LONDON (ResourceInvestor.com) -- Although Ukraine’s oil & gas requirements have only been thrust to prominence by recent upsets, Cardinal Resources [AIM:CDL] has been active in the sector for some time. Cardinal shares have found their natural home here in London, where, as a rule, investors are more comfortable appraising risky investments in distant places; the company having grown out of and superseded the defunct, formerly Toronto listed Carpatsky Petroleum and deliberately switched to a London listing on account of its greater suitability.
According to Cardinal’s Chairman & CEO Robert Bensh, the outfit has been operating in Ukraine long enough, since 1995 to be specific, to have acquired a useful array of contacts across the country’s oil & gas sector, which is dominated by the state controlled NAK Naftogaz Ukrainy. This established presence may assist the company in ameliorating some of the trickiness associated with such an operating environment.
Back when Cardinal was known as Carpatsky though, less was achieved than would have ideally been so. Bensh imparts that in essence “everything was wrong with Carpatsky”; he was in fact hired in 2000 to try and sort things out, the most significant single issues being Carpatsky’s chronic shortage of funds and that it suffered from the poor quality of certain of its business relationships in Ukraine.
So, following a long restructuring, Cardinal debuted on AIM in April 2005, raising GBP10.6 million in the process. Since then its shares have traded somewhat erratically, and today stand at 28 pence, compared with a placing price at listing of 32 pence. The company has recently emplaced a $38 million bridge loan facility, which was put up by a U.S. hedge fund, and is seeking an additional $10-15 million in order to satisfy the requirements of its growth plans.
Although Cardinal has producing assets, it does not expect to be a cash positive concern until 2008 or 2009, owing to high levels of planned expenditure. If all goes as the company expects, then the funding scheme just outlined should carry it to this point. Part of Cardinal’s development expenditure will redress damage done to its business position by past underfunding, the best example of this damage being the significant dilution of its profit interest in the producing Rudivsko-Chernovozavodske (RC) field in the east of Ukraine.
Cardinal now intends to earn its way up to a 45% revenue interest in the RC field, building from the 14.9% level down to which it has been diluted. The RC field is a joint venture with Ukranafta, an affiliate of NAK Naftogaz Ukrainy. At the moment, the RC field can be regarded as the Cardinal’s most substantial asset, even though 45% is the maximum stake that the company can hold under the joint venture agreement as it stands. The field’s original gas in place amounted to 1.5tcf and it presently supports five producing wells, with significantly greater production capacity expected to come on stream following a programme of workovers and new drilling.
A mix of workovers and new drilling is characteristic of Cardinal’s development plans for its various assets across Ukraine. Many of the country’s existing oil & gas wells are poorly completed and can often benefit from workovers either to restore production where total failures have occurred, or to raise output levels where these sit below their potential.
Cardinal uses mostly Ukrainian equipment hybridised with certain Western components, which keeps costs lower than would otherwise be the case and should improve effectiveness, as local equipment tends to be outdated and ill constructed. However, given the absence of Western oil & gas service companies in Ukraine, use of adapted local equipment is a convenient option for Cardinal.
The omens in the Ukrainian gas markets are, to an extent, good from a producer’s point of view. Ukrainian gas prices have been illustrated to be a bit of a contentious subject by recent events, but the Ukrainian government is thought to be moving towards letting prices rise closer to E.U. levels in order to promote efficiency and because of the difficulty of keeping prices depressed without Russian support, which has now been conspicuously withdrawn.
Cardinal already receives world prices for its oil output, a barrel of which sells at a $3 discount to a barrel of Russia’s Urals blend, which itself changes hands at a small discount to Brent. The company currently gets an average price for its gas of around $2.20/mcf; rather low next to current E.U. prices of $12-15/mcf, making it easy to understand the arguments for convergence.
Cardinal’s focus is decidedly on production rather than exploration, though this will not preclude it from some involvement in the latter activity if it espies the right opening. The company is on the look out for acquisition opportunities, Bensh seeing a 12-18 month window of opportunity, starting around now, within which some plum targets may become available before the competition for Ukrainian oil & gas assets becomes too heated.
Cardinal anticipates this growth in competition as a corollary of its expectation of improving Ukrainian gas market conditions and of an increase in the transparency of the nation’s business & government, but the company feels that its in-country connections will give it an edge. Investors will hope so, just as they will hope that Ukrainian gas prices are indeed allowed to track closer to E.U. levels.
