Ruspetro – have we seen the bottom?

UPDATE – 26 MAR 13 – Looks like someone’s let the cat out of the bag with the price action today – either the loans been sorted or the short covering is beginning in earnest. If the latter – good luck on that one! Alternately, my OLD “friend” Caaawky could be out of the stock and watching the screen in despair as the stock rises!! Oh the irony!

News just out – CEO Wolcott purchased just under 1m shares. I guess that’s a vote of confidence in the financing outcome? The bottom has been seen (and I’m not talking about Caawky’s!!)

I was asked by a couple of readers this last week just what our stance now was on Ruspetro following the results of last Monday and our inclusion of the stock in our Oil Explorers portfolio Buy list last year at much higher prices.

We plan on carrying out an interview with Ruspetro management for the next edition of our magazine as it is likely there will be resolution on the Sberbank loan issue by then. Hence we would prefer to wait until this point before making a definitive call on the stock one way or the other.

As we have relayed in prior blogs – we have been wrong on this (our only consolation being that we were not as wrong as my old “friend” Caaawky aka Evil Knievil) and have felt pain personally on the stock. The 2P reserves relative to the enterprise value were the attraction, together with the Directors’ purchasing of stock in 2012 that added, we felt, an additional veneer of confidence in the ability to extract the oil from the difficult Siberian fields.

Below is a table showing the EV/2P measure of a number of oil stocks and with our other Oil portfolio Conviction Buy stocks highlighted. The lowest measure is around 80c per boe held by Petroneft Resources. At the current market capitalisation, Ruspetro’s EV/2P is a derisory 21c per boe. Russian oil’s average upstream EV/2P is approx US$1.6/boe. That differential is, of course, the opportunity at this price level. Should the Sberbank loans be refinanced, and in taking a closer read of the results again this weekend without the noise of the markets, the language used by management in there seems to me to relay a good degree of confidence that they will come to a resolution with Sberbank, then a trebling of the stock price is easily possible.

The market however wants to see the company actually ramp up production. Merrills has the stock on an EV:EBITDA ratio of just over 2 times for next year and only 1.5 times for 2015 (see below). With the gas sales agreement with OJSC Forum totalling $700m from 2014 onwards then there is additional security of cash flows for the loans re-negotiation too.

So to us, the stock is essentially a binary bet here – re-financing and a trebling or beyond in the stock price, particularly with 25 % of the stock out on loan – almost 50m shares. With an average daily turnover of around 1m shares, and a relatively tight free float now, God knows where the stock will come from on a successful loan renegotiation. Could be one helluva squeeze that’s for sure…

On the other hand, in the event that Sberbank do not play ball, and of course it is Russia we are dealing with here, then the stock will likely collapse to zero. The wild card would be a bid approach for the stock, possibly by existing shareholder Alexander Christyakov or alternately a Russian oil major with a stronger balance sheet.

One other thing for the shorts to consider – just what benefit is there to Sberbank to not renegotiate the loans? Do they want to take control of the fields when it is widely accepted that if any man can extract the oil from the difficult to drill West Siberian block then CEO Wolcott is the man. The damage to other Russian oilers from a UK listed company going down after less than 2 years of being floated is another intangible factor to consider here…

So, to those readers who asked where we stand, our response is that assuming the stock is not a major part of your portfolio and you are not too heavily geared, then at this price it represents potentially a material upside. You must however be fully appraised of the risks.

Quite why the Investor’s Chronicle put out a sell recommendation at 22p when they recommended buying at 154p is utterly beyond us – having lost 90% of the capital from the recommendation then with the chance of a major spike against a negligible amount of additional downside for those that followed their advice, it is madness to sell here unless you need the scraps of capital – it’s like running a 90% stop loss!! Still, the IC is known as a publication to trade against and so longs can likely take comfort in this!

Finally, yesterdays sharp intraday reversal on rising volume is a strong technical signal that invariably typifies bottoms in stocks. Take a look at the intra day chart below over the last 5 days and the circled rising volume. Somebody wanted to chase the stock late in the day that’s for sure and when we enquired with the market we found that there was very little loose stock around.

There has also been some comment on the bulletin boards in the last 24 hours about the large number of trades in the last minute of trading – of small blocks of just over 8000 shares. This is what is called an “iceberg” order in which the buyer bids for stock but does not want to show the entire order size (hence the term “iceberg”). There was around 1m shares traded from this order at 17.5p (see a snapshot below of these trades) and it seems that the buyer was ongoing into the closing auction which means he has more apetite. In short, someone wanted the stock in a hurry, and in size, before Friday’s close. This could be either short covering by those reading the technical tea leaves and reacting to the strong reversal yesterday, or those in the know expecting news imminently.

5 day hourly chart with volume

Trades snapshot

The longer term chart here shows the stock right on the downtrend now and so, like our RIMM call last year at $7, this has all the classic ingredients for a potentially very substantial rebound IF the loans are renegotiated – heavy short interest, crazily low valuation, negative sentiment and the all important ingredient “fear” – fear is what creates the price opportunity and if this diminishes then the discount to true value does too.

It is the sort of assymetric risk profile that we like and that can have materially positive effects on your portfolio. If the loans are renegotiated then the “bankruptcy” risk disappears and we could be looking at 50p+. There is an analyst presentation on the 12th April and would expect more clarity then. An optimist would say that they expect to have completed the negotiations with Sberbank by then given the delay between it and the results (most presentations generally occur the same day as the results)…

We remain long.