Buy- Valkyries was one of the hardest hit of our companies during the recent sell-off, at one point down almost 30%. The stock has since recovered to the CAD 6.00 level, but is still sitting well off its recent high of CAD 7.70.
Why the fall? It looks as if a number of factors contributed, in addition to the general market correction. Firstly, on October 5, Interfax news service reported that Kirsan Ilyumzhinov, President of the Republic of Kalmykia where Valkyries has a number of projects, had resigned his post. Some investors may have been spooked by the resultant political uncertainty.
It appears, however, that this development represents political posturing rather than an actual change in leadership. We understand that the resignation was tendered under the guidance of Russian President Putin in order that Ilyumzhinov could be appointed to a new 5-year term in Kalmykia-a formality required by Russian law. The President should be returning to power immediately, which means business as usual for Valkyries.
A larger factor in VPC?s fall over the past weeks was a rumor circulating amongst the brokerage community that the company had drilled a dry hole in Russia. This is completely fictitious, and could well have been an attempt by a would-be buyer to drive down the price before loading up on the stock.
In fact, as our recent visit to Valkyries? projects confirmed, the company is progressing at a steady clip. At the Pechoraneftegas (PNG) project in the rolling forests of the northern Komi Republic, production is now at 6,650 b/d oil. Two new horizontal wells have been started, with drilling likely to be completed by the end of October.
Also impressive was the state of the production facilities. While many Soviet oilfields are environmental nightmares, the tanks and piping here looked to be in as good or better shape than at western fields. The site even hosts a sophisticated laboratory and a sauna to keep the field workers in good spirits.
From there, VPC?s charter jet-a loaner from the Russian Defence Agency-took us south to the Republic of Kalmykia, the only Buddhist territory in the former Soviet Union. After being met at the airport by women in traditional costumes reminiscent of Nepalese villagers, we sat down with the aforementioned President Ilyumzhinov. Over a cup of soupy Kalmyk tea, the President and his officials assured us they are eager to promote Valkyries? projects-a reassuring sign, given that having local partners onside is a major factor in successfully doing business in Russia. The fact that the current regime will be in power for at least another 5 years thus bodes well for VPC.
After a two-hour ride in a beaten-up Soviet helicopter, passing over endless barren plains, we arrived at Valkyries? Caspian Field project, just west of the Caspian Sea. Here, the vertical section of the first well-bore has already been completed, finding 7 meters of pay. The horizontal component of the well is now underway, with about 120 meters of drilling left to go.
With news on several fronts coming, we expect good things from Valkyries over the coming months. Institutional investors seem to agree-following our trip, which included agroup of 15 fund managers, analysts and high-net-worth buyers, the price immediately jumped from CAD 6.40 to CAD 7.20, suggesting that many of these visitors were rushing to get buy orders in. Considering that you can currently pick up the stock for less than they did, we?d be looking to buy. |
