Guy Norton reports from Almaty on the story behind Max Petroleum, a small, independent oil company in Kazakhstan gearing up to go head to head with the global oil majors.
Max Petroleum was only incorporated in April 2005 but it is fast proving that small, independent oil and gas companies have a bright future in Kazakhstan – and can more than hold their own against the global majors that have hitherto been the dominant market players in the resource-rich central Asian state.
Within a matter of months the company has already acquired rights and licences to explore and develop four highly promising oil blocks in the country, completed an initial public offering – achieving listings on the London and Frankfurt bourses in the process – placed a further block of shares through an institutional offering over the deadzone Christmas holiday period, and most recently completed a highly successful convertible bond offering. And all this before a single drop of oil has been extracted and sold.
As Philip Morgan, an analyst at WH Ireland Stockbrokers, noted in a research report entitled The birth of a giant?, published just after Max Petroleum’s IPO: “Inside a decade, all being well, this company could even become a major. The situation appears unique and the case for early investment is compelling. It could be quite a ride.”
Birth of a giant?
It all seems a long way from the time when the company’s two founders – executive chairman James Jeffs and chief executive officer Steve Kappelle, both oil industry veterans with extensive experience of working in Kazakhstan – were approached by Kazakhstani industrial holdings group Samek. In 2003, Samek had secured the rights from the Kazakhstani energy ministry to develop fields known as Blocks A&E and East Alibek in western Kazakhstan.
Samek had previously been unsuccessful in its attempts to attract a partner to help it extract potential oil and gas reserves in its contract areas, despite the fact that the East Alibek field, for example, is next to the Alikbekmola field, which is estimated to have reserves of about 400 million barrels.
Under the terms of their agreement, Max Petroleum would help provide Samek with the necessary international expertise and funding to exploit its assets, while Max acquired an 80% interest in the fields at the same time as being able to secure the political clout of having Samek on board as a strategic partner.
This has already resulted in Max Petroleum securing a cooperation agreement with Kazakhstani state-owned oil and gas company KazMunaiGas (KMG).
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“In the Astrakhansky field alone, there could be over 1.2 billion barrels of oil – to put that in context that’s equivalent to 10% of Shell’s worldwide output” Steve Kappelle, Max Petroleum |
Under the accord, Max Petroleum will gain access to well log data from KMG that will make it much easier to find suitable locations for reopening old wells and identify the likely position of new wells in parts of its Block E field. It will also benefit from access to KMG’s oil treatment facilities for annual production of more than 2 million barrels of oil a year for the period 2006-10, with privileged access thereafter at the nominal cost of oil treatment. In return, KMG will hold on to the rights to retain minor parts of the Block E where it had previously produced small amounts of oil – less than 200 barrels a day on average.
Furthermore, the presence of Kazakh investors as major shareholders is widely believed to have helped Max Petroleum acquire the rights to develop a further field at Astrakhansky, located alongside the Russian-Kazakhstan border and next to massive multi-billion barrel fields being developed by Russia’s Gazprom and Kazakhstan’s KazMunaiGas.
According to Tim Whittaker, head of drilling operations at Max Petroleum in Almaty, where the company now has a staff of 70, the breakneck pace of development is testament not only to the company’s own inherent strengths and qualities but also provides a prime example of what is achievable given the largely stable and predictable investment and operating environment in Kazakhstan.
“The government is still very keen on getting foreign investment into Kazakhstan,” says Whittaker. He adds that fears of a more foreign investor-unfriendly stance by the Kazakhstani government following the passage of a new investment law in 2003 have largely proved unfounded, if Max Petroleum’s experience to date is anything to go by. “We’ve had no problems so far securing all the necessary licences and approvals for our operations here,” says Whittaker, adding: “We have a genuine wish to work closely with the government as the terms and conditions available here for oil companies are still a lot more attractive than in other countries.”
Social responsibility
Steve Kappelle, Max Petroleum’s chief executive, adds: “A degree of humility when you enter any emerging market is no bad thing in our opinion and you need to fulfil all your social obligations as well.” He says that some of the foreign oil companies that have come to Kazakhstan in the past have acted in a high-handed manner with government officials, while neglecting the social needs of the often extremely poor local populace in the areas where they have set up operations. “That’s not something we’d ever do,” Kappelle says.
Although there have been widespread criticisms of the slow pace at which the bureaucratic wheels in Kazakhstan have turned in the past, Whittaker says that the regulatory and legislative environment is clearly changing for the better. “There’s a step change happening at the state agencies here in Kazakhstan, with a younger, western-educated generation of technocrats replacing older, Soviet-era-educated bureaucrats.”
As a result Whittaker believes it is now much easier for start-up oil and gas businesses in Kazakhstan to accelerate the pace of their development towards being fully fledged producers, a vital consideration if Max Petroleum is to reap the full benefits of the current investment vogue for commodity plays and attract the necessary capital to fund the company’s move from an exploration to a production company. “Previously it would normally have taken two to three years to get as far as we have in just over a year.”
Consequently, as Euromoney went to press, Max Petroleum was hoping to start drilling the first of 10 shallow wells it hopes to establish this year, with a further 25 sites planned for next year. According to Whittaker the relatively low drilling costs of shallow wells – estimated at about $750,000 per well – alongside surface production facilities costs of $350,000 per well, mean that the full development costs of a single well can often be covered by less than a month’s worth of production. “With our shallow wells production we can generate income within a very short timeframe,” he says.
Kappelle says that in some parts of the company’s acreages geologists have only had to stick a metal spike two feet into the ground before oil has come bubbling up. “It’s absolutely crazy, like something out of the Beverly Hillbillies show,” he says.
As a result of being able to bring on stream low-risk, low-cost oil reserves, the company hopes to be able to fund the higher risk, higher cost of intermediate and deep well drilling from its own capital.
Having raised £11.7 million ($22.1 million) in pre-IPO funding, much of the company’s current capital has come from foreign investors with the successful completion of an IPO in October 2005. That transaction, lead managed by ODL Securities and WH Ireland Stockbrokers, floated on the Alternative Investment Market of the London Stock Exchange after the issue of 73.9 million of ordinary shares at an initial price of 35p. It also gained entry to the Xetra small-cap market segment of the Deutsche Börse in Frankfurt.
Given the strong development prospects of the company, it was able to raise a further £37.65 million over the Christmas period with an institutional offering of 37.53 million shares at 100p, arranged by Mirabaud Securities.
Kappelle says that to be able to place further equity over the Christmas period at 100p per share, just seven weeks after the company first came to the market at 35p a share, was a great achievement and speaks volumes about how the company is viewed. “We are obviously delighted that institutions recognized the inherent quality of the assets we have.”
As of mid-August shares were trading at about 111p to give Max Petroleum a market capitalization of some £370 million, still way short of the current 190p target price set by the firm’s brokers.
Given the strong performance of the company’s equity to date it has been able to attract a strong investor following, with blue-chip names such as Credit Suisse and Lehman Brothers now holding Max Petroleum stock.
Morgan at WH Ireland believes that it is likely that other major US funds are likely to wake up to the Max Petroleum story and that the share price could benefit from massive buying interest as a result.
The company was also able to complete a well-received convertible bond offering at the beginning of August, with the initial offer size of $65 million raised to $75 million on the back of strong investor demand.
Following the launch of the convertible, Max Petroleum will be able to meet the costs of all of its shallow, intermediate and deep drilling commitments through 2007, with the aim that the company should be self-funding by 2008. “If only half our wells are successful, the company will still be more than comfortably funded,” says Whittaker, adding: “Our aim ultimately is not to have to go back to the markets to raise more capital.”
That could all change of course if Max Petroleum were to strike it lucky with one of its deep well projects, in which case the company acknowledges it would probably have to turn to a strategic partner to help it exploit such an opportunity.
“We’ve already had informal discussions with a number of the oil majors about possible cooperation in the future,” admits Whittaker, adding: “The big oil majors are more than happy to let the small independents do a lot of the spadework here in Kazakhstan and then come on board if there is a big find.”
If that happens, Max Petroleum and its investors will at least be able to afford golden spades. As Morgan at WH Ireland noted in a recent research report, if the company were to find 500 million barrels of oil, that could give it a market capitalization in the order of £1.6 billion, or more than 600p per share.
Kappelle is even more bullish about the potential size of the finds the company could make. “In the Astrakhansky field alone, there could be over 1.2 billion barrels of oil – to put that in context that’s equivalent to 10% of Shell’s worldwide output.”
Now that would really mean quite some payback for those lucky institutions that had the faith to pay 35p per share last October when the company was still very much in an embryonic state.
