Victoria Oil & Gas Plc – Operating in a volatile trading environment

Victoria Oil & Gas Plc (LON: VOG) is an FTSE AIM All-Share listed producer and distributor of gas. It is involved in the exploration, production, and distribution in Cameroon.

Rationale for Valuation – Avoid at GBX 2.59

• Price to Earnings and EV to EBITDA metrics are in the negative zone as compared to the Oil & Gas industry multiple.
• The Company is dependent upon funding through external sources to run its business operations.
• On leverage front, the debt-equity ratio stood at 1.58x in FY19, which was higher as compared to the industry median, reflecting that the Company is highly leveraged as compared to the industry.
• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• The Company’s profitability margins were in the negative zone in FY19.
• From the technical standpoint, the 100-day simple moving average price is currently at GBX 3.31, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• The Company’s operational performance is exposed to the global macroeconomic environment and industry conditions such as global demand and supply imbalance, which could affect product volumes and prices across markets.
• Long production delays and outages could have a material impact on production, operating performance, and financial condition.
• The overdependence on key customers like ENEO can cause substantial problems at liquidity and profitability front.

Financial Highlights (for the year ended 31 December 2019 (FY19), as on 30 September 2020)

(Source: Company Website)

• In April 2019, the Company completed a fundraise of US$16.8 million net of expenses, which provide a stable growth platform for the business.
• The Company delivered strong gas sales and revenue growth in FY19, an increase of 110% in daily average daily gas sales to 8.1 mmscf/d versus 2018.
• The Company reported a loss after tax of US$110.3 million in FY19.
• It has implemented a new strategy for the growth of high-value customer base.
• The Company has appointed a Roy Kelly as Chief Executive Officer (CEO) and Rob Collins as Chief Financial Officer (CFO).

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

In the second quarter of the financial year 2020 (as released on 27 July 2020), the Company’s net revenue increased due to higher sale of condensate to industrial customers. VOG is not planning for further drilling based on analysis of well stock and management has reduced estimated 1P (Proved Reserves) for the Logbaba Field. The Company’s financial performance is likely to be impacted after the termination of ENEO contract.

The Cameroon business showed resilient performance and managed to replace the gas sales volumes, which were previously allotted to ENEO. The Company made reserves reduction at Logbaba based on well stock, with years of supply. Overall, the Company is still in the development stage and works in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. The stock made a 52-week low and high of GBX 2.08 and GBX 8.75, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Victoria Oil & Gas at the current price of GBX 2.59 (as on 20 October 2020, before the market close at 2:00 PM GMT+1).

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