Buy
September 4th, 2006
Price: NOK 22
Ticker: AOGC
Listing: Oslo SE, OTC
Aladdin Oil & Gas Company AS
We initiate our coverage of Aladdin Oil & Gas Company (AOGC) with a BUY
recommendation and a 6 month target of 40 NOK. AOGC is a Norwegian company
with a 71,5% ownership in OOO Geoteknologia, a Russian oil company with two
leases in the Timan Pechora region in northwestern Russia. Seismic surveys and
well data indicate that the leases contain 83,5 mill bbls probable- and 3,2 mill bbls
proven reserves. We see few hurdles in setting up a highly aggressive drilling
program, and we believe this would result in an outstanding production growth and
high cash flows from the company.
DCF indicates an upside of 173%
Discounting the cash-flows from our estimated drilling program generates a value of 60
NOK/share. As far as we can see, we have added reasonable margins to all input variables.
Our estimated WTI oil prices are $ 70/bbl for 2nd half of 2006, $65/bbl for 2007, $60/bbl for 2008
and $55/bbl for 2009 and onwards. As we expect relatively stable flows from the wells, we have
forecasted cash-flows till the end of 2016. We have furthermore assumed a cost-inflation of
12,7% till 2012 and 8,7% from 2012 till 2016.
The company will experience a high tax pressure. There is however a chance that the central
government reduces the “production tax” (in addition there is “export tax” and corporate tax). A
reduction in the tax rate would lift the DCF estimate considerably.
AOGC’s estimated reserves are traded at a large discount
AOGC’s estimated proven and probable reserves are currently priced at only $0,7/bbl (market
capitalization/estimated reserves). This is extraordinarily low, even compared to competitors in
Russia. We believe an external audit of the reserves will boost the share price to ensure
consistency between the implicit value of AOGC’s reserves and the implicit value of competitors’
reserves. When an audited reserve report is present we believe the company wi