Zoltav Resources bubble bursts

Zoltav Resources was the star of the show on an otherwise grim Monday morning. The Russia-focused oil and gas company surged as much as 40% in quick time after turning in a maiden net profit. However, the party was short-lived and the lightly-traded shares have since plunged.

We heard earlier this month that Zoltav had improved operational performance and slashed costs, which meant it would actually make money this year. It did.

Last year's loss of $2.5 million (£1.9 million) became a pre-tax profit of $1.6 million in the six months to June, while Zoltav generated a net profit of $0.8 million versus a $2.8 million loss in 2015. Net cash from operating activities swelled to $4.8 million from $2.9 million.

And, despite the weak rouble and low oil prices, revenue in US dollars was steady at $14.3 million. Colin Smith, an analyst at joint house broker Panmure Gordon, welcomed the numbers, which significantly improve the forward valuation multiples.

Production targets are little changed as Zoltav's Western Gas Plant (WGP) is already running at full capacity, but a big decrease in the cost of sales triggers an increase in Panmure's earnings per share (EPS) estimate for 2016 from minus 1.5 US cents to a profit of 1.4 cents, rising to 2.9 cents in 2017.

However, we were also told less than three weeks ago about a change in strategy - new assets in Russia and elsewhere in the former Soviet Union are still expensive, so Zoltav will now focus solely on WGP and developing the Koltogor and Bortovoy licences.

This narrowed focus is why Smith cuts the Chance of Commerciality (CoC) on Bortovoy East from 60% to 45% and on Koltogor from 40% to 25%. This leads to a 10p reduction in his price target to 55p.

Smith writes: "Our basic thesis for investing in Zoltav was that it offered the opportunity to co-invest with powerful, connected Russian investors on ground floor terms in an ambitious business with a demonstrated track-record of making value accretive acquisitions from which it has been able to unlock value."

But the new strategy and focus on cost cutting clearly lessens the chance of growth by acquisition and, importantly, could affect the attitude of major shareholders ARA and Bandbear, which together control 79% of the company.

"We believe that makes the development of the Bortovoy East and Koltogor assets, which are likely to require substantial additional financing, less likely, hence the reduction in our estimates for CoC and overall, a less compelling investment thesis.

"The well-run Bortovoy West asset provides reasonable multiple support and an overall risked core net asset value at roughly the current share price," says Smith, who still rates the shares a 'buy'.

Clearly, others do not, and Zoltav shares are currently trading down 11% at 21.8p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.