INITIATION OF COVERAGE 23 September 2014
Summary
Interfox Resources (IFOX.ST)
List:
Market Cap:
Industry:
CEO:
Chairman:
Oil exploration in Siberia with
potential



Interfox Resources is an oil and gas explorer with
operations in the Tomsk region, Russia. Their main asset is
block 71-1, where hydrocarbons already have been
confirmed. The CPR available indicates mid-case
prospective resource of 32 mmboe. Subsequent
independent analysis performed by Geoprime and IOGT
indicate significantly higher volumes.
Aktietorget
75.5 MSEK
Exploration - Oil & Gas
Jens Bruno
Max Renard
Interfox Resources
OMXS 30
0.08
0.17
0.07
0.165
0.06
0.16
0.05
0.04
The company aims to sell the license to a larger operator by
the end of 2015. The work going forward is drilling to
determine the size, production characteristics and to
transfer resources to reserves.
0.155
0.03
0.15
0.02
0.145
0.01
0
20-Jan
0.14
20-Apr
Our fair value estimate for Interfox is 0.053 SEK per share
(5.3 after reversed split). Our Bull-case indicates a value of
0.089 SEK a share and our Bear-case 0.020 SEK. The
stakes are high but also the possible rewards.
Redeye Rating (0 – 10 points)
Management
6.5 points
Growth prospect
Ownership
5.5 points
Profitability
0.0 points
1.0 points
Financial strength
0.0 points
Key Financials
Revenue, MSEK
Growth
EBITDA
EBITDA margin
EBIT
EBIT margin
Pre-tax earnings
Net earnings
Net margin
Dividend/share
EPS adj.
P/E adj.
EV/S
EV/EBITDA
2012
0
2013
0
2014E
0
2015E
0
2016E
0
0%
0%
0%
0%
0%
0
-10
0
0%
0
0%
0%
-5
0%
0%
0%
0
-10
0%
0%
0%
0
0
0
0
-12
-12
-5
-4
-5
-4
0%
0%
0%
-5
-5
0%
0%
-5
Share information
Share price (SEK)
Number of shares (m)
Market Cap (MSEK)
Net cash (MSEK)
Free float (%)
Daily turnover (’000)
0.035
2159
75.5
15
66 %
100 000
0%
2012
2013
2014E
2015E
2016E
0.00
neg
n.m
n.m
n.m
0.00
neg
n.m
n.m
n.m
0.00
neg
n.m
n.m
n.m
0.00
neg
n.m
n.m
n.m
0.00
neg
n.m
n.m
n.m
Analysts:
Kristoffer Lindstrom
[email protected]
Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.
Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected]
Interfox Resources
Redeye Rating: Background and definitions
The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.
Company Qualities
The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or
operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.
We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 –
Ownership, 3 – Growth Outlook, 4 – Profitability and 5 – Financial Strength.
Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted
differently according to how important they are deemed to be. Each key factor is allocated a number of points
based on its rating. The assessment of each valuation key is based on the total number of points for these
individual factors. The rating scale ranges from 0 to +10 points.
The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of
the bars therefore reflects the rating distribution between the different valuation keys.
Management
Our Management rating represents an assessment of the ability of the board of directors and management to
manage the company in the best interests of the shareholders. A good board and management can make a
mediocre business concept profitable, while a poor board and management can even lead a strong company into
crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 –
Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.
Ownership
Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner
commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with
a dispersed ownership structure without a clear controlling shareholder have historically performed worse than
the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner
commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.
Growth Outlook
Our Growth Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit
growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does
not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to
assess Growth Outlook are: 1 – Strategies and business model, 2 – Sale potential, 3 – Market growth, 4 – Market
position, and 5 – Competitiveness.
Profitability
Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to
generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company
has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on
total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating
profit margin or EBIT.
Financial Strength
Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term.
The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no
benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength
is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 –
Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary
events.
Initiation of coverage
2
Interfox Resources
Table of contents
Index:
Investment summary .................................................................. 3
Searching for oil in Tomsk .......................................................... 6
Company Description ............................................................... 6
Key employees and shareholders ..............................................7
The oil industry........................................................................10
Resources to reserves .............................................................. 13
Exploration Portfolio ............................................................... 17
Valuation................................................................................... 20
Valuation Methodology........................................................... 22
Estimated fair value ................................................................ 26
Redeye Rating ........................................................................... 30
Company analysis
3
Interfox Resources
Investment summary
Background
Interfox Resources is an oil and gas exploration company with operations in
Russia, Tomsk region. The license that Interfox indirectly owns 74% of is
called Block 71-1. The company intends to develop the license through
exploration and appraisal work and then sell it to a large oil company.
Potential reserves much larger then stated in CPR
Recent drilling activities
indicates a much higher
resource volumes than the
stated CPR report
During the Soviet era two wells were drilled, both encountering
hydrocarbons. The available Competent Person Report (CPR) made before
conducting the first phase of exploration and re-entry of one of the old wells
estimates that there could be 32 mmboe of resources in a mid-case
scenario. Subsequent independent analysis made after the stated CPR
report both confirms hydrocarbons on the license and indicates
significantly higher volumes of resources. Works done by independent
company Geoprime (a Schlumberger company) have given a Russian
standard C3 resource that is under registration with government authorities
of 134 mmboe. The company IOGT made a complex analysis of the reentered well before perforation works were started whereby their
technology confirmed a number of intervals that are of interest to explore
further and confirmed hydrocarbons present. Even though the new data
support a higher volume assessment, to be conservative we will be using the
CPR resource levels in our valuation.
Resource assesment (mmboe)
160
140
120
New analysis indicates
much larger possible
reserves
130
134
100
71
80
60
32
40
17
20
0
1
CPR P90
CPR P50
CPR P90
Geoprime - C3
C3 resource under registration
Source: Interfox Resources
Confirmed reserves on
neighboring licenses
Neighboring block have confirmed reserves of 145 2P
The overall geological characteristics of the area are also in favor for
Interfox. Neighboring license Block 70, owned by ONGC, has three
confirmed structures with a total of 145 2P reserves.
Company analysis
4
Interfox Resources
Competent management team a great asset
A strong management
team with extensive
business experience in
Russia and the Far East
The company has a management team with considerable experience of
entrepreneurship in the Russian and Asian region and one of the most
experienced Russian geologists available. We believe that they are a great
asset for the company and crucial for the future progress.
Underlying need of reserves
There is always a need for oil and gas companies to increase their reserves
so they can sustain the production levels. This is positive for Interfox since
several large producing companies are present in the region and there is a
large underlying need to replace produced reserves. Another positive factor
for Interfox is that China has recently signed an oil and gas treaty with
Russia which should enhance the chances of a sale of the license.
Conservative resource assessment justifies current share price
Our estimated fair value
in a Base-case amounts to
5.3 SEK per share after
the reversed split
Based on recent transaction valuations, relative valuation multiples and our
estimated future reserves for the license (which uses the conservative CPR
resource assessment) we have estimated a fair value of 5.3 SEK per share
(0.053 before reversed split). We estimate that today’s valuation is justified
by a conservative estimate of future possible reserves. If the ongoing drilling
activities improve the assumed resources or are transferred to reserves this
will enhance the share price significantly.
Drilling activities the main value driver
The main value driver going forward will be related to different activities to
enhance, prove and improve the likely reserves of 71-1. The activities can be
of different sorts. But most likely different drill results and new reserve
updates. This can impact the stock price both negatively and positively.
Interfox shares sky rocked when the company published the IOGT report
that confirmed that there are hydrocarbons on the license. Activities such as
this will have the largest impact on the share price going forward. Also, as
Interfox is not a self-financing company the way that the company will
finance itself will also affect the valuation of the company. If the financing
can be made at attractive terms this will most likely create a higher
valuation.
Great potential and conservative valuation
Great potentials but of
course not without risks
An investment in Interfox is not without risk. There is always a risk that the
oil and gas resources on the license block will not contain large enough
amounts of producible oil. On the contrary the potential reward could be
very large given today’s relatively conservative valuation of the company.
We find that the share is attractively priced.
Company analysis
5
Interfox Resources
Searching for oil in Tomsk
Company Description
Operational in the Tomsk
Region, Russia
Recent estimates from
Geoprime and IOGT
indicates much higher
volumes of possible
reserves
Interfox Resources is an oil and gas exploration company with operations in
the Tomsk region of Siberia. The company is the continuing operations of
Archelon Mineral. The company's first license is called Block 71-1 or "EllejIgajskoje”. The company has through a rights issue and a directed share
issue raised the first capital needed to begin the re-entry of the now existing
wells on the license. When these wells were drilled during the Soviet era,
elevated carbonates could be identified. The question is thus not, whether
there are hydrocarbons in place, but how much there is and how producible
it is.
The UK consulting firm Oil Production Consultants (OPC) performed a CPR
in connection with a prospectus registered by the company for the rights
issue. The CPR was performed before any on-field works, that is, before
starting the re-entry, and based their analysis on historic well logs, newer
seismic data and the initial analysis from Geoprime. OPC estimates in a
mid-case scenario the prospective resource to about 32 mmboe (million
barrels of oil equivalent). The goal is to sell this license and give out a large
portion of this sale amount to the shareholders of the company. Exploration
works and analysis from Geoprime have given a Russian standard C3
resource of 134 mmboe, under registration, and the company IOGT has
confirmed with their new technology that hydrocarbons are in place.
Business model
Aims to sell the license
after reserves have been
confirmed
Interfox goal is that during a 16 month period conduct drill activates to
establish an estimate of the proven and probable resource on the license.
After this the license will be sold to larger company that has the possibility
to take the license to production. Therefore it is not Interfox intention to
become an oil production company or operator of the field.
Company analysis
6
Interfox Resources
Value creation process of E&P companies
The diagram exemplifies the value creation process, investment need and
risk for E&P (Exploration and Production) companies during different
phases. Interfox are in the final stages of the exploration phase and will
begin the evaluation of the resources. This is a "sweet spot" when the value
often in increases significantly, if the evaluation is favorable. The need for
investments remains quite low and the risk decreases when the likely
reserves take shape. The company thus aims to dismantle the license to a
production company before the development begins.
Value creation process for oil companies
100
90
Evaluation Phase
80
Development
Phase
70
60
Production Phase
Exploration Phase
50
40
30
20
10
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34
Value creation
Need of capital
Risk
Source: Redeye Research
Key employees and shareholders
Interfox Resources has successful recruited people with solid
entrepreneurial-, Russian culture-, capital markets and exploration
experience to senior positions in the company. Above all, the company's
CEO Jens Brown with extensive experience in Russia, chairman Max
Renard and chief geologist Mikhail Malyarenko are assets that are crucial
for the company to succeed in their undertakings.
Management:
Jens Bruno, CEO
Both CEO, Jens and
chairman Max have large
business network in
Russia and Far East
Jens Bruno is the CEO of the company. He has a long and extensive
experience in managing, controlling and commercializing investments in
Russia and the former Soviet Union. Jens has previously acted as an advisor
to the Russian Government and worked as accompanying financial officer
at the Swedish Embassy in Moscow. In the past he also worked at East
Capital Explorer with Russian investments. In the recent years, Jens
worked to develop the Ukrainian agricultural company Grain Alliance,
which started in 2008.
Jens contributes primarily with investment expertise in Russia, extensive
knowledge of the Russian business culture and broad financial and political
Company analysis
7
Interfox Resources
networks. Jens speaks and writes fluent Russian, which facilitates the
operation of the company.
Jens is currently not a shareholder of the company but he has a bonus
related contract where a quick and large sell of the license will benefit him.
We find this as positive as the bonus setup is in line with shareholder
interest.
Number of shares: 0
Max Renard, chairman
The Chairman, Max Renard, recently moved back to Sweden to be able to
pay full attention to Interfox Resources and his responsibilities as
Chairman. He has successfully operated abroad, mainly in China, for more
than 30 years, and was most of this time based in Hong Kong.
Max Renard is the
company’s largest
shareholder, as such the
board is highly
shareholder friendly
During this period he developed strategic business relationships and a
network of very senior Asian contacts. These contacts were initially
developed in the 1990s, in order to promote sales and contracts in the Asian
telecommunications business. Large contracts involving were successfully
concluded by Renard around year 2000.
As the telecom market matured, Renard shifted focus to the energy and
natural resources sector, just as the Asian major companies began to
acquire substantial natural resources reserves around the globe in order to
meet its ever-growing demand.
Number of shares: 287 389 797
Jan Lundström, vice chairman
Jan has extensive experience in capital markets including positions as
investment manager and deputy director in private equity firms. Jan is the
chairman of a forestry company with its assets in Karlia, Russia and has
substantial experience in entrepreneurship. He has also taken large part in
starting and developing several companies in the Life Science industry since
the mid-90s and has taken a big part in restructuring IT companies after
the crash in year 2000. His experience also includes investments in
Ukraine, Germany and Brasil.
Number of shares: 7 000 000
Jan and Anders primarily
contributes with extensive
capital market experience
Anders Thorsell, Board member
Anders has extensive experience in capital markets in particular regarding
Corporate Finance transactions, having raised substantial funds for various
companies and in particular natural resources companies. Aside from this
experience, he has successfully started and/or developed different
companies. These companies include an asset management and corporate
finance boutique that was sold to an Investment Bank. Anders also started
and developed other companies within the financial sphere in Sweden and
in Russia, natural resources companies in Russia and Ukraine and an
agriculture company in Ukraine. He has also been in charge of Interfox
Invest AB and FEPI with a particular focus on Russia, having worked with
Russian and Ukrainian projects for the last 9 years. Anders has together
Company analysis
8
Interfox Resources
with Mr Renard for the last two years created the project that became
Interfox Resources AB.
Number of shares: 2 857 210
Geologists:
Mikhail Malyarenko, General Director, subsidiary OOO Bakcharneftegaz
Mikhail is a highly
renowned Russian
geologist
Mikhail is a Russian geologist with extensive experience of exploration in
Russia. The Malka licenses are probably the best earlier known licenses that
Mikhail has worked on. The work surrounding the project got negative
press in Sweden as Malka in connection with the financial crisis in 20082009 ended up in financial trouble and had to perform an unofficial
reconstruction and Mikhail lost his influence and place in Malka. The Malka
oil license was nevertheless a great success and is now one of the state
company Gazprom Neft’s key holdings in the area, producing 17-20,000
bopd. Mikhals knowledge of exploration is central for a successful outcome
for Interfox Resources. Mikhael will own 26% of the license after the
investment program finished. If the exploration is highly successfully sold,
Mikhail’s economical stake in the sales price will be increased. The
structure of the commitment is designed so that Interfox Resources will still
benefit greatly of the expanded reserves, which leads to no conflicts of
interest.
In addition to Mikhail, an operational unit with selected experts in geology
and economics has been recruited. Worth mentioning is the head geologist,
Mr. Alexander Kokunov, who has many years of experience from the area,
working in senior positions in larger as well as smaller companies.
Company analysis
9
Interfox Resources
Shareholders
The largest shareholder of Interfox is Far East and Pacific Investment Inc,
this is a company owned and operated by Interfoxs chairman Max Renard.
We find it positive to have Max as Chairman of the board and also the
largest shareholder of the company.
Shareholders
Stated shareholders list
recently updated.
Holder
THE FAR EAST & PACIFIC INVESTMENT INC.
AVANZA BANK
SEB
SWEDBANK
NORDNET
HANDELSBANKEN
ERIKSSON, PETER
AFSNEE AB
OTHER
Total
Number of shares
287 389 797
142 834 153
131 917 374
116 952 532
104 982 368
101 003 339
55 500 000
4 133 350
1 177 691 922
2 159 604 835
Percentage
13.3 %
6.6 %
6.1 %
5.4 %
4.9 %
4.7 %
2.6 %
0.2 %
54.5 %
100.0 %
Source: Interfox Resources (by 2014-09-22)
The oil industry
Interfox is a pure
upstream company
The modern oil industry is divided into three main segments, "upstream",
“midstream” and "downstream". Upstream refers to companies active in
exploration and production, the midstream sector involves transportation
and wholesale marketing of crude or refined products, while downstream
companies focus on refining and distribution. Interfox Resources is thus a
pure upstream oil company with a strong focus on exploration.
Oil demand is economic growth around the world. The need for energy per
capita is steadily increasing even though there are new technologies that
improve the efficiency of energy use. U.S. Energy Information
Administration (EIA) estimates that the world’s energy consumption will
increase by about 56% between 2010 and 2040. Above all increased
demand will come from the emerging countries. EIA believes that the need
of natural gas will be the fastest growing of the fossil fuels, with a projected
increase of 1.7% per year. Interfox license is believed to contain both natural
gas and crude oil.
The need for exploration
Constant need to replace
produced reserves drive
the need of exploration
assets
Since there is an underlying future need of oil and gas, there is obviously a
need for oil producers to increase their reserves in line with increased
production and even with sustained production due to the natural depletion
in the reserve base. The relationship between the reserves and production,
or the R/P ratio, cannot decline too much or else it in the end will hamper
the production rate.
Due to the substantial future demand for fossil fuels, there is clear need to
perform substantial exploration in order to expand or even maintain the
existing reserves for producing oil companies in Russia. The R/P ratio for
oil production and reserves has been relatively stable the last ten years. This
means that the amount added to the reserves have been in line with the
production rate. As the production is estimated to increase going forward
Company analysis
10
Interfox Resources
there is still a large demand for reserves. For gas the relationship between
produced gas and reserves has been more volatile but overall the R/P ratio
has increased somewhat.
Russian oil prodcution and proved reserves, million barrels of oil
100000
4500
90000
4000
80000
35
30
3500
25
70000
3000
60000
2500
20
2000
15
50000
Growth in production will
lead to a larges need of
reserves
40000
1500
30000
10
1000
20000
500
10000
0
0
1998
2003
Proved reserves (mmbo)
2008
5
0
2013
1998
2003
Production per year (mmbo)
2008
2013
R/P ratio
Source: BP Statistical Review of World Energy 2014
Russian gas prodcution and proved reserves, billion cubic feet
1 110 000
22 000
1 100 000
21 000
1 090 000
62
60
58
1 080 000
20 000
1 070 000
1 060 000
19 000
1 050 000
18 000
1 040 000
56
54
52
50
1 030 000
17 000
1 020 000
1 010 000
16 000
1997
2002
Proved reserves (bcf)
2007
2012
Production per year (bcf)
48
46
1997
2002
2007
2012
R/P ratio
Source: BP Statistical Review of World Energy 2014
Chinese oil and gas trade
The large Russian and
Chinese treaty can
enhance the demand for
Russian oil assets
The expansion of the ESPO (Eastern Siberia-Pacific Ocean) pipeline is one
of the most important projects in Russia today. This expansion enables
exports of oil and gas to the Asian markets. This project is already on its
way and the pipeline is being supplied with oil from the Tomsk region
among others.
China has been a large buyer of Russian oil and gas ever since Mao Zedong
in 1950 travelled to Moscow to sign the Sino-Soviet Treaty of Friendship,
Alliance, and Mutual Assistance. On May 23rd 2014 Russia and China
signed a new far reaching agreement between the countries. The highlight
of the agreement is Russian exports of USD 400 billion worth of natural gas
to China over 30 years. The agreement also paves the way for Chinese
Company analysis
11
Interfox Resources
investment in Russia, in the area of aviation, transportation and
infrastructure. It also would give the China National Petroleum Corporation
an opportunity to acquire a 19 percent stake in Rosneft.
The recent agreement between China and Russia opens up large
opportunities for Russian oil and gas producer and explorations companies
as the demand and interest for Russian oil and gas assets is likely to
increase.
Politics
The stressed political
climate should have small
impact on Interfox
chances of selling their
license
The political climate in Russia, as in any country, affects companies that are
operating within its borders. The current unrest in Ukraine is likely to affect
mainly the investment willingness of Western investors. On other hand, the
interest of Russian oil projects has grown substantially in Asia. A future
buyer of the license 71-1 will probably be one of the major production
companies in the Tomsk region or from Asia. The demand for reserves
could be hampered if there is a large sanction made against Russian oil
export
Tomsk
The Tomsk region is one of the ten leading oil regions of Russia and almost
every major Russian market player is operating in the region. Oil
production in the Tomsk began in the 1960s, and production of gas in the
mid-1990s. Interfoxs license 71-1 is located in the southwestern parts of the
region. Overall the infrastructure in Tomsk is well developed as the region
is already a large producer of oil and gas.
The Tomsk region - Siberia
Tomsk is one of the
leading oil regions in
Russia with welldeveloped infrastructure
Source: Interfox Resources
Infrastructure
The goal for Interfox Resources is as mentioned earlier to sell their license
when a reserves registration or at least a reserves and resources assessment
has been done or possibly to enter into a partnership. Central to such a
situation is the amount of investments that is needed for a buyer of the
Company analysis
12
Interfox Resources
license to create an operationally functional activity. In addition to
investments in drilling equipment and geophysical and geological analysis
work there is often a need of investment in infrastructure such as roads and
pipeline. There are already winter roads constructed to the license area
which is positive. These roads are dependent on the weather conditions as
warm weather makes them impassable and unexpected closure of the
winter roads may delay the delivery of various equipment. The nearby
pipeline is owned by ONGC (Imperial Energy) and is close to the license
block, which is also positive. Furthermore, the resource itself is high and
narrower than usual which makes likely it feasible to produce from fewer
wells than usual, providing better production economics. The investment
requirement for an operational actor is relatively small which of course is
good in a negotiating situation for Interfox. Different buyers will have
different investment needs and thus will be willing to pay different prices.
Resources to reserves
In the E&P industry a classification system is used for evaluating petroleum
reserves and resources. The most widely used system outside Russia is the
Petroleum Resource Management System (PRMS). Russia have since the
Soviet times developed a slightly different standard system, which is used.
In general they follow the same principles.
Oil and gas reserves and resources are defined as volumes that will be
commercially recovered in the future. The reserves and resources for E&P
companies unlike the inventory for a manufacturing company cannot be
inspected and counted as they are located in reservoirs underground. The
amount of reserves and resources must be estimated, thus reserve estimates
involve some degree of uncertainty.
Oil and gas reserves and
resources are defined as
volumes that will be
commercially recovered
in the future, according to
international standards
Prospective resource represents quantities of petroleum that are estimated
to be potentially recoverable based on indirect evidence. These resources
have not yet been drilled. This class represents a high degree of risk since
there is also a risk of non-discovery. Basically for prospective resources to
be classified as contingent resources, hydrocarbons need to be discovered.
Contingent resources are less certain than reserves but more than
prospective resources. These resources are recoverable but not yet
considered mature enough for commercial development due to either
technological or economic factors. For the contingent resource to be
classified as a reserve, environmental and government approvals should be
in place. Also the company must show evidence of intention to proceed with
development within a reasonable time frame.
Reserves are the part of the total resource that are commercially
recoverable and have been justified for development. These are the highest
form and possess the highest likelihood of extraction from the ground. The
reserves are divided in 1P, 2P and 3P. With 1P as the category with highest
certainty of extraction
Company analysis
13
Interfox Resources
Within every resource class there are different categories, the resources are
divided into different categories based on their probability of eventually
coming out of the ground. In the reserve class the categories proved,
probable and possible are used, with proved having the highest chance of
extraction. In the resources classes a measurement of low, best/mid and
high is used. Where high is the high estimate of resources in the ground.
The reserves are divided
in 1P, 2P and 3P. With 1P
as the category with
highest certainty of
extraction
Source: SPE
Difference between Russian and international classifications.
The Russian reserves
system differs somewhat
from the Western
standards, specifically
how and the extent to
which commercial factors
are considered in
calculating reserves
The Russian reserves system differs somewhat from the PRMS, specifically
how and the extent to which commercial factors are considered in
calculating reserves. Reserves that are calculated using different methods
cannot be accurately compared or converted.
The Russian reserves system is based on the analysis of geological
attributes. Explored reserves are expressed by categories A, B, and C1;
preliminary estimated reserves are classified as category C2; potential
resources are classified as category C3; and forecasted resources are
represented by categories D1 and D2. Gas reserves in categories A, B and C1
are considered to be fully extractable. For reserves of oil and gas
condensate, a predicated coefficient of extraction is calculated based on
geological and technical factors.
Category A reserves are calculated on the part of a deposit drilled in
accordance with approved development project for an oil or gas field. This
category represent reserves that have been analyzed in sufficient detail to
define exactly the type, size and shape of the deposit; hydrocarbon
saturation level; reservoir type; nature of changes in the reservoir
characteristics; content and characteristics of the hydrocarbons. In addition
to this all major features of the deposit; type of operations, well
productivity, pressure, gas, gas condensate and oil balance, are also well
known.
Company analysis
14
Interfox Resources
Explored reserves are
expressed by categories A,
B, and C1
Category B represents the reserves of a deposit (or portion thereof), the oil
or natural gas content of which has been determined on the basis of
commercial flows of oil or natural gas obtained in wells at various
hypsometric depths. The type, shape and size of the deposit; the effective oil
and natural gas saturation depth and type of the reservoir; the nature of
changes in the reservoir characteristics; the oil and natural gas saturation of
the productive strata of the deposit; the composition and characteristics of
crude oil, natural gas and gas condensate under in-situ and standard
conditions and other parameters; and the major features of the deposit that
determine the conditions of its development have been studied in sufficient
detail to draw up a project to develop the deposit.
Category B reserves are computed for a deposit (or a portion thereof) that
has been drilled in accordance with either a trial industrial development
project in the case of a natural gas field or an approved technological
development scheme in the case of an oil field.
Category C1 represents the reserves of a deposit (or of a portion thereof)
whose oil or natural gas content has been determined on the basis of
commercial flows of oil or natural gas obtained in wells (with some of the
wells having been probed by a formation tester) and positive results of
geological and geophysical exploration of non-probed wells.
C1 is the determined
amount of reserves that
have been determined
based on commercial
flows
The type, shape and size of the deposit and the formation structure of the
oil- and gas-bearing reservoirs have been determined from the results of
drilling exploration and production wells and by those geological and
geophysical exploration techniques that have been field-tested for the
applicable area. The lithological content, reservoir type and characteristics,
oil and natural gas saturation, oil displacement ratio and effective oil and
natural gas saturation depth of the productive strata have been studied
based on drill cores and geophysical well exploration materials. The
composition and characteristics of crude oil, natural gas and gas condensate
under in-situ and standard conditions have been studied on the basis of
well testing data. In the case of an oil and natural gas deposit, the
commercial potential of its oil-bearing fringe has been determined. Well
productivity, hydro- and piezo-conductivity of the stratum, stratum
pressures and crude oil, natural gas and gas condensate temperatures and
yields have been studied on the basis of well testing and well exploration
results. The hydro-geological and geocryological conditions have been
determined on the basis of well drilling results and comparisons with
neighbouring explored fields.
Category C1 reserves are computed on the basis of results of geological
exploration work and production drilling and must have been studied in
sufficient detail to yield data from which to draw up either a trial industrial
development project in the case of a natural gas field or a technological
development scheme in the case of an oil field.
Company analysis
15
Interfox Resources
C2 reserves are
preliminary estimated
reserves
The C3 resources are
prospective reserves
Category C2 reserves are preliminary estimated reserves of a deposit
calculated on the basis of geological and geophysical research of unexplored
sections of deposits adjoining sections of a field containing reserves of
higher categories and of untested deposits of explored fields. The shape,
size, structure, level, reservoir types, content and characteristics of the
hydrocarbon deposit are determined in general terms based on the results
of the geological and geophysical exploration and information on the more
fully explored portions of a deposit. Category C2 reserves are used to
determine the development potential of a field and to plan geological,
exploration and production activities.
Category C3 resources are prospective reserves prepared for the drilling of
(i) traps within the oil-and-gas bearing area, delineated by geological and
geophysical exploration methods tested for such area and (ii) the formation
of explored fields which have not yet been exposed by drilling. The form,
size and stratification conditions of the assumed deposit are estimated from
the results of geological and geophysical research. The thickness, reservoir
characteristics of the formations, the composition and the characteristics of
hydrocarbons are assumed to be analogous to those for explored fields.
Category C3 resources are used in the planning of prospecting and
exploration work in areas known to contain other reserve bearing fields.
Category D1 resources are calculated based on the results the region’s
geological, geophysical and geochemical research and by analogy with
explored fields within the region being evaluated. Category D1 resources are
reserves in lithological and stratigraphic series that are evaluated within the
boundaries of large regional structures confirmed to contain commercial
reserves of oil and natural gas.
Category D2 resources are calculated using assumed parameters on the
basis of general geological concepts and by analogy with other, better
studied regions with explored oil and natural gas fields. Category D2
resources are reserves in lithological and stratigraphic series that are
evaluated within the boundaries of large regional structures not yet
confirmed to contain commercial reserves of oil and natural gas. The
prospects for these series to prove to be oil-and gas-bearing are evaluated
based on geological, geophysical and geochemical research.
Company analysis
16
Interfox Resources
The evaluation of natural gas reserves in newly discovered natural gas or
oil-and-gas deposits is carried out under the Russian reserves system using
the volume method.
Comparision of Russian and SPE classification of reserves*
SPE
Russia
Proven
A+B+C1
Recoverable
C2
Probable + Possible
C3
D1
Sub-commercial
Sub-commercial
D2
*This comparision is only approximate
Source: Interfox Resources & Redeye Research
Resources close by - Imperials block 70
Block 70, which Interfox block 71-1 is close to, had in the year 2008
estimated 2P resources of 145.5 mmboe in total. On the block there were 3
known structures with a median 2P reserve of 46 mmboe. This formation
shows that the area is resource rich and there should be good chances for
Interfox to find oil. We will use this information as a possible outcome for
Interfox license with the median reserve amount in our Base-case. The high
and low reserve amount will be used in our Bull- and Bear-case
On the neighboring block
70, there is an average 2P
reserve of 46.5 mmboe per
structure
2008 year reserve report Block 70
Block
1P
North Chertalinskoye
7.5
Glukhovskoye
9.3
Maiskaya
13.6
2P
46.5
25.3
73.7
3P
183.5
469.4
119
High
Median
Low
73.7
46.5
25.3
469.4
183.5
119.0
13.6
9.3
7.5
Source: Imperial Energy
Exploration Portfolio
Block 71-1.
Interfox currently hold a license for exploration and production. The license
is for Block 71-1 and is as mentioned earlier in the Tomsk region of Russia.
The license extends to an area of 34 square kilometers and is located on the
only known geological structure on the license block of 71. The license is
owned by the Company, BNG, that Mikhail Malyarenko operates, which is
owned by Mezhlisa Cyprys Resources Ltd that Interfox acquired.
Interfox license is located
on the only known
structure on Block 71
It is estimated that the hydrocarbons in the block are mainly located at
three different depths. In the layers of the Jura, the weathered zone and in
Devon. Devon sights are at a depth of about 3000-4500 m. Historically in
Russia there have been little exploration activities in the Devon layer. But
recently the interest has increased as the need for new resources is
increasingly growing. Nearby license areas with similar geology exhibited
significant flow of hydrocarbons from individual wells.
Company analysis
17
Interfox Resources
During the Soviet era there were drilling activities on the license block. Two
wells were drilled to a depth of about 4300 m. These wells were not drilled
with the intention of finding oil, but to investigate the geology of the area.
The two wells have been evaluated according to the current seismic
interpretation, old well logs and drilling protocols and are located around 4
km from the center of the structure. Both wells reportedly had uncontrolled
outflows of hydrocarbons. Since the two wells where not drilled in the
exploration purpose, it is likely that modern methods will provide a better
estimate resources available in the block.
Resource Assessments
Geoprime estimate C3
resources of 130 mmboe
OPC estimates in a midcase scenario that the
likely resources to amount
to 32 mmboe
Both OPC and Geoprime have both performed independent analyzes of the
seismic data available. Geoprime conducted its analysis in 2013 and it was
commissioned by BNG. Geoprime based its analysis on seismic data and
logs from wells in the Soviet period. They estimate that the license block can
contain as much as 134 mmboe and categorizes them in C3, which simply
means potentially recoverable. This is not an assessment of the reserves but
a resource assessment. Currently there are 134 mmboe of C3 resources
under registration to the Federal Subsoil Resources Management Agency.
The CPR currently available was performed by OPC for the purpose of being
included in a prospectus for the rights issue. The report was published on
the 14:th of January. OPC:s report is performed before the re-entry or any
on-field works were done and is based on the Geoprime report, old well
data and the some of the seismic data available. The block is estimated to
contain both oil and gas, but with a larger part of oil. This is in line with the
neighboring license block of 86 that is owned by Imperial Energy. OPC
estimates that there is in a mid-case scenario about 32 mmboe. We have
used these estimates as our likely future 2P reserve. The recovery factor for
the oil in place is estimated to 21-23 %, which OPC states is in line with oil
fields in the region.
OPC- CRP
Prospective Oil-in-place (mmbo)
Reservoir
Jurassic
Weathering Crust
Devonian Limestone
Total
P90
10,6
0,7
2,1
13,4
P50
18,1
2,1
7,8
28
Prospective Gas-in-place (bcf)
P10
29,3
4,6
28,3
62,2
GOR (scf/bbl)
1080
1335
501
Total
Estimated mmboe
P90
11,4
0,9
1,1
13,4
2,2
P50
19,5
2,8
3,9
26,2
4,4
P10
31,6
6,1
14,2
51,9
8,7
Prospective Recoverable Resources (mmbo)
Reservoir
P90
P50
P10
Jurassic
2,1
4
7
Weathering Crust
0,2
0,5
1,1
Devonian Limestone
0,4
1,7
6,4
Prospective Recoverable Resources (bcf)
GOR (scf/bbl)
P90
P50
1080
2,3
4,3
1335
0,3
0,7
501
0,2
0,9
P10
7,6
1,5
3,2
Total
Total
2,8
5,9
12,3
Estimated mmboe
0,5
1,0
2,1
2,7
6,2
14,5
Source: Interfox Resources
Company analysis
18
Interfox Resources
The amount of reserves we will use in our valuation and final estimates of
likely barrels of oil is 16 mmboe 1P and 32 mmboe 2P. This will change if
there is an updated CPR report or other new information indicating other
reserve levels. The new data will also affect our probability weight to
different outcomes in our reserve estimate.
OPC report estimates total
Case
mmboe
P90
16
P50
32
P10
71
Source: Interfox Resources
Newer analysis indicates much larger reserves
To be conservative we have used the stated CPR report as a base in our
valuation, despite that recent analysis done by both Geoprime and IOGT
indicates volumes much larger than the CPR.
IOGT confirms large volumes of hydrocarbons
Newly conducted analysis
by IOGT confirms
hydrocarbons on the
license
Just recently IOGT, part of Gazprom bank group, used a new technology to
evaluate well number four on 71-1. The analysis started at the 15:th of July
and the analysis confirms that there is hydrocarbons on the license.
Through a set of spectrometric methods, IOGT analyzed the reservoir’s
properties and determined the current oil, water and gas saturation levels.
The analysis done by IOGT confirmed the previous conclusions of large
reserves of oil and gas on the license block from independent CPR and the
historical data from the original works during soviet times.
Based on Geoprimes analaysis, 134 mmboe C3 resources are
under registration
Geoprime identified three interesting formations in the deeper Devonian
layers. This data was correlated with information from the logs of the two
existing wells. The result is that Geoprime sees four potential hydrocarbonsaturated intervals. Geoprime estimates in a mineral resource estimate
according to Russian standard that the license block in total contains 130
mmboe in category C3.
134 mmboe C3 resources
under registration
Based on Geoprimes resource assessment 134 mmboe of C3 resources have
been reported to the Federal Subsoil Resources Management Agency. As
such the company has 134 mmboe of C3 resources under registration.
Reverse stock split
Interfox are conducting a
reversed stock split of
1:100
Interfox recently decided to make a reverse stock split at a 100:1. Due to
technicalities the company will also issue about 200 000 shares before the
reversed split. The number of shares after the adjustment will amount to
25.3 million shares inclusive of the shares the Board has suggested to issue
to FEPI as part of the original acquisition of the project. In our valuation we
will use the number of split adjusted shares, the estimated enterprise value
will of course not be any different.
Company analysis
19
Interfox Resources
Valuation
Sector Overview
Our valuation of Interfox will be based on a relative EV/2P sales multiple
and EV/1P sales multiple and recent market transactions. To perform this
multiple valuation we need to look at some E&P companies that are
operational in the region. We have also included companies from Ukraine
and other parts of Asia to get a larger sample of companies.
Transactions in the region
In retrospect the Imperial
Energy acquisition was
expensive
Imperial Energy - Imperial owns neighboring licenses to 71-1, Block 70.
The company was acquired by the Indian state oil company (ONGC) in
2008. During the takeover, Imperial had 2P resources of 920 mmboe. The
price tag for Imperial landed at 2.58 billion USD. Imperial unlike Interfox is
a producing company. EV/ 2P multiple for the transaction was thus 16.2X
in SEK.
SN Gazdobycha - The company was bought by Alliance Oil in 2012 for
128 million USD. Admitted 2P resources at purchase were 112 mmboe.
SNGD had two gas licenses in an area of 1 323 km2 and was about 55 km
west of the city Kargasok. Kargosok is located in the Tomsk region's middle
and which is about 400 km from Interfoxs license. EV / 2P multiple for the
transaction was thus 7.4x in SEK.
The marketable
transactions indicate an
EV/2P multiple of 9.8
SEK, in the lower
spectrum of the sample
Tomskneft – In late 2007 Gazpromneft bought a stake of 50% in
Tomskneft, the largest producer in the Tomsk region. The price tag was
around 3.7 billion USD for the stake. This implies an EV/2P for the
transaction in the region of 4.4x in USD as Tomskneft had a total 2P reserve
at the time around 3 256 mmboe. In SEK at the time the transaction was
valued at around 22.2 billion which corresponds to an EV/2P multiple of
13.6X SEK.
Petroneft – Is a Russian company with operations in the Tomsk region. It
is listed both on London AIM and Dublin ESM markets. Petronefts main
assets are Block 61 and 67. Petroneft recently farmed out 50% of its main
block 61, with an estimated 2P resource of 117 mmboe, to Oil India Limited
for 85 million USD. The transaction valued the license at around EV/2P of
9.6X SEK. The company is currently traded at an EV/2P multiple of 9X
SEK.
Marketable transactions
Target
Tomskneft
Petroneft Block 61
SN-Gazdobycha
Imperial Energy
Buyer
Gazprom Neft
Oil India
Alliance Oil
ONGC
EV Buy price (mSEK)
22 200
578
832
15 480
75:e Percentil
50:e Percentil
25:e Percentil
2P reserves (mmboe)
1 628
60
112
920
EV/2P
13.6
9.6
7.4
16.8
14.5
12.1
9.8
Source: Companies and Redeye Research
Company analysis
20
Interfox Resources
Public traded companies
Dragon Oil - Dragon Oil is an international E&P company with
headquarters in Dubai. The stock is traded on LSE. The main asset areas
are Turkmenistan with other exploration assets in other parts of the world.
The company has about 908 mmboe of 2P reserves that consist of about
75% oil. The daily production is around 73 000 boepd (barrels of oil per
day).
Our public traded
companies is producers of
oil and gas, not pure
explores
Ukrnafta - Ukraine's leading oil and gas company with a total of six
regional production units. The company is operating in Ukraine and has its
headquarters in Kiev. Estimated 2P reserves are 800 mmboe, a daily
production of around 45 000 boepd.
RusPetro - Is an independent oil and gas development and production
company. Listed on the LSE and Operating in the province of
Krasnoleninsky Arch, in Western Siberia. Their main assets are three
license blocks with over 1.8 billion barrels of proven and probable reserves.
The company has about 225 mmboe of proved reserves and a large base of
about 1600 mmboe probable reserves. Their daily production is about 4
800 boepd.
Exillon - Operating in Russia and is an oil producer. Their main assets are
located in northern Russia. The company is traded on the London stock
exchange and is based in Urai. Estimated 2P reserves are 520 mmboe and a
daily production of 17 500 boepd.
We find it likely that an
sales multiple of Interfox
license will be below the
sample average as there is
an investment need to
commercialize the asset
Tethys petroleum – Is an E&P company with production in central Asia
and the Caspian region. The company is listed both on Toronto and London
stock exchanges.
Misen Energy - Misen Energy AB is a Swedish upstream oil and gas
company with headquarters in Stockholm. The Company is listed on the
First North List at NASDAQ OMX Stockholm and is dedicated to the
production of oil and gas, mainly gas, in the Ukraine. Misen has estimated
2P reserves of 115 mmboe and the daily production amounts to 14 700
boepd.
VG - Volga Gas is an exploration and production company focused on oil
and gas. The company is operational in Russia in the Volga region and is
based in London. They are traded on the London stock exhange. Estimated
2P reserves amount to 42 mmboe and have a daily production of 4 000
boepd.
Max Petroleum - Is an independent Oil and Gas exploration and
production company focused on the Republic of Kazakhstan. The shares of
the company are traded on the London stock exchange. The 2P reserves
amount to 11 mmboe and have a daily production of around 3300 boepd.
Company analysis
21
Interfox Resources
JKX - Is an exploration and production company with operations in
Russia, Ukraine, Bulgaria, Hungary and Slovakia. The company’s shares are
traded in London. Estimated 2P reserves amount to 105 mmboe and have a
daily production of 9 700 boepd.
We find a likely sales
multiple of EV/1p 18.9
SEK and EV/2P of 8.4
SEK
Jupiter Energy – Is an oil exploration and production company, listed on
the Australian Stock Exchange. Its main assets are located in the Mangistau
Basin, West Kazakhstan. The company has an estimated 2P reserve of 19
mmboe.
Shelton Petroleum - Shelton Petroleum is a Swedish company focusing
on the exploration of oil and gas in Russia and Ukraine. The company was
formerly known as Petrosibi and is traded on OMX Stockholm. Estimated
2P reserves amount to 9 mmboe and have a daily production of 850 boepd.
Relative valuation
Company
Dragon oil
Ukrnafta
RusPetro
Exillon
Misen Energy
VG
Max Petroleum
JKX
Tethys Petroleum
Petroneft Resources
Jupiter Energy
Shelton Petroleum
75:e Percentil
50:e Percentil
25:e Percentil
EV
(mSEK)
16 566
8 796
3 037
2 933
1 923
1 112
841
757
719
640
475
188
Geographic Region
Turkmenistan
Ukraine
Russia
Russia
Ukraine
Russia
Kazakhstan
Ukraine & Russia
Kazakhstan & Tajikistan
Russia
Kazakhstan
Russia & Ukraine
1P reservs
mmboe
225
195
95
39
5
29
14
12
10
3
2P reservs
mmboe
908
800
1 411
520
121
42
10
92
25
73
19
9
3 011
976
660
730
82
21
Gas/Oil
26%
95%
62%
97%
51%
0%
96%
56%
19%
1P/2P
ratio
16%
38%
79%
92%
57%
32%
55%
16%
51%
33%
EV/1P reservs
EV/2P reservs
13
15
20
29
156
26
51
56
49
63
18
11
2
6
16
26
89
8
28
9
25
21
57.4
38.7
18.9
25.9
17.1
8.4
Source: Bloomberg, company data and Redeye Research
Valuation Methodology
The valuation of Interfox Resources is based on the assumption that a sale
of the license is made within a period of approximately 12-18 months. The
question then is how much the company has to invest in order to
demonstrate their reserves and the price that the company can get for their
reserves in a sales situation.
We value Interfox on the
assumption that a sale
takes place by the end of
2015
Redeye uses a scenario-based analysis methodology. The scenarios are
based on three different outcomes. Base-case should be seen as the value
and target price that we believe that the company should trade at and is the
scenario that we assume in our discussion. Bear-case is a pessimistic
outcome of the company's future to demonstrate what this would mean for
the value of the company. Bull-case is thus a positive future outcome and
how this would affect the Company's fair value estimate.
The company will therefore be valued according to the principle that a sale
is made within about 16 months to a greater operational actor. The value
today of the company will thus be affected by the size of the reserves that
Company analysis
22
Interfox Resources
have been recognized on the license at the sales moment and the
investment need up until this date.
Redeye resources estimate
The OPC report estimated resources will be the basis for our valuation.
However, as these estimates are based on data that are relatively old and
drilling results that were not really for exploration purposes. Both
Geoprime and IOGTs analysis see a much larger likely resources then the
stated CPR as such we find the risks that the block will be “dry/none
economic” as small. We will make use of the resource estimates available
for the adjacent block 70, where Imperial Energy is the owner. The geology
of these two fields seems similar, and it is not unlikely that the amount of
reserves is comparable. We will therefore in our reserve estimate to put a
probability of 45% that resources amounts to the same average level as in
blocks 70 and 45% of outcome as the OPC estimated. We also add a case
where the resources is none economical to extract, thus this case have 0 in
reserve. In our Base-case we use a 10% weight to this outcome. We estimate
a likely weighted 1P reserve of 11 mmboe and 2P of 35 mmboe.
Our Base-case assumes a
likely 1P reserve of 11
mmboe and 2P of 35
mmboe
Resource mmboe - Base case
Block and company
Interfox Resrources block 71-1
Imperial block 70 average
Dry/none economic
Redeye estimat
P90/1P
16
P50/2P
32
P10/P3
71
Weight
45%
9
0
11
47
0
35
184
0
114
45%
10%
100%
Source: Redeye Research, Imperial Energy, Interfox Resources
Sales multiple
As Interfox do not have any income or cash flow the valuation will be based
on the assumed reserves that the company has at the sale of the license. To
get an idea of what the market is willing to pay for reserves Redeye have
analyzed public traded companies that have their main operation in Russia,
Ukraine and neighboring countries and their valuation compared to 1P, 2P
reserves. We have also looked at recent market transactions and what
valuation multiples those deals have been made at.
Both the market
transaction and relative
valuation derives with
similar EV/2P multiples
We believe that a company acquiring Interfox license will likely buy at a
lower multiple than the average market valuation, as there is a need for
investments in pipeline and new wells. Thus we find it likely that a possible
transaction will be made around the 25% percentile of our public traded
company’s sample. The relative valuation multiple will change over time
and it is possible that the market will value 2P resources either higher or
lower. The multiple is affected by sentiment in the market; risk appetite for
Russian assets and the oil price are all factors that affect the multiple. We
find a likely EV/1P multiple to be in the region of 19X SEK and EV/2P of
8.4X SEK.
Company analysis
23
Interfox Resources
When looking at recent market transaction in the region we arrive at about
the same implied sales multiple for the EV/2P. The outlier in the sample is
when ONGC bought Imperial Energy, in retrospect this acquisition is
considered to have been far too expensive. We estimate a likely EV/2P
according to the transactions to be in the region of 9.1X SEK.
In the valuation we will
use 18.9 for EV/1P and 8.7
for EV/2P
We find a likely EV/1P sales multiple to be 18.9X SEK and EV/2P of 8.7X
SEK. These multiples will then be applied to the estimated 1P and 2P
reserves for the license to derive an estimated sales value.
Sales multiple
Valuation
EV/1P relative valuation
Multiple
18.9
EV/2P relative valuation
EV/2P market transactions
8.4
9.1
Median EV/2P
8.7
Source: Redeye Research
Investment need
The estimated investment
need amount to 68 MSEK
The Company has budgeted that approximately SEK 68m is needed to be
able to show what reserves are present in the license block. We find it likely
that these investments will be done over a period of time; we have
discounted the future capital outlay with the assumptions that the SEK 68m
will be divided in five instalments.
Working interest
In our scenario Interfox
will have a right to 80% of
the sales value
In the event of an exit, a special adjustment model applies. This model is
described in the rights issue prospectus. Interfox Resources will have a
higher share of the sales price than what corresponds to its ownership of the
license and Mikhail Malyarenko (MM) share will then increase successively
as the number of official reserves according to Russian standard increases
at the time of the sale. In the event that there are 20 mmboe in official GKZ
reserves C1+C2 at the time of the sale, IFOX will have 80 percent and MM
20 percent. If there are 100 mmboe, IFOX 47 will have 69 percent and MM
31 percent. If there are 200 million barrels, IFOX will have 44 percent and
MM 56 percent. Our valuation is based on 2P reserves but in all our
scenarios we will use an 80% WI for Interfox as our estimated of mmboe
reserves is below 100 mmboe in all three cases.
Company analysis
24
Interfox Resources
Discounted sales value
Our discounted sales
value amounts to SEK
160m
We have looked at different multiples to estimate a valuation range of fair
values given our assumptions for Interfox. The sales value will then be
discounted using our WACC of 20%, determined by our Redeye rating. In
our Base-case we envision a likely sales value range from SEK 212-310m,
our median estimate is SEK 261m, with consideration of Interfox 80% WI
and discounted to today this value is estimated to be SEK 160m.
Multiples used and sales value
1P estimate
EV/1P Multiple
EV value (EV/1P)
2P estimate
EV/2P Multiple
11
18.9
350
350
300
300
212
250
250
200
200
150
150
100
100
50
50
35
8.7
EV value (EV/2P)
310
0
Median EV Estimate
Interfox part of sales value
Discounted sales value
261
209
160
0
EV value
(EV/1P)
EV value
(EV/2P)
Median EV Estimate
Source: Bloomberg, Companies and Redeye Research
We have included an
estimates burn rate of
SEK 0.3m a month and
the future investment
need in our valuation
When estimating our fair value we also have to take into consideration the
future need of investments and different overhead costs for running
Interfox Resources as a company. When looking at the interim reports we
find it likely that the company will have a cost per month in the region of
SEK 0.3m, this including the salary to the CEO and different administration
costs. The discounted value of future overhead cost is estimated at around –
SEK 4m. The stated future investment which the company is committed to
is SEK 68m. The discounted value of the future investment needs is SEK 59m.
Company analysis
25
Interfox Resources
Estimated fair value
We estimate the fair enterprise value to be about SEK 96 m, given today’s
available CPR report and relative multiple valuation levels. As the company
is debt free and has cash on hand after the recent rights issue our estimated
fair value for the equity is SEK 115m, this corresponds to a per share value
of 5.3SEK (0.053 before reversed split). The shares are currently traded
around 0.036 SEK, so our assumed fair value provides a margin of safety
around 56%.
Valuation - Base-case
Our estimated fair value
for Interfox amounts to
5.3 SEK per share (0.053
before reversed split)
License
MSEK
71-1 sales value today
160
Sum.
160
Discounted future investment need
Discounted overhead cost
-59
-4
Enterprise Value
97
Cash
Debt
19
0
Net debt
19
Equity Value
Per share
116
5.3
Share price (SEK)
Implied margin of saftey
3.6
49%
Source: Redeye Research
Value drivers
Future drilling activities
that confirms the reserves
is the likely value drivers
going forward
The main value driver going forward will be related to different activities to
enhance, prove and improve the likely reserves of 71-1. The activities can be
of different sorts. But most likely different drill results and new reserve
updates. This can impact the stock price both negatively and positively.
Interfox stock sky rocked when the company published the IOGT report
that confirmed that there are hydrocarbons on the license. Activities such as
this will have the largest impact on the share price going forward.
The value of Interfox will also change if the estimated sales multiples
change. These multiples are largely affected by the political climate and oil
prices. This is not something that the company can affect by them self but it
will have an impact on their valuation. Also, as Interfox is not a selffinancing company the way that the company will acquire capital will also of
affect the valuation of the company. If the financing can be made at
attractive terms this will most likely create a higher valuation.
.
Company analysis
26
Interfox Resources
Sensitivity analysis
In a case like this a sensitivity analysis over different variables in the
valuation model is very useful. The three main components that affect the
value of Interfox apart from the sales price when selling the project in our
model are the WACC, given by Redeye rating, the amount of resources at
sales date and the sales multiples. We have created sensitivity tables to see
how different scenarios play out.
The performed sensitivity
analysis changes the
variables WACC, resource
and sales multiples
As the sales date is estimated in 16 months the WACC does not have a
significant effect of the value, as the times is relative short. We can see that
a WACC of 24%, given our resource assumptions, would still imply a fair
value of 5.1 SEK per share. We can also note that a 30% drop in the
estimated resource, both 1P and 2P, would still imply a fair value per share
above todays share price. We believe that a valuation above 4.5 SEK per
share is relatively robust.
WACC
Fair Value Sek per share
Change in resource assesment
5.3
16%
18%
20%
22%
24%
-30.0%
4.5
4.4
4.2
4.1
4.0
-15.00%
5.1
4.9
4.8
4.7
4.5
0%
5.6
5.5
5.3
5.2
5.1
15.00%
6.2
6.1
5.9
5.7
5.6
30%
6.8
6.6
6.5
6.3
6.1
Source: Redeye Research
According to our analysis
a valuation above 3.7 SEK
per share (0.037 before
reversed split) is robust
The sales multiples have a large impact on the value of Interfox, we can see
that if the sales multiples would change to EV/1P of 17x SEK and EV/2P of
7X SEK this would implies a fair value of around 4 SEK per share. The
implied sales multiples can change if the political environment changes, to
the better or worse, or that the oil price increases/decrease. Overall we feel
confident with our assumed sales multiples and find that the valuation
above 3.7 is relatively robust.
Fair Value Sek per share
EV/1P
multiple
EV/2P multiple
13
17
18.9
21
25
3
2.7
3.0
3.3
3.6
3.9
7
3.7
4.0
4.3
4.6
4.9
Source: Redeye Research
Company analysis
27
8.7
4.7
5.0
5.3
5.6
5.9
11
5.7
6.0
6.3
6.6
6.9
15
6.7
7.0
7.3
7.6
7.9
Interfox Resources
Scenario analysis
Bull-case
In our Bull-case valuation we have used the stated resources of the CPR
report and the highest structure resource assessments for imperials block
70. We have put a 0% chance of failure, 30% to the CPR and 70% to the
high imperial case. This yields assumed 1P resources of 14 mmboe and 2P of
61 mmboe. This assessment must be seen as relatively probable and not at
all far too optimistic.
14 mmboe 1P and 61
mmboe 2P assumed in our
Bull-case, is not really
that bullish
Resource mmboe - Bull case
Block and company
Interfox Resrources block 71-1
Imperial block 70 high
Dry/none economic
Redeye estimat
P90/1P
16
14
0
14
P50/2P
32
74
0
61
P10/P3
71
469
0
350
Weight
30%
70%
0%
100%
Source: Redeye Research & Imperial Energy
We have used the same assumed sales multiples as in our Base-case, but as
the assumed resources are higher this implies a higher sales value. Our
estimate ranges from SEK 273 - 499m with a median estimate of the sales
value that amounts to SEK 386m, of which 80% is attributed to Interfox.
The discounted sales value amounts to SEK 236m.
Multiples used and sales value
1P estimate
EV/1P Multiple
14
18.9
EV value (EV/1P)
273
2P estimate
EV/2P Multiple
57
8.7
EV value (EV/2P)
499
600
600
500
500
400
400
300
300
200
200
100
100
0
Median EV Estimate
Interfox part of sales value
Discounted sales value
386
309
236
0
EV value
(EV/1P)
EV value
(EV/2P)
Median EV Estimate
Source: Redeye Research
Bull-case estimated fair
value of 8.9 SEK per share
(0.089 before reversed
split)
We have used the same amount of investment need and future overhead
cost as in our Base-case. Our estimated value in our Bull-case amounts to
8.9 SEK per share; this implies a margin of safety to today’s share price of
around 160%.
Valuation - Bull-case
License
MSEK
71-1 sales value today
236
Sum.
236
Discounted future investment need
Discounted overhead cost
Enterprise Value
-59
-4
173
Cash
Debt
19
0
Net debt
19
Equity Value
Per share
192
8.9
Share price (SEK)
Implied margin of saftey
3.6
147%
Source: Redeye Research
Company analysis
28
Interfox Resources
Bear-case
Our Bear-case uses the stated resources of the CPR report and the lowest
structure resource assessments for imperials block 70. We have put a high
risk of failure of 50% and equally weighted the chance of an outcome as the
CPR and block 70. This should be seen as a fairly pessimistic outcome,
given that there are already confirmed hydrocarbons at Interfox license.
This yields assumed 1P resources of 6 mmboe and 2P of 14 mmboe.
6 mmboe of 1P and 14
mmboe of 2P reserves in
our Bear-case
Resource mmboe - Bear case
Block and company
Interfox Resrources block 71-1
Imperial block 70 low
Dry/none economic
Redeye estimat
P90/1P
16
8
0
6
P50/2P
32
25
0
14
P10/P3
71
119
0
47
Weight
25%
25%
50%
100%
Source: Redeye Research & Imperial Energy
Discounted sales amount
of SEK 86m
We have used the same assumed sales multiples as in our Base-case, but as
the assumed resources are lower this implies a lower sales value. Our
estimate ranges from SEK 131 - 151m with a median estimate of the sales
value that amounts to SEK 141m, of which 80% is attributed to Interfox.
The discounted sales value amounts to SEK 86m.
Multiples used and sales value
1P estimate
EV/1P Multiple
7
18.9
155
EV value (EV/1P)
131
145
2P estimate
EV/2P Multiple
17
8.7
EV value (EV/2P)
151
155
150
150
140
145
135
140
130
135
125
120
Median EV Estimate
Interfox part of sales value
Discounted sales value
141
113
86
130
EV value
(EV/1P)
EV value
(EV/2P)
Median EV Estimate
Source: Redeye Research
We have used the same amount of investment need and future overhead
cost as in our Base and Bull-case. Our estimated value in our Bear-case
amounts to 2 SEK per share; this implies a drop from today’s share price
with about -46%.
Valuation - Bear-case
License
MSEK
71-1 sales value today
Our Bear-case estimated
fair value amounts to 2
SEK per share (0.02
before reversed split)
86
Sum.
86
Discounted future investment need
Discounted overhead cost
-59
-4
Enterprise Value
23
Cash
Debt
19
0
Net debt
19
Equity Value
Per share
42.1
2.0
Share price (SEK)
Implied margin of saftey
3.6
-46%
Source: Redeye Research
Company analysis
29
Interfox Resources
Summary Redeye Rating
The rating consists of five valuation keys, each constituting an overall
assessment of several factors that are rated on a scale of 0 to 2 points. The
maximum score for a valuation key is 10 points.
Rating changes in the report
This is Redeyes initiating research report.
Management 6.5p
The management team consists of individuals who have extensive
relevant experience of entrepreneurship, Russian Corporate, capital
markets and exploration companies. Management has complementary
skills. Jens Bruno as CEO is seen as very positive because of his long
experience of entrepreneurship in Russia and existing business
networking is seen as a great resource. Max Renard, the largest single
largest shareholder, was recently appointed as Chairman of the board is
seen as a positive. As management's interests are directly linked to the
shareholders because of the boards large ownership of the company.
Ownership 5.5p
The company’s largest shareholder is also the newly appointed Chairman
of the board. We see this as highly positive. We would like to see the CEO
and other board members as owners plus an institutional owner for a
higher rating.
Growth prospect 1.0p
There is considerable interest among major oil and gas companies in the
region to buy licenses from smaller exploration companies. In recent
years the reserves relative to production in Russia has been decreasing,
this means that there is a huge underlying need for new reserves for the
major production companies. Competition from neighboring fields is
moderate but larger producers can always focus their capital allocation to
other regions.
Profitability 0.0p
Since Interfox Resources is an exploration company, they have no
income which leads to the low score for profitability.
Financial strength 0.0p
Interfox Resources has almost no debt, but because the company does
not have any income this leads to the low grade.
Company analysis
30
Interfox Resources
Income statement
Net sales
Total operating costs
EBITDA
DCF valuation
Risk premium (%)
Beta
Risk-free rate (%)
Interest premium
WACC (%)
2012
0
0
0
2013
0
0
0
2014E
0
-10
-10
2015E
0
-5
-5
2016E
0
-5
-5
Depreciation
Amortization
Impairment charges
EBIT
0
0
0
0
0
0
0
0
0
0
0
-10
0
0
0
-5
0
0
0
-5
Share in profits
Net financial items
Exchange rate dif.
Pre-tax profit
0
0
0
0
0
0
0
0
0
-2
0
-12
0
0
0
-5
0
0
0
-5
Tax
Net earnings
0
0
0
0
0
-12
1
-4
1
-4
2012
2013
2014E
2015E
2016E
0
0
0
0
0
0
0
0
0
0
0
0
0
2
2
1
0
0
2
3
0
0
0
2
2
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
36
0
0
0
0
0
0
36
0
78
0
0
0
0
0
0
78
0
78
0
0
0
0
0
0
78
0
Valuation
EV
P/E
P/E diluted
P/Sales
EV/Sales
EV/EBITDA
EV/EBIT
P/BV
0
0
38
81
80
Share performance
1 month
3 month
12 month
Since start of the year
Balance
Assets
Current assets
Cash in banks
Receivables
Inventories
Other current assets
Current assets
Fixed assets
Tangible assets
Associated comp.
Investments
Goodwill
Cap. exp. for dev.
O intangible rights
O non-current assets
Total fixed assets
Deferred tax assets
Total (assets)
Liabilities
Current liabilities
Short-term debt
Accounts payable
O current liabilities
Current liabilities
Long-term debt
O long-term liabilities
Convertibles
Total Liabilities
Deferred tax liab
Provisions
Shareholders' equity
Minority interest (BS)
Minority & equity
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
15
0
0
15
0
0
0
15
0
0
23
0
23
0
0
0
0
0
0
0
0
0
0
81
0
81
2
0
0
2
0
0
0
2
0
0
77
0
77
Total liab & SE
0
0
38
81
80
2012
0
0
0
0
0
0
0
0
0
0
2013
0
0
0
0
0
0
0
0
0
0
2014E
0
-10
0
-10
0
-10
0
-10
-2
-36
2015E
0
-5
0
-5
1
-4
0
-4
0
-42
2016E
0
-5
0
-5
1
-4
0
-4
0
0
0
0
-48
-45
-4
Capital structure
Equity ratio
Debt/equity ratio
Net debt
Capital employed
Capital turnover rate
2012
0%
0%
0
0
0.0
2013
0%
0%
0
0
0.0
2014E
61%
63%
15
38
0.0
2015E
100%
0%
-1
80
0.0
2016E
97%
3%
2
80
0.0
Growth
Sales growth
EPS growth (adj)
2012
0%
0%
2013
0%
0%
2014E
0%
0%
2015E
0%
-69%
2016E
0%
0%
Free cash flow
Net sales
Total operating costs
Depreciations total
EBIT
Taxes on EBIT
NOPLAT
Depreciation
Gross cash flow
Change in WC
Gross CAPEX
Free cash flow
4.8
1.0
4.5
5.0
7.0
Cash flow, MSEK
NPV FCF (2013-2015)
NPV FCF (2016-2022)
NPV FCF (2023-)
Non-operating assets
Interest-bearing debt
Fair value estimate MSEK
%
%
%
%
132
-16
-27
0
0
89
Assumptions 2015-2021 (%)
Average sales growth
0.0 %
Fair value e. per share, SEK
EBIT margin
Share price, SEK
120,00
0.0 %
Profitability
2012
2013
2014E
2015E
ROE
0%
0%
0%
-7%
ROCE
0%
0%
-52%
-8%
ROIC
0%
0%
0%
-9%
EBITDA margin
0%
0%
248498
120000
%
%
EBIT margin
0%
0%
248498
120000
Data per share
2012
2013
2014E
2015E
%
%
EPS margin
0.00
0.00
-0.54-0.16Net
0%
0%
EPS adj
0.00
0.00
-0.54
-0.16
290698
88800%
Dividend
0.00
0.00
0.00
0.00
%
Net debt
0.00
0.00
0.68
-0.05
Total shares
0.00
21.60
21.60
21.60
2012
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-33.0%
50.0 %
-80.0 %
-62.5 %
2013
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Management & board
CEO
CFO
IR
Chairman
Financial information
Q3 report
FY 2014 Results
Q1 report
Q2 report
Analysts
Kristoffer Lindstrom
[email protected]
Company analysis
31
2016E
-4%
-6%
-4%
120000
%
120000
2016E
%
-0.16-0.16
88800%
0.00
0.11
21.60
2015E
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
2016E
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Growth/year
Net sales
Operating profit adj
EPS, just
Equity
Shareholder structure %
THE FAR EAST & PACIFIC INVESTMENT INC.
AVANZA BANK
SEB
SWEDBANK
NORDNET
HANDELSBANKEN
ERIKSSON, PETER
AFSNEE AB
Other owners
Share information
Reuters code
List
Share price
Total shares, million
Market Cap, MSEK
2014E
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
4.1
0.0
12/14e
0.00 %
0.0 %
0.0 %
0.0 %
Capital
13.3 %
6.6 %
6.1 %
5.4 %
4.9 %
4.7 %
2.6 %
0.2 %
54.5 %
Votes
13.3 %
6.6 %
6.1 %
5.4 %
4.9 %
4.7 %
2.6 %
0.2 %
54.5 %
Aktietorget
0.035
2159
75.5
Jens Bruno
Max Renard
November
February
May
August
18,
17,
15,
19,
2014
2015
2015
2015
Redeye AB
Mäster Samuelsgatan 42, 10tr
111 57 Stockholm
Interfox Resources
Revenue & Growth (%)
EBIT (adjusted) & Margin (%)
Earnings per share
Equity & debt-equity ratio (%)
1.2
70.0%
60.0%
1
50.0%
0.8
40.0%
0.6
30.0%
20.0%
0.4
10.0%
0.2
0.0%
0
-10.0%
2011
2012
2013
Equity ratio
2014E
2015E
2016E
Debt-equity ratio
Sales division
Geographical areas
Conflict of interests
Company description
Kristoffer.Lindström owns shares in the company : No
Bolagets affärsidé är att identifiera licensobjekt med potential att bli
betydande olje- och gastillgångar och därmed intressanta köp- eller
samarbetsobjekt för ett flertal potentiella produktionsbolag
Redeye performs/have performed services for the Company and
receives/have received compensation from the Company in connection
with this.
Company analysis
32
Interfox Resources
DISCLAIMER
Important information
Redeye AB ("Redeye" or "the Company") is a specialist investment banking boutique that focuses on small and mid-cap growth companies in the Nordic
region. We focus on the IT, life sciences, media, betting, clean tech and commodities sectors. We provide services within Corporate Broking, Corporate
Finance, equity research, investor relations and media services. Our strengths are our award-winning research and analysis department, experienced
advisers, a unique investor network, and powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the
supervision of the Swedish Financial Supervisory Authority.
Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare
and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients,
place financial instruments without position taking, provide for the safekeeping of financial instruments, accept funds with accounting responsibility,
provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial
instruments and to operate as a Certified Advisory business (ancillary authorization).
Limitation of liability
This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this
analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking
information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that
forecasts and forward-looking statements will materialize. Investors take all investment decisions independently. This analysis is intended to be one of a
number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional
relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting
from the use of this analysis.
Potential conflict of interest
Redeye’s research department is regulated by organisational and administrative rules established to avoid conflicts of interest and to ensure the
objectivity and independence of its analysts. The following applies:

For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial
Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are
not allowed to trade in financial instruments of the company in question, effective from the day that the decision is taken to produce a research
analysis on the company and the two banking days after the report is published.

An analyst may not engage in corporate finance transactions without the express approval of management, and may not receive any
remuneration directly linked to such transactions.

Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an
underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports
should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance
of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.
Redeye’s research coverage
Redeye’s research analyses consist of case-based analyses, which implies that the frequency of the analytical reports may vary over time. Unless
otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of
significant changes in market conditions or events related to the issuer/the financial instrument.
Recommendation structure
Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating
model, Redeye Rating, in which each company is analysed and evaluated. This analysis aims to provide an independent assessment of the company in
question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decisionmaking.
Redeye’s recommendations for technical analyses are: Buy (Köp) and Sell (Sälj). The investment horizon for these recommendati ons is very short, at
usually less than 1 month.
Redeye Rating (2013-12-12)
Rating
Management
Ownership
18
39
9
66
14
46
6
66
7,5p - 10,0p
3,5p - 7,0p
0,0p - 3,0p
Company N
Growth
Prospect
8
27
31
66
Profitability
9
41
16
66
Financial
Strength
16
41
9
66
Duplication and distribution
This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or
legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations.
Copyright Redeye AB.
Company analysis
33