Dutch treat for Baltic Oil Terminals

Recovery could be gaining pace at Baltic Oil Terminals, the AIM-quoted company based in London but with its operating headquarters in Russia’s Baltic enclave of Kaliningrad. Baltic, a sought-after 2006 float that later turned decidedly sour, has pleased followers with its recent purchase of Rotterdam-based oil storage company Petroval Bunker International for £6.9 million cash and a first half-year turnaround from £1.2 million losses to pre-tax profits of £2.8 million.

The company, steered by chief executive Simon Escott, an ex-World Bank luminary and experienced Russian hand, offers some unique attributes in an oil-hungry world. The company boasts a key half-share in Rosbunker, an oil transhipment terminal in Baltysk, able to handle some 70,000 cubic metres of fuel oil and diesel per month, at the mouth of the Pregol River, which leads into Kaliningrad, Russia’s only port on the Baltic that remains ice-free all year round and a crucial outlet for Russian oil destined for Europe.

Set up by Escott with backing from RAB Capital, the aggressive investment group then riding high on the resources boom, Baltic floated on AIM with a £23 million placing at 140p five years ago and soon went to 212p. In addition to its Rosbunker holding, the company had interests in oil exploration near the Siberian/ Kazakhstan border with Nasdaq-OTC group Siberian Energy and was involved in low-margin, high-volume oil trading activities.

But progress proved anything but smooth. While anticipated reductions in Russian export taxes in the Kaliningrad Free Trade Zone took longer to come through than expected, Baltic ran into problems trying to improve management at Rosbunker.

The company had a dispute with Vladimir Gavrilov, its former operations chief who had been dismissed over alleged conflicts of interest and sued the company over a £510,000 loan. Losses mounted and the shares collapsed all the way to 6.5p at one point.

However, Escott and his colleagues, encouraged by chairman and resources entrepreneur Richard Healey,
have persevered and prospects have improved. Long-awaited official legislation was recently enacted that is favourable to Baltic’s tax position and, argues Escott, likely to enable a faster turnaround of vessels, especially
in winter months.

The company, which last year reached a final settlement with Gavrilov, is working on a grain silo project with Alpcot Agro, a Swedish concern focused on agricultural projects in Russia. Baltic recently reported brisk activity at Baltic Top, its 60 per cent-owned refined products terminal business, which can store 10,000 tonnes of fuel and handle throughput of 15,000 tonnes a month, handling petrol and diesel for third-party clients, including Russian giants Rosneft and Lukoil.

A crucial move in enhancing the company’s prospects was last December’s agreement to buy Petroval Bunker International for $10.8 million (£6.9 million). Petroval, which operates two heated fuel tanks with a capacity of 120,000 cubic metres in Rotterdam’s Europoort, made around £2.2 million profit in 2009, benefits from relatively low operating costs and, at the time of the deal, had all its storage let until the middle of 2011.

Baltic funded this takeover with a £4.1 million share placing at 25p and £2.8 million from selling most of its stake in Swedish-quoted Shelton Petroleum, an oil exploration and production company with interests in Russia and the Ukraine. While Shelton itself retained a significant holding in Baltic, this disposal pleased several investors, anxious to see Baltic maintaining its focus on shipment handling.

Analysts argue that the Petroval takeover is providing Baltic with immediate access to cash flow and means that non-Russian activities will now contribute around 30 per cent of turnover, thus mitigating the potential country risk of an all-Russian business. The company is seen as financially strong enough to contemplate new acquisitions.

House broker Arbuthnot Securities sees a 2010 full-year turnaround from £1 million losses to £4.8 million pre-tax profits, with £6.3 million in sight for this year and £6.7 million for 2012. That implies an undemanding prospective p/e ratio of 4.5 for the shares at 23.5p, which, despite the element of country and commodity risk and the absence of a dividend, offer exposure to what could prove to be rich pickings indeed.