The common wisdom that Canadian markets are a difficult environment for independent oil and gas companies to raise money may be true.
However, this week features an exciting IPO (initial public offering) on the London Stock Exchange. Zenith Energy PLC (LON: ZEN) dual listed today, Wednesday 11th January, after having been quoted on the Canadian Venture Exchange since 2008 (TSX-V: ZEE).
Zenith is an oil and gas production company with a portfolio of assets in Argentina and Italy alongside its current interest in Azerbaijan, where it operates in one of the country’s largest onshore oil fields through a REDPSA (Rehabilitation, Exploration, Development and Production Sharing Agreement) with SOCAR, the State Oil Company of the Azerbaijan Republic. This agreement was signed on 16th March 2016 for an area of 642 square kilometres: Azerbaijan’s largest onshore field.
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The Azeri deal, completed last year in August, has added substantial business, with production revenues potentially leading the company towards a mid-cap oil valuation on a long-term investment time frame. It is the ‘jewel in the crown’. Nevertheless, although the lead-up to the acquisition was clearly flagged over a year ago, investors remained inactive, possibly sceptical of a deal that a small Canadian company managed to complete in a well-known major oil arena.
The London listing could prove to be a game changer as the company seeks to establish itself as a serious potential oil producer.
CEO and President of Zenith Andrea Cattaneo, who currently spends most of his time flying back and forth to the Capital of Azerbaijan, Baku, still manages to strike deals in Italy while negotiating the Azerbaijan TAP pipeline. He’s certainly a busy man.
Cattaneo has a solid background in oil trading and banking. An entrepreneur and dealmaker, he has more than 30 years’ experience in emerging markets, such as the USSR and FSR. He negotiated the first ever loan in history to VIETCOMBANK, the national bank of Vietnam, which was at that time the third poorest country in the world. Andrea has a strong financial background alongside three decades of experience in emerging markets as a government advisor on financial, industrial and energy-related matters.
Zenith is IPOing at 7p per share and already has ~300 bopd of current oil production, which could show Zenith is undervalued in terms of EV/BOBP compared to some of their peers listed in London and Canada.
In addition, independent investment research company Align Research just published an updated note headlining Zenith as a ‘Compelling investment play in Azerbaijan – with a conviction buy and target of 42p per share’. The report is available here.
The work programme in Azerbaijan utilises existing infrastructure and masses of data from the Soviet era. There’s a substantial work-over operation (ten wells are targeted to be worked over in 2017) and soon to be implemented using Canadian geological knowledge together with Western first-world technology and modern techniques, which will significantly increase production.
Andrea conservatively aims for a minimum of 700 bopd to be achieved within 12 months of work-over programme. But it could be more, considering the historical peak in excess of 15,000 bopd (from three wells) during the Soviet Union. The key Muradxanli Block produced some 14,010 bbls over the first 49 days of operation to 30th September and generated gross revenues of CAD $659,000 within that quarter.
Revenues will consequently increase in line with monthly payments for the oil produced and delivered into the international pipeline network from the Shirvan oil terminal, from where they are then routed internationally via the network of SOCAR pipelines.
The fact that oil prices are also expected to stabilise at a reasonable price over Q1 2017, following the recent OPEC agreement, can only add another positive element to company profitability.
I expect a rerating could happen, giving a higher valuation which could be significantly in excess of their IPO price of 7p. Regular monthly news flow is expected on (in line with) work-over operations.
I recently conducted an interview with Andrea Cattaneo and Zak Mir for London South East TV. You can watch it here.