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Canadian Overseas Petroleum

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Cash concerns cloud long-awaited finance package at Canadian Overseas

Canadian Overseas Petroleum (LSE:COPL) fell back  4pc to 0.56p on Monday after news of the long-awaited finance package worth up to $50m for its Nigerian Development project. However, the agreement contains numerous conditions and catering solely to project costs, the firm is by no means out of the woods. Indeed, despite the opportunity on offer in Nigeria, there remains a considerable short-term risk that the business will need to carry out a placing to cover its operational costs as it burns through cash.

Nigerian potential

In Monday’s update, Canadian Overseas revealed that its 50pc-owned joint venture company ShoreCan has received and agreed to a project financing and offtake agreement term sheet. This provides for a senior secured facility from the Mauritius Commercial Bank and Trafigura PTE worth between $30m and $50m.

ShoreCan must invest the money into its 80pc-owned affiliate Essar Exploration and Production, which owns an oil appraisal and development project called OPL226 in shallow to mid-water offshore Nigeria. Canadian Overseas said the facility will provide funding for all production expenditures following the drilling and testing of the initial production well to be drilled by Essar, planned for late 2018 to early 2019.

However, to access the attractive facility, some essential conditions must be met. Indeed, the money will only become available if ShoreCan can contribute an additional $20m to $33m of funding and secure $100m funding from an offshore oil services group to deliver the project. Meanwhile, Essar must achieve a minimum of 6,000bbls/d production rate averaged over 20 days must also, and ShoreCan must execute a formal definitive binding agreement with the facility providers.

The agreement also includes a two-year term to maturity and a grant to the lenders of $3m worth of warrants to purchase shares in Canadian Overseas. These will last for two years with an exercise price equal to Canadian Overseas’ share price on the date of closing the facility.

Elsewhere, Canadian Overseas said it is in late-stage discussions with a service provider, which involves the provision of drilling services, the supply of a mobile production unit and a storage vessel for a deferred fee. On the agreement, Arthur Millholland, president and chief executive of Canadian Overseas, said:

‘The company and Shoreline through our jointly held affiliate have worked hard to achieve this first step in the unlocking of the resource within OPL 226. We are confident that we will complete the process to enable Essar Nigeria to commence this first phase of development operations.’

What’s the story?

Canadian Overseas’ planned activities in Nigeria are a significant part of its long-term strategy to generate stable cash flow from secure offshore and onshore assets in partnership with Shoreline Energy. Through Shoreline, it was also awarded the PT-5b exploration license onshore Mozambique late last year, which surrounds a complex with reported gas reserves of 2.6 TCF and production in 2016 of 475 mmcf/d.

Returning to Nigeria, the project as planned involves the drilling and completion of a horizontal oil production well offsetting the 2001 NOA#1 oil discovery well. It also consists of the drilling and completion of two-to-three additional high angle oil production wells in the adjacent NOA East fault block from a common wellhead platform. These will be placed on production in an approved early production scheme.

An independent report on OPL226 found that, as at 1 March 2016, the gross unrisked contingent oil resources recoverable for the primary Noa West oil discovery are estimated to be the following: low estimate (1C), 11.5 million Bbls; best estimate (2C), 16.1 million Bbls; and high estimate (3C), 20.7 million Bbls.

In this sense, then, any progress towards getting these resources out of the ground is good progress, and many Canadian Overseas Investors are relishing the latest update given the lack of news flow.

However, it is important not to let this excitement cloud the fact the financing is highly contingent and does not cover operational costs. As at 31 March 2018, the company said had c.$3.1m of cash and was burning through around $1.4m a quarter in operating expenses. Given that was now four months ago with no placing taking place in the interim, it seems logical to assume that this cash balance has diminished somewhat.

With this in mind, the more cynical members of Twitter’s AIM community have interpreted the news as a way of increasing shares ahead of placing to bolster the firm’s coffers. Whether or not this is true remains a matter of speculation – what it does say is that COPL’s thin balance sheet clouds any of the long-term benefits brought by the recent news.

“You can hear Arthur talk about the company with Andrew Scott”

The author does not own shares but was remunerated to write this article