PetroNeft Resources [LON:PTR] the AIM-listed O&G exploration and production company with assets in Russia and the former U.S.S.R. looked like it was about to turn a corner a year or so ago.
Not a petro-titan by any means, PetroNeft, listed in London and Dublin was one of those small-to-mid-tier O&G companies that ‘had potential’. The company was diligently proving two licences (Licence 67 and Licence 61) in the Tomsk Oblast, somewhere in central Russia on the Siberian plains, and had published a reserves report at the end of 2021, saying it had in its tenements around 50 million barrels of oil and a valuation of USD522m. It was confident of moving into production in 2022, with a 49% chance of production success, according to the then-CEO, Englishman David Sturt. The probable reserve was 107 million barrels and the company successfully started pumping oil last year.
And then the War in Ukraine started, and all bets were off.
Russia focussed
Although listed on AIM and the Euronext in Dublin, originally listing in London in September 2006, the company’s main assets, and most importantly the majority of its cash was in Russia and came under the international sanctions regime.
In February this year the company reported cash holdings at the corporate level – namely in its Head Office in the Republic of Ireland – to be in the region of USD57,000. All PetroNeft’s other funds were locked in the Russian operational entities, and the financial sanctions meant that it was difficult, if not impossible, for PetroNeft to send funds from its operations in Russia to its corporate headquarters in Western Europe.
The teams on the ground in Tomsk had continued working (presumably because they were paid in roubles from Russian banks) and the pumps were still nodding at Licence 67, where the company was producing 300 barrels of oil per day and at Licence 61, where oil was being sold locally.
Pipeline dispute
The company was further affected by a legal dispute with pipeline operator, Nord Imperial, which withdrew access for Licence 61 forcing PetroNeft to look at trucking its oil out by road. The company’s production revenues were further impacted by a fall in the price of oil and petroleum products in Russia, presumably because all Russian oil producers were officially frozen out of international markets meaning that a lot of oil was being stored in barrels and refineries, having no official cross-border outlet leading to a glut of supply.
In isolation, PetroNeft is still a small oil producer with a reasonably valuable resource, and if it was in the North Sea, would probably be handsomely rewarding its patient shareholders right about now. But the geopolitical map has been redrawn. That said, not everyone in ‘on-message’ according to the US and its Western European allies with regards the international sanctions on the O&G sector specifically in Russia.
Asian outlet
Although President Putin can probably count his international friends on the fingers of one hand, Russia does have the world’s two most populous nations, China and India, in close proximity and the second and fifth largest economies in the world have an insatiable appetite for energy. President Xi Jinping’s visit to Russia this week underlines not only the closer political ties between the two superpowers, but the closer economic ties between China and Russia, as Russia becomes the top oil supplier to China, surpassing Saudi Arabia.
Russian oil is also finding customers in other Asian nations, as many in that continent view a European conflict of little impact and interest and are willing to do deals that can help their developing economies.
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But geopolitics aside, where does the last year’s events leave PetroNeft shareholders?
Like some of its peers, the last year has been a bit of boardroom musical shares and corporate adjustments. Evraz LON:EVR, the London-listed Russian steel and vanadium producer, was suspended for trading on the LSE in March 2023. It too has continued to produce its main products, and like PetroNeft has remained in isolation a profitable business. But in terms of what it could do internationally it’s become a bit of a zombie company. It divested from its North American assets, changed the board, but investors can’t expect much in 2023. That said, steel is still something consumers will continue to want, and Evraz as we reported, remains an endurable, well-structured, low debt, free cash flow dividend-oriented machine.
By contrast, Polymetal International LON:POLY, the Russian gold and silver producer, moved very quickly. The miner reorganized it board and switched addresses to Jersey, as reported, and subsequently announced it was to switch its primary listing to Kazakhstan and split-off its Russian assets from its Kazakh assets – effectively re-emerging as a Kazakh company. The company recently suspended dividend payments, and again its near-term prospects look ropey, but longer-term could come back with a bang.
However, Petropavlovsk [LON:POG], another Russian miner was forced into administration last July, leaving UK shareholders with nothing, as despite it having productive assets, as a result of the sanctions regime it couldn’t service its debts.
Debt countdown
Debt is an overhanging issue for PetroNeft. The company had around USD2.5m of loans from Petrogrand a Swedish financier that supports the Russian oil and gas industry. The Swedish company pushed out the maturity of the loan to 15th March, but the maturity date passed and on the latest update the company was in discussions to extend the loan maturity further.
Another USD600,000 was due through a convertible note package at the end of this month. But the clock is ticking on this as well. Moreover, PetroNeft has has communication issues with its website being taken down due to “connectivity issues”.
The company’s current CEO, Pavel Tetyakov has opened discussions on buying out PetroNeft’s Russian assets, leaving it as a clean company, but without any producing assets, potentially allowing it to find new non-Russian exploration projects. It’s a big ask, and the board has some hard decisions to make. Such a sale could clear its debt, and interest may appear from potential buyers of the remaining shell from India or other locations, but what would the company be without Licence 61 and Licence 67?
D-day looming
It is a messy situation and could very soon go one of two ways. The lenders could call in their debt, the company may not be able to get money out of Russia to pay, and it would be looking at administration and suspension from trading.However, it could sell its Russian assets, segregate the corporate entity from Russian sanctions, somehow pay of its debt and start afresh. Whatever happens, D-day is likely to be the end of this month.
The company opened trading today (20th March) at 0.39p and has offered a year-to-date return of -7.8% and a one-year return of -69.5%. The 52-week price swung between 0.22p and 1.9p. PetroNeft has a market capitalisation of GBP4m.
