City fashion is a dangerous thing. Its followers rarely come out smiling. So although there is a chorus now calling for mergers and acquisitions in the small company sector, this seems more to do with fund managers’ concerns about illiquid stocks than any commercial rationale.

But still, the merger of two small AIM–listed resource stocks Victoria Oil & Gas (VOG) and Bramlin (BML)may be more than just a case of two drunks leaning on each other for support. Sharing the same chairman, Kevin Foo, they should at least be pretty familiar with one another and the link goes rather deeper than this.

‘Blue sky’ potential

The major shareholder of Victoria Oil & Gas is the Abu Dhabi-based, Noor Petroleum. Not only does Noor know of Bramlin, it is also introducing into the enlarged group the assets of Falcon Petroleum (PFC). Victoria has signed a twelve month option to acquire the latter, which consist of exploration licenses over 45,000 sq kms of land in Mali and Ethiopia.

This adds some ‘blue sky’ potential to the group. But the more immediate areas of interest are Victoria’s operations in the former Soviet Union and those of Bramlin in Cameroon. The share price of Victoria today is just 6p. But back in 2006 they hit 260p after independent consultant, DeGolyer & MacNaughton, estimated that its West Med project in Siberia contains 1.1bn barrels of prospective recoverable oil equivalent, mostly in the form of gas.

The shares became a great favourite of private investors, but this reserve estimate was subsequently reduced by 9% putting the shares into a tailspin from which they have never recovered.

West Med is located in the Nadym-Pur-Taz region of Western Siberia. Along with the Yamalk region of Russia, this is the heartland of Gazprom and holds approximately 20% of the world’s proven gas reserves. West Med lies next to the super-giant Medvezhye field and about 120km from Urengoy, the largest gas and gas condensate field in the world.

This clearly has massive potential but production is some way off. Victoria has appointed GeoDynamics to conduct a passive seismic survey this winter focused on a new target location, and then drilling of the next exploration well is not expected until 2010 with a further two wells scheduled for 2012.

Jackpot potential put off course – but new deal could produce cash flow

So although Victoria may eventually hit the jackpot here, for the time being it is costing it money and its plans have been blown badly off course by the suspension of production at its Kemerkol field in Kazakhstan. This 65 sq km license area to the east of the Caspian Sea was put into production in March 2006, and in the first half of this year it produced thirty thousand barrels.

However, in a stark illustration of the perils of doing business in the region, Victoria then faced a challenge to its title to Kemerko, a challenge that was upheld by a regional court. Victoria has taken the matter to Kazakhstan’s Supreme Court and hopes for a ruling very soon. In the meantime, it has countered with its own action for breach of warranties against one Olga Elfteriadi. It is claiming $14.75m – the original cost of the license – as well, possibly, as the $23m that it has spent developing the field.

Victoria is confident of winning the day, but the court action has meant that it has had to suspend production at Kemerkol. So one attraction of the deal with Bramlin is that it with it a property that should soon be producing some cash flow. This is Bramlin’s Logbaba project, which is located within the eastern suburbs of Douala, the economic capital of Cameroon.

Not yet on City radars

Four wells were drilled here by Elf back in the 1950s, all encountering gas. An evaluation of only a small section of the area by RPS Energy in July found reserves with a net present value of $169m. Given that industrial users sit almost on top of the field and otherwise have to pay about $23/mcf for imported gas from Equatorial Guinea, they should certainly be prepared to pay the $15 proposed by Bramlin while the task of supplying them should be neither too difficult nor expensive. Bramlin has already signed some letters of intent with customers and plans to start drilling early next year with first deliveries scheduled for late 2009.

With Victoria issuing 163 million new shares to acquire Bramlin, the new group will still be valued at only £26m, just over half the £50m value at which City investors are perceived to take an interest in small companies.

However, Victoria has raised the possibility of acquiring further distressed oil and gas companies, while its share price could of course rise depending on progress in Cameron and the Former Soviet Union. But with many of Victoria’s shareholders suffering from burnt fingers they are unlikely to take too much on trust.

This one has not yet got the credentials that make it a good “bounceback belter” candidate for 2009 – not like the three I’ve just uncovered here.