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Regal Shareholders Have a Lot to Look Forward to in 2010

There are only a few oil and gas companies on AIM who can boast production of over 1,200 barrels of oil equivalent per day (boe/d) of gas and even fewer who can say they own 100% interests to assets containing proven and probable (2P) reserves of over 165 million boe. In fact as of last month, Regal Petroleum (AIM: RPT)(“Regal”) are now the largest exploration and production (E & P) company listed on AIM on a 2P reserves basis.

This was one of the main themes of an analyst presentation held by the group last month and rightly so. Their 2P reserves are almost equivalent to those of mid-tier oil and gas E & P companies listed on the FTSE, so it should come as no surprise to investors that the company is mulling a move up to the main board.

The group also outlined the strong position they are in with no outstanding debt having completed a placing in June for $104 million.

RPT’s circumstances haven’t always been so rosy however after former CEO, Frank Timis, told shareholders of a giant hydrocarbon discovery which never materialised back in 2004.

What followed was shareholder revolt, legal suits, several board changes and ultimately the complete re-branding of the company to try and clear their name. In November this year a fine of £600,000 marked the end of one of the worst chapters of the Regal story; management commented that they were glad to be finished with it.

Since then management seem to have stepped up efforts to try and gain favour with shareholders through ensuring steady communication of accurate information and in the large part delivering targets on time, which on the whole is not an easy task for an oil and gas E & P company.

The group’s current focus is their Ukrainian assets, namely the Mekhediviska-Golotvschinska (MEX-GOL) and Svyrydivske (SV) gas and condensate fields. The upper layers of these combined fields are known as the B-sands and are of Visean age. This is where the company delineated their current reserve of 169 million boe from and production is underway.

The company however carried out extensive seismic work on deeper layers of these fields underneath the B-sands in 2007 and 2008 in what is known as the T-sands (Tournaisian age) and D-sands (Devonian age). The company estimates that the B and T sands alone contain in place resources of 860 million boe.

Not surprisingly, the potential to convert some of this resource to reserves has led to an intensive drilling and defining program on the area, with an eagerly anticipated resource update expected mid-2010. If the figure delineated is anywhere near the estimated resource this would be transformational for the company and would no doubt act as their ticket to the main index.

Meanwhile the drilling program should also lead to an increase in production as further wells are being drilled on the B-sands. At time of writing there have been a few minor hiccups involving an obstruction in one of the wells slowing down the definition process of the deeper T and D-sands. In addition one of the new wells is producing gas at a slower rate than anticipated.

The resulting lower share price is unlikely to be maintained however with such significant and abundant news flow expected over the next 6-12 months. Furthermore analysts have commented that the slow gas flow from one of the new wells is not indicative of the field as a whole.

Out with Ukraine the company also has operations in Romania and Egypt. In Romania the company have a 100% interest in the Barlad block and a 50% interest in the Suceava block comprising an area in excess of 10,000 sq km.

So far the presence of hydrocarbons has been confirmed at the Barlad block though was deemed to be non-commercial. Further drilling is planned and the license has been extended to Sept 2010. At Suceava hydrocarbons have also been confirmed though work is still ongoing here to see if it will be commercially viable. This license has been extended to July 2010.

In Egypt the company has a 25% interest in the East Ran Budran concession which has been appraised and oil was discovered on test. Work is ongoing and the joint venture partners, Apache Khalda Corporation estimate there to be 5.2 million barrels of oil.

Overall, the company look to be fundamentally strong with a healthy balance sheet and good cash flow. In the short term the company looks to benefit from increased production, arguably the most significant resource update in the company’s history and a possible main board listing.

Furthermore the grip of the recession appears to be loosening resulting in increased gas demand and proportionately increasing gas prices.

Longer term the outlook for gas prices in the Ukraine look very attractive. Gazprom the Russian gas giant recently said it expects gas consumption in Europe to increase by around 12.5% by 2020 and by over 58% in Asia-Pacific. Not to mention Regal’s gas reserves will be most welcome in Ukraine where a decreased reliance on Russia will be of immense help considering the ever constant quarrelling between the 2 countries with regards to gas.

Thus 2010 looks set to be an important and equally exhilarating year for Regal which could potentially see them catapulted into the division of mid cap oil and gas producers.

As with most AIM oil and gas stocks there are risks involved. However owing to the substantial reserves already in place it could be argued Regal are one of the least risky AIM stocks that still pack considerable upside potential.

Disclosure: The author holds no positions in the company