Victoria Oil & Gas customer site

Why I’ve sold Victoria Oil & Gas plc

Victoria Oil & Gas customer site

Victoria Oil & Gas is using its producing Cameroon gas field, Logbaba, to create a gas supply network for industry in the Doula region of Cameroon (image copyright Victoria Oil & Gas).

I’ve long been a bull of Victoria Oil & Gas plc (LON:VOG), but after reading the firm’s final results yesterday, I sold my shares. Here’s why.

Missing info: In my view, the worst thing about Victoria’s results was what they didn’t say. For example, the firm did not confirm the average price per unit sold of gas or condensate, although it previously has done.

This seems bizarre; I’ve never seen an energy or resource company publish annual results without specifying the average price per unit sold. Obviously the price of condensate will have fallen with the oil price, but has the price of gas fallen too, perhaps for new customers? We don’t know.

Accounting notes: Victoria’s accounts also raised some questions, due to the firm’s decision to publish them without any supplementary notes. As with gas prices, notes were included (as normal) in the interim results earlier this year, but were missing yesterday. Why?

I expect they will appear in the firm’s annual report, due in the next couple of weeks, but their absence from the final results RNS yesterday makes me uneasy, especially given the glacial pace at which Victoria publishes its accounts, nearly five full months after the firm’s 31 May year end.

In my view, there are only two explanations for this: Victoria is trying to hide some bad news for as long as possible, or its financial controls are so chaotic that its only just managed to scrape together some coherent figures, one month before the next half-year ends. Either way, I’m not impressed.

Accounting questions: I may not be a forensic accountant, but I reckon I ought to be able to spot the $20m cash inflow from RSM on Victoria’s cash flow statement, given that the firm only did $14m of revenue last year.

I can see an arbitration-related adjustment on the income statement, but why isn’t this cash influx clearly represented on the cash flow statement? Again, notes are needed to make sense of what’s happened to the $20m payment.

There are other questions, too: what, for example, was the $3,978,000 ‘other loss’ recognised in the income statement? The lack of financial detail in these results is shocking, in my view.

How long? I accept Chairman Kevin Foo’s comments that ground-breaking engineering projects always take longer than expected — having been an engineer myself, I understand this. However, the firm’s glacial reporting appears to be matched by the speed at which it pays suppliers and receives payment from customers.

Things don’t seem to be improving, either, as debtor days are rising and creditor days are falling. If this trend continues, a cash crunch could follow:

2013 2012
Debtor Days (average time VOG takes to get paid by customers) 348 days 305 days
Creditor Days* (average time VOG takes to pay suppliers) 443 days 606 days

*Estimated using cost of sales

Of course, things may have changed — for better or worse — in the five months since the period these figures refer to. It appears to be a struggle for Victoria to publish its annual results before the end of the first half — and that’s the problem. I no longer feel I have any idea what’s going with this business.

The company’s annual report, which is due to be made available in the next couple of weeks, may answer some of my questions, but then again, perhaps there’s a reason the company is so tardy.

Back in January, Victoria promised that the results of the Deloitte review of the RSM settlement payment would “be completed within 90 days”. Nine months later, and we’re told Victoria and RSM are reviewing the draft — but we’re still in the dark.

Will some of the $20m have to be repaid to RSM? Has Victoria spent any of this money? We just don’t know, and I’m not prepared to risk my own money on that basis anymore.

Valuation doubts: My final concern relates to Victoria’s valuation. This year, revenue doubled to $14.7m, but the company failed to make a profit due to ‘other losses’ as yet to be explained.

If we assume revenue will double again in the current year and that Victoria will deliver an operating margin of around 25%, which is not unusual for this type of business, then we’d be looking at an operating profit of around $7.5m, with post-tax profits of perhaps £3.8m, assuming a 20% tax rate and the current USD/GBP exchange rate.

That means Victoria’s current valuation is around 15 times my purely theoretical guess at next year’s profits — which may be wildly optimistic. That suggests to me that there could be limited near-term upside to VOG’s share price.

Better out than in: Victoria oil & Gas may still deliver a multi-bagging gain from here on in, but it seems very speculative for an investment that is, essentially, a small utility, not an E&P company.

I’ve run out of patience with the company’s slow and opaque reporting, and have put my money elsewhere, in grown-up company, whose reporting doesn’t raise so many questions.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in Victoria Oil & Gas. Do your own research or seek qualified professional advice before making any trading decisions.

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