Petroceltic International (LSE: PCI) shares fell by 30% to around 115p when markets opened this morning, as investors reacted to news that Dragon Oil (LSE: DGO) had decided not to make an offer for the firm, due to current market conditions — a.k.a. the collapsing price of oil.
What’s happened?
Reading between the lines of Petroceltic’s announcement suggests that Dragon’s 54% shareholder, Emirates National Oil Company, decided to veto the deal, despite Dragon successfully completing its due diligence on Petroceltic.
As a result, Petroceltic now faces a less certain future as a small independent exploration and production company.
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Well funded
Despite today’s slide, it’s not all bad news for Petroceltic shareholders.
Petroceltic is quite well funded and has meaningful production revenues. The firm’s revenue during the first half of the year was $96.3m, driven by production of 25,200 barrels of oil equivalent per day (boepd).
The firm also raised $100m through a share placing during the first half, and has plans to move up from the AIM market to the main London market by the end of this year, which should provide stronger institutional backing for the stock.
Gas fired assets
Another positive is that Petroceltic’s flagship asset is gas, rather than oil: the Ain Tsila gas condensate field in Algeria accounts for 83% of Petroceltic’s proven and probable reserves, which stood at 361 million barrels of oil equivalent (boe) at the end of 2013.
That equates to a valuation of just over $1/boe of reserves, which could prove cheap if the Ain Tsila field is brought into production by 2018 as planned, without too much further dilution for Petroceltic shareholders.
What are the risks?
One risk is that most of Petroceltic’s current production — on which it depends for cash flow to fund its other projects — is in Egypt.
The company’s operations and payment receipts have been affected by the disturbances in that country, but Petroceltic says payment arrears are falling steadily and production remains strong.
Is Petroceltic a buy?
Today’s news is probably a good opportunity for existing shareholders to average down, and offers decent long-term growth potential.
However, in the near term, a fair amount of success is already priced into the stock: as I write, Petroceltic shares are changing hands at 111p, placing them on a 2014 forecast P/E of 56, and a 2015 forecast P/E of 41.
I reckon Petroceltic has a better-than-average chance of making into the ranks of medium cap oil and gas producers, but the firm may yet face a number of challenges.
