Roxi Petroleum (AIM:RXP) AGM Report

First the actual formal AGM:

Chaired by Clive Carver. All motions passed without incident, as you might expect when all of them had ~197m of proxies behind them. I did raise my eyebrows at Res 5 that allows the management to allot 190m shares – quite a big dilution, but it was justified by the possible need to use the GEM facility (more on that later) and exercise of warrants and options.

Now, the meaty bit: the presentation by Duncan McDougall. It is difficult to over-estimate the calm assurance in which he delivered the presentation, his openness to answering questions and being extremely informative. The meeting only had about 3 PI's, one corporate proxy and a few City hangers on (apologies to any reading). Bob and I asked most of the questions, in what was felt like a fairly cordial boardroom setting. Couldn't be better.

I think the best way of going through this is to step through the presentation as it was given ( http://www.roxipetroleum.com/PDFs/RoxiAGMDMCDJuly2009.pdf ), and chip in any further info that came up wither in the session, or afterwards in a brief chat with some of the directors.

Slide 4

They've essentially spent the last year raising finance. They've largely shunned placings and rights issues because the cost of capital would have diluted the company very, very significantly. So, they've gone the farm-out route and seem proud of their achievements. It seems that now they are funded up for a very significant exploration programme. Rob SSchoonbrood emphasised on more than one occasion after the meeting that the GEM facility was an "insurance policy" and he did not intend to use it as it was "very expensive money". I believed him, but I guess we should all note that no CEO is ever going to pre-announce using GEM, as it would make it even more expensive money. But as I see it, at the moment there is no need to use it.

Slide 5:

One of my concerns about Galaz was taken away, in that now we have had confirmation of the extension to the exploration phase to May 2011, which leaves plenty of time to drill up the deeper target(s).

Slides 6-10: BNG
Currently 2C reserves of 42 million barrels of oil (mmbo) – 40mmbo to Yelemes and 2mmbo to G54. There is not enough reliable data at present to declare 2P reserves to SPE standards. This will come from a combination of the 3-D seismic interpretation and new drilling. Spangle: the picture of G-1 was not mentioned on that slide, but elsewhere they stated that it previously tested at ~2,000barrels of oil per day (bopd) from a sandstone play – I've no idea what pipework they had in place for that test. G54 tested at 200bopd.

The significance of the blue dot-dash line is the "Transition Zone". Basically areas to the south and west of the line suffer flooding from the Caspian in the Spring. So, they need to plan operations in these areas carefully (for instance they are planning 3-D seismic over that area now. The red zone represents the carbonates distribution boundary – I didn't quite pick up on the significance of this, but Bob may have done.

Bob asked about the Max Petroleum interpretation of the geology, that all of the pre-salt and post-salt oil comes from the same, deep source rock. Duncan McDougal confirmed this as their understanding and said that the underlying Carboniferous source rock may be up to 40,000 feet thick (yes taller than Everest).

They are interested in acquiring the "coffin-shaped" bit in the middle, and believe it may become available in 2010. The other two excluded areas are producing fields (although there as a hint the southern one may be shut-in) and are not available for exploration. Maybe available to acquire as producing assets(?). However, significantly, they both have pipelines from them, making getting any new oil discovered to market (some 30-40km to the export facility) easier than it might otherwise be.

They expect the deeper wells to 4,000m carboniferous targets to cost $10-12m a throw, with wells in the southern part being perhaps 10% more than that with extra concrete pads and raised roads being needed to combat flooding. For these wells they are designing the wells, the casing and well head to prepare to encounter H2S, but they do not expect to encounter H2S, as historic wells in the immediate area have been H2S free.

They are looking to define the well locations later this year and trying to design wells that will hit the river channel features (shown on slide 9 – they very quite excited about these features) that they hope will produce 1.5mmbo each over their life rather than 0.5mmbo in other locations. Looking to target ~3 wells in the G-54 Jurassic closure area and possibly ~1 deep well in the G-7 area – a 4-way dip closure – I think this may be subject to change. I'm not sure but I think this well may target the area shown on the seismic map outlined in light blue that G-1 hit.

Slides 11-13: Galaz
Recently extended the size of this acreage and extended the exploration time horizon. It is a bit hidden on the slide, but KazRosMunai have invested about $5.5m so far, with a potential for $17m. But as what they have found in the Upper Jurassic is ahead of expectations, they are not going to proceed with KazRosMunai funding for drilling the mid-Jurassic target. So, Roxi's share of the acreage is going to remain at 43.3% (higher than the previously announced post-farm-in expectation of 30.09%).

They are hoping for 2C reserves in the region of 30mmbo. This submission will be in the next couple of weeks. They will start reporting reserves in both Soviet GOST standards (to satisfy Kazak authorities) and SPE standards (to satisfy investors). Hoping for pilot production approval of 1,200-1,400 bopd by end of the year.

Again they are excited about the "river channels" and they map the field along that channel. They plan to drill 4 more wells, probably in the in the yellow sections of the channel to prove up more reserves and better define the OWC. NK-4 had water ingress that they have solved with a diesel-cement squeeze (they described that as a bit crude). They are considering "coil tube side-tracking" (I can guess what that is, but maybe Spangle can elaborate).

The NE green channel will need water injection to fully produce. It is a bit of a problem where the water is going to come from, now they've sealed off NK-4.

They intend to extend the seismic grid to the whole Galaz area, and believe there are a large number of targets.

Another operator is going to drill a deeper well to the West of the northern-most apex of the triangle to ~2,500m. I don't know who that is, but the results will be no doubt interesting to RXP as they plan their own deeper well programme. Another operator also holds the "zig-zaggy" triangle near the top of the acreage.

I asked about how wise it was to sell off Galaz when it was on the verge of significant production A reference to the MoU with LG of Korea), and the business needs income. The reply was that they will only sell if they get "full value" representing the reserves they have found and an element of upside. It may make sense to monetise now the next 20 years of production. Sounds to me like they know what they are doing. Additionally, they expect some production from Yelemes later in the year, so they would still have an income stream if they ended up selling off Galaz.

Slides 14-16: Ravninnoe (pronounced Rav-nina)

They are planning a new well here (#20) which will be a slightly offset re-drill of the old well #8, which tested ~800bopd. 3,800m td, but they will log the secondary Jurassic target on the way down. Drilling contract awarded, they've purchased the long-lead items and are working on sorting the services contracts. Probably spud in October, looking to produce at commercial rates. Although I don't recall it being mentioned during the meeting, looking at the slide 15 now, it looks like they've got two targets in the mid and lower Carboniferous which looks exciting.

Slide 17: Beibars

When they acquired the acreage they didn't think that there had been any Soviet-era exploration. But they have now "found" two old wells. The first encountered oil and the second flowed gas at I think he said 500,000scfgpd. But the block is currently under a "military polygon" which has invoked "force majeure". So, no further activity until this is resolved. They didn't give a timeline and I didn't ask.

In the post presentation questions I asked about two things:

1) ADA. They haven't invoked repayment of their deposit as they are still interested in the asset. A deal may be done, but a different shape to the prior agreement.

2) Arawak/Vitol. I asked if we should attach any significance to them buying in. Rob Schoonbrood said it was for "internal Kazak reasons" and done at the "Arawak level", not the "Vitol level". He also said that any bid for the company would have to be agreed by major shareholders. At that point the meeting looked towards Kuat Oraziman, and he just laughed. I don't think he is interested in selling any time soon.

Bob also asked about when a full estimate of "unrisked resources" would be made available. They understood the question and what he was getting at. The answer is that to do that they need data, both from interpretation of the seismic and some drilling. Once they have that, then it will be provided. CC also mentioned that now they have the funding in place and a programme taking shape they will consider stepping up the PR campaign. Bob suggested Oil Barrel and Pro-active Investors as suitable venues, and I did get the impression a broker note was in progress.

So, overall I came away impressed with the people, with what they are doing and the future plans. In my view this is an "investment stock" not a "trader's stock". If I had more cash available, I would be buying more, but I don't, so I'm just sitting tight and watching the story unfold over the coming months and years. Inevitably, the share price will go up and it will go down, but what matters is where you buy at and what you eventually sell for.