Can depressed Solo Oil monetise its assets in Tanzania under new management?
This year has seen shares in Solo Oil fall from highs of 4.6p to their current 1.8p, with two considerable placings offsetting numerous positive developments across the company’s non-operated assets in Tanzania. With the firm now looking to further monetise its portfolio following the disposal of its direct interest in Horse Hill and a major boardroom shake-up, we ask whether it is worth a punt at its current lows.
Following a successful extended flow test at the controversial Horse Hill oil discovery, Solo offloaded its 15pc position in the site’s operator Horse Hill Developments to UK Oil & Gas (UKOG) in September for £4.5m. At the same time as selling its stake, the business paid £4.5m to purchased a 4.2pc position in UKOG, a significant stakeholder in Horse Hill both directly and through its stake in HHDL.
At the time, managing director Dan Maling said the deal allowed Solo to monetise its investment in HHDL while providing it with more balance sheet liquidity. He added that the subsequent investment in UKOG provides the firm with ongoing exposure to Horse Hill’s upside potential without the burden of having to contribute to development costs.
In its half-year report, Solo added that it will now monitor UKOG’s progress closely and will have the ability over time to sell some or all of its shares for cash. Following this, the company gradually cut its position in UKOG to 2.91pc in October.
Alongside its decision to offload its direct exposure to Horse Hill, a project in which many have grown sceptical, Solo has also carried out a significant management shakeup this year. This began in July when the firm announced that executive chairman Neil Ritson would retire before the end of 2018 as part of a board restructuring ‘designed to transition the company for the future’. At the time, Ritson added: ‘As we reach the point of monetising the first round of core assets, I think it is appropriate that a refreshed team be appointed to take Solo forward into the next phase of its corporate development.’
Shortly afterward, Solo named Ritson’s replacement as Alastair Ferguson, a chartered engineer with 40 years of experience in the oil and gas industry including senior stints at BP, Zoltav Resources, and JKX Oil & Gas. Ferguson currently owns a 2.1pc stake in Solo. Ritson, who also retains a 2.1pc position, remains as a technical director. Meanwhile, Dan Maling, previously Solo’s finance director, was appointed managing director with immediate effect.
Additionally, in May, the business also announced the appointment of corporate lawyer and petroleum economist Jon Fitzpatrick as a non-executive director. At the time, Ritson said Fitzpatrick was taken on board to complement the team with his ‘extensive capital markets and deal structuring expertise’. As of early September, Fitzpatrick held a combined direct and indirect position of 4.17pc in Solo. Finally, earlier this month, non-executive director Donald Strang stepped down as a non-executive director. Solo is currently searching for his replacement.
Following the disposal of its interest in Horse Hill, Solo still retains a direct interest in several projects.
According to the company, much of its core value lies in its 25pc stake in the Ruvuma Basin production sharing agreement (PSA) in Tanzania where it has enjoyed a great deal of progress this year. Firstly, early in the year, operator Aminex announced a tenfold increase in the 2C contingent resource estimate for the site’s Ntorya gas discovery. The location is now estimated to contain a gross gas resources of 763bcf and Pmean total gas initially in place of 1.87tcf.
Aminex’s CPR provided independent validation of the materiality of the Ruvuma PSA and found that Ntorya could be sanctioned with three wells. It also said an early production scheme would limit upfront capital expenditure and enable the central field development to be funded from future cash-flow.
Later on, Aminex announced a farm out of 50pc interest and transfer of operatorship in its Ruvuma stake to the Zubair Corporation for $5m, further underlying the asset’s commercial viability and upside potential. The farm out prompted Solo’s aforementioned decision to shift its strategic focus onto monetising its assets. Indeed, in its half-year results, the firm said it was considering all options around its stake in Ruvuma, including a more aggressive marketing strategy as it looks to complete a partial or full sale.
Elsewhere in its portfolio, Solo owns an 8.4pc stake in the producing Kiliwani North-1 asset, which is also located in Tanzania and has produced 6.4BCF since April 2016, generating gross revenues of $18.3m. Alongside a well called Kiliwani North-1, it houses a prospect called Kiliwani South, expected to contain mean un-risked GIIP of 57BCF.
Earlier this year, Kiliwani North-1 saw a decline in pressure, prompting a review by operator Aminex, which has subsequently been carrying out remediation work. Pending approvals, Aminex also plans to perforate a lower untested and potentially gas bear section of the reservoir system at Kiliwani North to take the well back to full-time production. It is also planning 3D seismic activity on the licence to de-risk prospects and leads as part of more extensive field development efforts.
Finally, Solo owns a 13.8pc position in Helium One, which is fully funded and moving towards drilling the Rukwa Basin natural helium play in Tanzania.
Solo’s share price appears to have been damaged in recent times by its repeated cash calls to investors. However, in its £2.41m placing in August at 2.25p each, Ferguson argued that the capital is needed ‘to safeguard our equity position and negotiate the very best deals for our shareholders’, adding that: ‘Whilst the raising of that capital is dilutive at the existing shareholder level, it is a necessary function to protect and enhance the inherent value within the portfolio.’
Indeed, the company estimated that it was due to receive a call on capital of £2-3m across its portfolio over the following year, and that’s excluding possible drilling expenditure at the Ruvuma Basin. It is encouraging that Solo no longer has any debt, having paid off a facility in September. However, one cannot help but wonder whether another placing could be on the cards over the medium-term if it struggles to further monetise its portfolio. It is also somewhat concerning to see that the business appears to have little significant institutional backing, based on disclosures currently present on its website.
Immediate cash concerns aside, there are plenty of potential positives for Solo that could be worth investigating at a time when shares are so cheap. For example, the firm’s board own around 10pc of shares collectively, providing plenty of skin in the game.
Likewise, the vast potential on offer at Ruvuma could bring in a great deal on cash if Solo can monetise it in some way. This upside is especially appealing given that the company’s market cap currently sits at just £11.7m. Compounding this, further developments at Kiliwani and Helium One could add additional value to its non-operated portfolio. Whether or not you take a punt on Solo depends on your faith in the new board, who have so far shown a willingness to shake things up and take significant steps to generate cash from existing holdings.
Dan Mailing MD of Solo Oil & Gas after rejigging there portfolio
The author was remunerated but does not hold shares in the company