas Company
May 2008
VALUE 2
UKRAINE 2
MANAGEMENT 9
Non-executive director 10
Index: Aim
Sector: Mining
Key points
licence area, in Ukraine, with results which confirm historic records. Market cap £m 5
Initial Price target
The recent placing funds development of these wells, and we believe the company 1.665p
Nostra Terra’s initial plan is to re-open and develop seven wells, the first four for
the production of oil from Oktyabrskoe and the other three for the production of Exchange rate used
£ : US$ 1.9488
liquid gas from West Oktyabrskoe. Development should be funded by cash flows
At 15 May 2008
from wells as and when they come on stream.
Our estimate of NPV based on the first phase of investment comes to 1.665p per
share, which we choose as an initial price target. This will be subject to revision
as results come through and also on receipt of information on the additional
unexploited assets.
3.5
2.5
Andy Edmond
VALUE
Nostra Terra came to aim in July 2007 by way of a reversal into the cash shell
LHP Investments, with a placing at 0.5p per share to raise £350,000 for the
business before expenses (fees satisfied by an issue of an additional 20m shares).
The company was formed to re-activate the Oktyabrskoe and West Oktyabrskoe
oil and gas field in Crimea, Ukraine. Under former Soviet control the field had
been fully explored, but had not been moved to the production stage. Nostra
Terra has to date re-opened two of the seven wells it intends to develop
We believe the company is now cash flow positive on a day-to-day basis, and
should soon generate substantial amounts of cash.
Nostra Terra has only recently begun operations, and has yet to prove itself. Our
numbers are, however, relatively conservative in that they relate only to seven
wells, while there is a total of 36 possibly to be exploited.
Our central estimate of NPV for the seven wells is 1.665p per share, which we
think is a reasonable figure to choose as an initial price target.
UKRAINE
Figure 2: Map of Ukraine
CIA
Ukraine borders Russia to the east, Belarus to the north, Poland, Slovakia and
Hungary to the west, Romania and Moldova (including the disputed territory of
Transnistria) to the southwest, and the Black Sea and Sea of Azov to the south.
Ukraine is well developed culturally and economically. In the days of the former
Soviet Union it was second only to Russia in its economic importance, producing
about four times the output of the next-ranking republic.
2 www.equity-development.co.uk
Nostra Terra
Since then the economy has improved, and reform in 2005 has helped to produce
a strongly growing economy, with real GDP growing by about 7% in 2007.
The country is heavily dependent on imports for its oil and gas needs, which are
sourced mostly from Russia. Gas is particularly important, and sensitive politically
– price rises and supply interruptions have caused problems.
Ukraine has 24 provinces and one autonomous republic: Crimea. Crimea was part
of Russia until the Ukrainian Nikita Khrushchev transferred it to Ukraine in 1954.
Its population of about 1.8m people is for the most part ethnically and culturally
Russian.
The licence area contains 36 wells drilled by the exploration arm of the USSR
between 1960 and 1991 which were capped prior to the break-up of the USSR.
The field was never advanced to production due to competing alternative higher
priorities within the Soviet production department, and has lain dormant ever
since.
Only seven of these wells are the subject of the initial re-opening plan being
carried out by Nostra Terra.
www.equity-development.co.uk 3
Nostra Terra
Company
The net result of this is that Nostra Terra receives 88% of net revenues until
capex is recovered, and thereafter 70%.
Reserves
The licence area contains two reservoir horizons, the Necomian and the
Cenomanian, at depths of 1,700m and 2,800m respectively. These have been
confirmed from the results of wells re-opened so far.
Trimble CPR
The Trimble CPR based its estimates on very conservative assumptions, the
principal ones being that only 15% of initial oil in place would be recovered and,
in addition, that recovery rates would deplete at a rate of 22% per annum. The
price of oil was taken at $65.35/bbl and of gas at $3.66/Mcf. On this basis, NPV to
Nostra Terra after royalties, tax and partner share was calculated at $19m, using
a discount rate of 10%.
The field is in two parts, Oktyabrskoe and West Oktyabrskoe, with West
Oktyabrskoe producing gas rather than oil.
Oktyabrskoe
This contains 19 wells, four of which are being re-opened at this stage. Three of
these had previously been completed and tested with commercial hydrocarbon
production rates. The fourth (Well 10) is assumed to be analogous to the others.
The quality of oil is very high at 500API2, Russians anecdotally piping it straight
from the well into their cars.
Well 1 within the Neocomian reservoir was operated by Krymgeologia for about
two years before Nostra Terra became the operator, producing oil at the rate of
1
‘Competent Person’s Report Anglo Crimean Oil Company Reserves and Present Worth
Oktyabrskoe License, Crimea, Ukraine’ by Trimble Engineering Associates Ltd., dated
28 February 2007
2
Source: Nostra Terra
4 www.equity-development.co.uk
Nostra Terra
about 20bbl/day for twelve hours per day, equal to 10bbl/day. The production
zone is between 2,671m and 2,733m.
Significantly, this production rate was confirmed by Nostra Terra for the month of
March 2008, when oil production was 391 bbls (above the average for the
previous operations). The well was opened every 36 hours, producing free flowing
light oil of 0.78 specific gravity (500API).
A subsequent test locked in the packer at 1,650m. In addition to a flow of oil from
the primary zone, the zone above the packer produced oil which flowed into the
space between the tubing and the casing and rose to the surface, indicating
another pay zone.
West Oktyabrskoe
Gas in liquid form will be the principal product from West Oktyabrskoe.
The wells were suspended in 1982 due to hydrocarbon liquid loading: at the time,
Krymgeologia did not have the financial resources or the mandate to install lifting
equipment. Re-opening by Nostra Terra will involve the installation of such
equipment.
Production rates
When under FSU control the management did not have access to the capital to
invest in methods of recovery assisted by lifting equipment – also, in part, there
were fears that pumps might damage the wells.
www.equity-development.co.uk 5
Nostra Terra
production than stated recoverable reserves – which are only 15% of initial oil in
place. This may be optimistic.
Taken to 2018, this results in the production profile shown in the following chart:
Mboe
120
100
Well 28
80 Well 9
Well 31
60 Well 50
Well 10
40 Well 24
Well 1
20
0
Qtr1 08
Qtr3 08
Qtr1 09
Qtr3 09
Qtr1 10
Qtr3 10
Qtr1 11
Qtr3 11
Qtr1 12
Qtr3 12
Qtr1 13
Qtr3 13
Qtr1 14
Qtr3 14
Qtr1 15
Qtr3 15
Qtr1 16
Qtr3 16
Qtr1 17
Qtr3 17
Qtr1 18
Qtr3 18
ED/Company
This emphasises the importance of gas production from the later development of
West Oktyabrskoe. It is, of course, less important than this in money terms
because of the price differential:
$000
5,000
4,500
4,000 Well 28
3,500 Well 9
Well 31
3,000
Well 50
2,500
Well 10
2,000 Well 24
1,500 Well 1
1,000
500
0
Qtr1 08
Qtr3 08
Qtr1 09
Qtr3 09
Qtr1 10
Qtr3 10
Qtr1 11
Qtr3 11
Qtr1 12
Qtr3 12
Qtr1 13
Qtr3 13
Qtr1 14
Qtr3 14
Qtr1 15
Qtr3 15
Qtr1 16
Qtr3 16
Qtr1 17
Qtr3 17
Qtr1 18
Qtr3 18
ED/Company
6 www.equity-development.co.uk
Nostra Terra
Oil Price
Prices realised for product will be related to world market prices – there are no
price controls for oil and gas prices within Ukraine, although gas prices are very
sensitive politically – but the market, given that Nostra Terra will be a small
producer, will be local.
Wellhead price will apply for oil, with Nostra Terra not responsible for transport
charges other than for storage on site. Transportation will be via 8m3 capacity
trucks (about 50bbls), and will be the responsibility of the buyer.
In our calculations we have used the Equity Development price assumptions for
oil, which are $90-110/bbl current and $80/bbl from late 2008 on, against the
present price for Brent crude of about $125/bbl. We have not applied any
inflationary increases to this, nor have we done so far as costs are concerned.
Water content
Oil from Oktyabrskoe contains about 5% water. Nostra Terra will not undertake
any cleaning process, but will sell the oil in the form in which it comes out from
the ground. We have assumed a discount of 5% to the ruling price of oil.
Gas price
Gas prices are difficult to determine – typically, they are related to the equivalent
energy rate for oil, but are less volatile. For our purposes, we have assumed 50%
of the price of oil, on a boe basis.
This will imply the construction of a pipeline to the gas plant being constructed by
Indusmin about 1.5km away. We have factored in a capex cost of $500,000 for
this, and assumed it will take place in Q4 2008.
Royalties
Royalties are set as a percentage of gross receipts, calculated on a formula
determined and payable monthly in arrears. They vary each month at about 50%
of gross JAA receipts: we have assumed 55% throughout.
Rental
Rental is payable as and when wells come into operation. We have assumed
$2,000 per well per month.
Capex
Development of the Oktyabrskoe field is not capital-intensive. We have assumed a
starting cost of about $300,000 per well, to include the installation of pumps. In
addition to this, we have assumed expenditure of $500,000 for the construction of
a gas pipeline link to the Indusmin plant.
Overheads
Site overheads are very low: we have assumed $2,200 per month per well.
Cash requirements
The recent placing at 0.75p / share brought in £370,000, which should be
sufficient to cover the development cost of Well 1. We have also assumed a final
drawdown of the loan from Power Elite with conversion into equity.
www.equity-development.co.uk 7
Nostra Terra
We estimate that the JAA is currently cash positive on a month by month basis
and, with cash flow from wells as they come on stream, should be capable of
funding the development of all seven wells without recourse to further external
finance.
We assume rapid development of all seven wells over a period of twelve months
from now. This may prove to be an optimistic timescale: if unforeseen problems
occur there could be delays impacting on our estimates.
Estimates
We have modelled the field on a monthly basis to begin with, because of the
importance of short term cash flow, and thereafter quarterly. Discounting is also
on a quarterly basis.
Parent company cash flows include the money received from the recent placing,
and also from the presumed further drawdown from Power Elite.
Also of importance is the recovery from revenue by Nostra Terra of General Sales
Tax (Ukraine equivalent of Value Added Tax) already paid: this amounts to about
$500,000.
In the following estimates we have included all capital movements in the figures
for Oktyabrskoe:
Table 3: Nostra Terra summary cash flows for first five years
Year to end December 2008 2009 2010 2011 2012
$000 $000 $000 $000 $000
Gross revenue 2,071 15,859 14,383 12,953 10,105
Royalties (1,139) (8,723) (7,911) (7,124) (5,558)
Net revenue 932 7,137 6,472 5,829 4,547
Cash flow to Nostra Terra ($000) 1,738 5,323 3,582 2,596 1,761
Cash flow to Nostra Terra (£000) 892 2,731 1,838 1,332 904
ED estimates
ED
8 www.equity-development.co.uk
Nostra Terra
MANAGEMENT
The following information is taken from the company’s web site:
Non-executive chairman
Sir Adrian Blennerhassett holds a Masters of Geology from Imperial College,
London and an MBA from Cranfield School of Business Management. Sir Adrian
has previously held positions as general manager for Claremount Oil & Gas Ltd
and has acted as technical director at Peninsula Petroleum Ltd. He has experience
of corporate finance and securities activities and more recently had eleven years
experience in corporate finance including mergers and acquisitions.
Chief executive
Brian Courtney has been actively investing in the oil and gas business for over
thirty years, first working with Desmond Smith on the Ingoldsby 10-12 horizontal
well, and most recently by serving as the Chairman and CEO of Ucoco Energy,
Inc. In addition Mr. Courtney has held many senior executive positions and public
company directorships including being founding president and former VP of
America’s Oracle Corporation Canada and director of EFT Canada Inc. Most
recently Mr. Courtney served as CEO of Global Election Systems Inc. - an
American Stock Exchange listed company, and was chairman and CEO of Patent
Enforcement and Royalties, a TSX Venture Exchange listed company. Mr.
Courtney has been investing in Ukraine for three years. Mr. Courtney is a
graduate of the University of Manitoba (B. Comm.).
www.equity-development.co.uk 9
Nostra Terra
Non-executive director
Stephen Vaughan Oakes has over 30 years experience in financial markets and
is a Fellow of the Securities Institute. He began his career with stockbrokers
Vickers da Costa Ltd, becoming a Member of the Stock Exchange in 1984. In 1985
he joined the then James Capel & Co (now HSBC Investment Bank plc) as a
portfolio manager. Increasing management responsibility culminated in the
position of Chief Executive Officer, HSBC Investment Management, firstly in
respect of the international business and subsequently as acting CEO of the
combined UK and international operations. He left HSBC in December 2002 and in
October 2003 he joined Alfred Henry Corporate Finance Limited. He is currently a
director of Alltrue Investments Plc and Chief Executive Officer of Falcon Securities
(UK) Ltd. He is Chairman of Timestrip plc and is also a director of a number of
companies whose shares are traded on AIM.
10 www.equity-development.co.uk
Nostra Terra
This document has been provided to you solely for your information and may not be reproduced or
redistributed, in whole or in part to any other person. The information contained in this document
has not been approved for the purposes of Section 21(2) of the Financial Services & Markets Act
2000 of the United Kingdom (FSMA’). As such this document is being distributed only to and is
directed only at persons falling within the categories of exempt person described in the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2001 as amended, (the Order) or
pursuant to any applicable exemption under FSMA (together ‘relevant persons”). Any person who is
not a relevant person should not act or rely on this document or any of its contents.
This report is intended for intermediate clients, market makers, Self-certified High Net Worth or
Self-certified sophisticated investors only. Self certification can be completed free of charge at
www.fisma.org
This document may not be distributed in or into, directly or indirectly to any persons with
addresses in Australia, Canada, Japan, The Republic of Ireland, The Republic of South Africa or the
United States (or any of its territories or possessions).
This report is being provided to relevant persons by Equity Development Limited (“ED”) to provide
background information about the corporate client. ED are regulated by the Financial Services
Authority, and are retained to act as financial adviser for various clients, some or all of whom may
now or in the future have an interest in the contents of this document and/or in the Company,
In the preparation of this report, ED has had access to publicly available information, the
Company’s management and other sources believed to be reliable. Whilst all reasonable care has
been taken to ensure that the facts stated herein are accurate and that the forecasts opinions and
expectations contained herein are fair and reasonable, neither the author nor ED has verified the
information contained herein and accordingly none of the author, ED nor any of their respective
directors, officers or employees makes any representation or warranty, express or implied as to the
accuracy or completeness of the information or opinions contained herein and shall not be in any
way responsible or liable for the contents hereof and no reliance should be placed on the accuracy,
fairness or completeness of the information contained in this document. No person accepts any
liability whatsoever for any loss howsoever arising from any use of this document or its contents or
otherwise arising in connection therewith. Nothing in this paragraph shall exclude liability for any
representations or warranties made fraudulently.
Any opinions, forecasts or estimates herein constitute a judgment as at the date of this report.
There can be no assurance that future results or events will be consistent with any such opinions,
forecasts or estimates. This information is subject to change without notice. It may be incomplete
or condensed and it may not contain all material information concerning the Company.
This document does not constitute or form part of and should not be construed as any offer for sale
or purchase of (or solicitation of or invitation to make any offer to buy or sell) any securities nor
shall it or any part of it form the basis of or be relied on in connection with any contract or
commitment whatsoever.
ED may In the future or may have in the past have provided investment banking services to the
Company.
ED or its directors or officers may in the future or in the past have had a material investment in the
Company.
www.equity-development.co.uk 11
www.equitydevelopment.co.uk
Equity Development
91 Farringdon Road
London
EC1M 3LN
Equity Development Limited is authorised and regulated by the Financial Services Authority