Guy Norton in Zagreb -

PetroNeft Resources has become the latest in a series of junior oil and gas companies operating in the former Soviet Union to tap international investors for fresh capital.

In late September, PetroNeft raised $27.5m in an oversubscribed secondary share placement, which will help it finance a vital link into Russia's main oil pipeline network. PetroNeft, which is listed on the small-cap segments of the London and Dublin bourses, was looking to raise $25m, principally to help finance the construction of a 70-kilometre pipeline for its operations in the Tomsk region of Siberia. Under an agreement with Imperial Energy, another Russia-based oil firm owned by India's ONGC, the new pipeline will be completed in 2010 and link Petroneft's production sites with Russia's trunk pipeline network. Thanks to a combination of a shorter-than-initially-planned route and lower material and labour costs the pipeline is forecast to cost just $25m rather than the previously estimated $60m.

J&E Davy, Canaccord Adams and Renaissance Capital acted as joint bookrunners for the secondary offering of 120.6m new ordinary shares at $0.23 apiece, raising a total of $27.5m. Dmitry Brodsky, vice president, investment banking at Renaissance in Moscow, says the issue was sold to a mix of new and existing UK and Ireland-based buyers that typically invest on the AIM and IEX segments of the London and Dublin stock markets, alongside emerging market and oil fund specialists. "Demand was mostly from international buyers, but there were also some chunky orders from Russia as well." As a result, he says, PetroNeft was able to push the issue to $27.5m from the initial target of $25m.

Commenting on the investor reaction to the issue, Dennis Francis, PetroNeft's chief excutive officer, said: "We are delighted with the outcome of the placing and the high level of support received from new and existing shareholders demonstrating the market's confidence in the company and its strategy."

Oil flows, money flows

PetroNeft was established in 2005 to develop oil and gas assets in Russia and the former Soviet Union, and was admitted to the AIM and IEX in late September 2006. Brodsky of Renaissance says investors were attracted by PetroNeft having strong proven reserves, it's already drilled several wells and its pipeline agreement with Imperial Energy will ensure it has market access for its oil. The company plans to start full-scale production in July 2010, which will enable it to become self-funding in the future. "The commencement of year-round production will represent a major milestone for PetroNeft and is an excellent base from which we can take advantage of the opportunities available to us in the region and further develop and expand our exciting portfolio of assets," says Francis at PetroNeft.

Sentiment towards small, independent operators such as PetroNet has also been boosted by the strong share performance of the Russian oil majors such as Rosneft and Lukoil, which have been the principal force behind the strong rise in the Russian stock market this year, which by October had soared by 75% this year. "The Russian oil majors have had a major rally this year and so investors believe the next wave of outperformance will come from small and mid-cap firms such as PetroNeft," says Renaissance's Brodsky.

This expectation has already enabled a number of oil and gas SMEs operating in the CIS region to successfully raise expansion capital in recent months. Alliance Oil started the ball rolling in mid-June when it set a positive trend by raising $390m through a sale of convertible bonds and new shares - well above the $325m it had hoped for. Shortly thereafter, Russian exploration company Volga Gas secured $27m and Central Asia-focused Tethys Petroleum raised $20m. In mid-September Kazakhstan-focused oil company Zhaikmunai raised $300m.

Recent weeks have seen crude oil prices stabilise at around $70 per barrel, with high US stockpiles and muted demand growth capping this year's resurgent oil market, with prices up over 60% this year following the spectacular fall from its all-time high of $147 in 2008. Brodsky at Renaissance says that provided oil prices stay in their current range, there is the likelihood of further issuance by other SMEs with offerings in the $15m-$30m range.

He adds that given the strength of market sentiment towards Russia at present, there is also the possibility of issuance from other sectors such as retail and real estate, which are witnessing a return to favour after poor performances in the last half of 2008 and the first half of this year. Among the deals on the cards is a possible $300m-$500m secondary offering by retailer Magnit, while metals giant RusAl could possibly tap the international markets by the end of 2009 with an issue of up to $2bn. That placement, mandated to BNP Paribas, Credit Suisse, Goldman Sachs and Chinese investment bank BOCI International, which is expected to be listed on the Hong Kong Stock Exchange, would be the first major share issue from Russia since the IPO boom year of 2007 when Russian corporates raised more than $30bn overseas. Brodsky says that Russian equities are increasingly a vogue investment. "More and more emerging market investors, which have seen strong inflows in recent months, are looking at Russia because of its strong outperformance this year."

Barring a major reversal in market performance he expects a major increase in issuance in 2010, as potential issuers are more comfortable with current pricing levels. "Companies are already getting prepared for 2010 and are looking at tapping the international markets next year now that the Russia rally has proved more sustainable than was thought," he says.

He cautions, however, that investors remain wary of untested or highly leveraged names. "You can't just sell any Russian stock - right now investors want issuance from already listed companies with a strong business track record."

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