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Caspian Sunrise could have a bright future

By Gary Newman | Wednesday 9 August 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Sometimes geographical location can be enough to put off investors, but in a lot of cases that is unjustified and means that companies operating in these areas can represent good value for money.

I believe that is at least in part what has been holding back the share price of Kazakhstan oil producer and explorer Caspian Sunrise (CASP), formerly Roxi Petroleum. Although it is true that it has also had its fair share of problems operationally when it comes to its deeper wells.

I view this AIM-listed company as a real gamble given that it already has a market cap of just over £120 million, with a share price of around 7.5p to buy - though this being close to the lowest level it has been within the past year. In order for it to ultimately justify the valuation, and potentially much more, it will need to get the deep wells into production on its BNG licence, which it now owns a 99% interest in following a merger with Baverstock earlier this year.

So far over the years that it has been drilling the BNG deep structure it has had problems with high pressure and temperature, meaning that none of the three wells drilled so far have been able to be tested. But it is now drilling a sidetrack at its A5 well in the hope of carrying out a longer-term flow test – this well has managed rates of up to 2,000bopod for short periods, as did well 801 before becoming blocked.

These wells aren’t cheap, coming in at anything up to $15 million, but if the company is able to get them flowing and into production, then the potential upside is large, especially when you consider that the oil is of a high quality. There is certainly no guarantee of though and based on drills so far there is plenty of risk, but it has been achieved at the nearby Tengiz field, which at its peak was producing 285,000bopd and is just 40km away – although obviously that is no guarantee that the reservoirs at BNG will exhibit the same characteristics.

In the meantime, the company is producing nearly 2,000bopd, with the majority of that coming from the shallower MJF structure at BNG, plus 182bopd at South Yelemes and 60bopd at Munaily.

One problem for the company currently is that it only holds an appraisal licence, meaning that the oil can only be sold into the local market, for as little as $16 per barrel currently, but even taking that into account these shallower wells, which average 600bopd, repay the drilling costs in around one year.

The latest operational update mentions that in July 2018 the company is hoping to gain regulatory approval to convert to a production licence, at which point the oil will be sold at world oil prices, providing a large boost to the financial position of the company. Even allowing for the low prices being realised currently, the company is now at a stage where it is able to fund its day to day expenses, plus the cost of drilling these shallow wells.   

The 2P reserves for these shallow wells currently stand at 29.3mmbbls, but following recent drilling activity it is expected that will be further increased.

The company isn’t exactly awash with cash and I would expect it to have to continue to raise funds in order to drill further deep wells, but it is now debt free following the Baverstock merger, during which a $10.1 million loan from CEO Kuat Oraziman was converted into shares – he now holds nearly 46% of the stock.

In terms of local costs Caspian will also be benefitting from signs of weakness in the local currency, the Tenge, which now trades in the low 330s against the $, as compared to 310/$ as recently as late May.

As I mentioned earlier, there is still plenty of risk here at this market valuation, but the company is already profitably producing some oil - with plenty of upside once it is able to export that. Plus it has a lot of future potential from the deeper wells – it has found oil and has got it to flow to some degree, it just needs to manage to do it on a consistent basis in order to go into production from this part of the field.

Therefore, for anyone who likes a bit of a gamble on an earlier stage oil company, this is well worth a look at the current share price.

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