Eurasia - Drilling Three Reasons To Get in

Kalim Aziz
February 27, 2015
  • Eurasia Drilling is the largest driller in the Russia with roughly 1/4th market share of meters drilled
  • The Company is currently under the process of being bid and delisted @ US$ 22 per GDR
  • At current price of US$ 16.5-17.0 per share, it is decently valued in absolute terms as well as in terms of its history

The largest driller in Russia...

Eurasia Drilling is the largest driller in the Russia with roughly 1/4th market share in terms of meters drilled and is the local leader of horizontal drilling in Russia as well. With more than 260 rigs, it drilled roughly 6 mil meters in 2014.

Chart 1: Net Profit Momentum

...being delisting from the Stock Exchange

The Company is currently under the process of being bid and delisted. Schlumberger and the current majority shareholder has offered US$22 per GDR. As it stands, the federal antimonopoly in Russia is has intervened to vet the deal and has asked for a 90 day period to conduct due diligence to come to a decision.

Schlumberger and the majority shareholder did not seek federal antimonopoly approval prior to making the offer as they considered that given the control will remain in the hands of majority shareholder as it is now, there was not a need to get a permission after approvals from the board etc.

Later, Federal anti monopoly has come out indicating that it is less relevant as monopoly issue but a strategic industry issue so they have referred it to the concerned authorities. Given that Schlumberger does not have rigs/drilling operations in Russia onshore, there is no overlap and therefore no monopoly issues.

There are no guarantees whether this sufficient reasons to believe that the deal will go through but we understand that the powers that be at Rosneft and Lukoil do not appear to be against this transaction.

As far as strategic industries law is concerned, oil services do not fall under this category. On balance, there should not be a reason to reject the deal as this would be a fdi into Russia after a decently long time, but it is difficult to call. Schlumberger has all its approvals from the board etc.

Russian's drilling market is worth US$ 10 bil

Overall Russian market size in terms of capex for well construction, work-over and servicing and side-tracking is just shy of US$ 20 bil of which drilling is around US$ 10 bil.

Considering the total crude oil output from Russia on an annual basis of 3.8 bil barrels, Capex associated with well construction, work-over and servicing, and side-tracking is about US$ 5.22/barrel or drilling is about US$ 2.6/barrel.

On an average, Russian oil is produced with roughly 100-110k wells in operations and with an estimated natural decline rate of between 9-13% implies, annual drilling requirement of around 10-12,000 wells. Or around 20-22 mil meters.

Valuation

At current price of US$ 16.5-17.0, it is decently valued in absolute terms as well as in terms of its history. The only time it was trading below these multiples was in 2009 (when oil price collapsed to US$ 36/barrel)

Kalim Aziz
Kalim Aziz
Senior Analyst at Duet Asset Management LLP, London
Mr. Kalim Aziz spent more than 20 years analysing companies in the global emerging markets. Kalim served as a Head of EMEA Research managing over 30 analysts at ING Groep in London and later headed Equity Research of the EMEA Region at UniCredit Banca Mobiliare in London together with Centralny Dom Maklerski Pekao in Warsaw and Koc Yatirim in Turkey, altogether covering more than 100 companies in the region. In 2006, he moved to the buyside as a Co-fund Manager of Kairos Eurasian Fund with Guido Brera. Kalim now helps managing equity fund at Duet Asset Management in London. Besides, he owns a consultuancy company Kiradvisory Limited, an affiliate of Helgi Library on various analytical work.