Shares in Victoria Oil & Gas (LSE: VOG) rose this morning after the Cameroon gas producer and utility published a bullish production update. The firm’s monthly average gas production has risen by 210% since January, from 4 million cubic feet per day (mmscf/d) to 12.4mmscf/d.
Investors have yet to see how this translates into revenue and cash flow, but the firm is clearly making progress with its utility business model, selling gas from its Logbaba field to local businesses for power and heat generation.
Victoria may finally be starting to deliver on its original promise. Investors shouldn’t get too excited, however. Back in 2011, Victoria targeted gas production of 44mscf/d by 2014!
Victoria’s house broker, Numis Securities, is forecasting revenue of $32.9m for the 2014/15 financial year, which ended on 31 May.
The firm is expected to breakeven this year, excluding a $49m non-cash impairment on its undeveloped Russian asset. Victoria is then expected to report a profit in 2015/16.
Cheap?
In fact, Victoria shares look quite cheap, based on these forecasts. Forecasts for the current year suggest the firm could report earnings per share of $0.18, giving 2016 forecast P/E of just 5.8.
In my view this reflects the risk of disappointment. Victoria has benefited from a major influx of cash from its partner RSM over the last year, without which I estimate it would have had to raise new funds.
The firm doesn’t seem able to collect payment from its customers very easily. According to its interim results, it takes the firm’s customers more than 100 days to pay their bills, on average. I’m concerned that Victoria might still be struggling to generate positive cash flow, despite its increased production levels.
In my view, Victoria’s current share price reflects the risks facing investors in the firm.
What about alternatives?
Two possible alternatives to Victoria are UK Oil & Gas Investments (LSE: UKOG) and Gulf Keystone Petroleum (LSE: GKP).
Last week, UK Oil & Gas published a new report from oil services firm Schlumberger suggesting that the Horse Hill-1 could have oil in place of 271.4m barrels per square mile.
However, it’s worth noting that 255.2m barrels of this is so-called ‘tight oil’, which many experts believe may need fracking to extract. It’s also worth considering that only one well has been drilled so far on Horse Hill, and that has not yet been flow tested.
UK Oil & Gas remains a very speculative investment, in my opinion.
In contrast, Gulf Keystone’s asset Shaikan is well proven and understood. The problem is that the field is in Kurdistan, on the edge of the ISIS conflict.
Gulf also has a problematic net debt of around $440m and is owed around $100m for past production by the Kurdistan authorities.
Gulf cannot afford to fund further development of its Shaikan asset, and is trying to find a buyer. The firm has just hired a new chief executive, Jón Ferrier, who is familiar with the region and has a business background.
If Mr Ferrier is successful, Gulf shares could look cheap at 35p. But the risks are high.
I’m not sure that any of these firms are a clear buy today.