Saturday, September 30th 2023

TLOU Energy

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Can Tlou Energy break out this quarter as market awaits Botswana progress?

Botswana-focused energy business Tlou Energy has been hit so far this year by Government proposal hiccups and the dilutive effects of a placing in June. However, with the firm set to begin a drilling programme and potentially deliver a key contract update this quarter, could the 7p its shares are currently trading at mark an attractive entry point?

Alternative energy

Tlou is developing low-carbon producing coal bed methane (CBM) projects, which it hopes to use to generate electricity in Botswana and, in the future, southern Africa more broadly. As it stands, Botswana is experiencing an electricity deficit and is in need of a clean energy source to replace coal and diesel. Tlou believes CBM could be the answer to this.

Tlou’s flagship asset is the Lesedi project, which has a certified contingent resource of up to 3.2TCF and is currently, according to the firm, the most advanced CBM project in Botswana. Lesedi is yet to enter the development stage, but Tlou has received the necessary environmental approvals and mining licences to advance. Lesedi sits in Tlou’s 8,300km2 of acreage, which also includes the Mambo project area. In February, the business announced that 2P gas reserves across this entire area had jumped by 944pc to 41BCF. This upgrade followed a seismic survey, a core-hole drill campaign, and the testing of pilot wells that produced sustained gas flows.

Several setbacks

In January, Botswana’s government cancelled a request for proposal (RFP) to develop up to 100MW of CBM-fuelled pilot power plants after finding that the bids it had received had fallen short of compliance requirements. The RFP, issued early last year, was a vital step towards the creation of a CBM market in the country and as such, its cancellation led Tlou, one of just two total bidders, to tank.

The situation turned a corner in July, when Tlou announced that it was one of just two companies to be invited once again to bid for the development. The market received the news well, and shares bounced 12.3pc. Tlou said its submission will outline a staged development starting with 10MW of generation, project feasibility, field development, installation of power generation facilities and supply of power into Botswana’s grid.

In August, the company said that while there is no guarantee of success, it felt a pre-tender meeting with government was positive. It added that there appears to be ‘continued government goodwill to advance [Lesedi]’. With the closing date for receipt of tender offers falling next week (12 September), could another update be imminent?

Tlou took another major hit in June when it announced a placing to raise £1.4m and a non-renounceable entitlement to raise up to a further £3.2m. Although the placing may have been dilutive, its proceeds will fund a vital stage of the firm’s development, with the cash being used to undertake an accelerated production well drilling programme. Specifically, this covers lateral production pods at Lesedi, core-hole drilling, the progression of power purchase negotiations, regulatory requirements, further fieldwork, and working capital.

The firm indicated that progress had been made in August,, with equipment arriving onsite ahead of the drilling of lateral and vertical pilot production wells. It expects to spud the first of up to three of these wells in September, once critical long lead items are onsite. It will drill the pods in areas identified as being potentially highly suited for initial project development. Following drilling, the wells will be de-watered before entering gas production.

Can it deliver?

Despite steady operational progress, Tlou’s shares have struggled to achieve any sustainable gains this year thanks – at least in part – to the ongoing RFP issues and the placing. However, the firm could now be entering an exciting time for news flow, with this quarter likely to include an update on its government tender offer and the start of its drilling programme. Given that these are major steps for the company in achieving its long-term goals, any success could bring with it the chance of a re-rate. That being said, if the government once again rejects its bid, or its drilling yields no results, the consequences could be dire.

Potential developments aside, the company’s fundamental case continues to look strong. It had a healthy cash balance of c.$7m as of June, and Botswana is a stable, well-connected operating jurisdiction. It was also encouraging to see the firm’s directors subscribe for c.£320,000 worth of shares in its recent placing. With shares looking weak and potential catalysts on the horizon, whether or not you take a punt on Tlou boils down to your faith in its claims that government talks are on track and that progress is imminent at Lesedi.

Colm Cloonan & Gabaake Gabaak talk about Tlou Energy Updates on RFP re-tender

The author does not hold shares but was remunerated for the article