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Solo Oil PLC: THE INVESTMENT CASE

Shares in Solo Oil jump after it receives first payment for Kiliwani gas

The oil and gas firm says it is “delighted” after having received its first payment for the gas supplied to the Tanzania Petroleum Development Corporation
oil barrels and an oil rig
INVESTMENT OVERVIEW: SOLO The Big Picture
Solo expects to generate around US$150,000 a month for its share of the project

Shares in Solo Oil PLC (LON:SOLO) advanced 10% after the company told investors it had received its first payment for gas pumped from its Kiliwani North-1 well in Tanzania.

The firm, which holds a 7.175% interest in the project, didn’t reveal exactly how much had been paid by the Tanzania Petroleum Development Corporation (TPDC), but Solo chairman Neil Ritson said the amount was “quite small”.

Although the well, which is operated by Aminex plc (LON:AEX), is still in a testing period to try and achieve an optimal rate, TPDC is still paying for the gas produced.

“Solo is delighted that the first payment for gas from the Kiliwani North field has been made with minimal delay,” said Ritson.

“Future payments will be larger and create an underlying cash flow from operations that will support Solo's ongoing investments.”

 

Tanzania close to optimal performance

Production at the Kiliwani North-1 well began back in April and, as explained above, remains in the ramp-up phase to achieve optimal performance, which is anticipated in the near future.

Based on data recorded so far, the project is expected to operate at around 25-30mln cubic feet of gas per day, representing roughly 5,000 barrels of oil per day.

Under the terms of the sales agreement, Solo, along with Aminex and the other stakeholders, will receive somewhere in the region of US$3.07 per thousand cubic feet.

All that means that the AIM-listed company expects to take home around US$150,000 each month for its share of the project once it is fully up-and-running.

This share could increase as well, as Solo chairman Neil Ritson has previously suggested that the firm will look to increase its stake to 10% should certain goals be met.

This cash-generative asset anchors Solo’s operations in Tanzania and can help pay for further expansion and development in the area.

 

Ntorya and Ruvuma look promising, too

Although Kiliwani North is Solo’s most mature asset in Tanzania, the company also has its finger in other pies in the country.

It is also part owner of acreage in the Ruvuma basin, which straddles the coastal land and shallow waters of the West African country and is a hotspot for mega oil and gas discoveries.

“Drilling is now rapidly approaching at Ruvuma, where we see considerable un-risked potential to complement the cash flow emerging from Kiliwani,” said house broker Shore Capital.

The Ntorya gas discovery is the most advanced of the assets under this agreement.

Future work on this asset is likely to focus on findings from a 2012 well, which previously flow tested at 20mln cubic feet per day, equivalent to around 3,330 barrels of oil, with 139 barrels of condensate as well.

Only recently, Solo’s partner in Tanzania, Aminex, began groundwork on the Ntorya-2 appraisal well.

Analysis of the first Ntorya well led to estimates that the project could host 1.5 trillion cubic feet of gas resources, marking it out as potentially world-class.

READ: Solo Oil and Aminex confirm extension in Tanzania

VIDEO: Ruvuma extension gives Solo Oil time to find partner

The new well will satisfy its appraisal drilling obligation and is a precursor to a 25-year development licence.

Success here could lead to a significant leap in the respective valuations of Solo and Aminex.

 

Closer to home…

Solo Oil is one of the companies with an interest in the much-talked-about Horse Hill project in the UK’s Weald Basin.

It has an effective 6.5% stake in the project which flow tested last year at exceptional rates, despite initial scepticism.

The potential of Horse Hill was expressed in ‘billions of barrels’, raising more than a few eyebrows before the well testing programme went some way to justifying the claims.

The testing programme tapped four intervals and flowed an aggregate of 1,688 barrels of oil per day.

For context, that would represent around 8.5% of Britain’s current onshore production.

READ: Gatwick Gusher: Portland oil zone upgraded

Planning and environmental impact consultant Barton Willmore has now been hired to prepare applications to Surrey County Council for a new appraisal programme as the group looks to advance the project towards production.

Longer production tests for several zones have been proposed, while two further wells have also been proposed along with 3D seismic.

Expect a public consultation and engagement process to get underway in the coming weeks and months, with the submission of a planning application pencilled in towards the end of 2016.

 

What the brokers are saying

Shore Capital’s Craig Howie expects this new income stream from Kiliwani will go a long way towards making Solo a cash-flow positive company.

He says that the firm has “a winning combination of non-operated interests” at various stages along the exploration and production value chain, which should stand in it in good stead for future growth.

 

And finally, the share price…

Like most oil and gas stocks over the past 18 months or so, Solo has suffered from plummeting oil prices.

With the price stabilising in recent months, the company believes it is well-positioned to stage a recovery.

Shares in Solo were up 0.03p, or 10%, to 0.28p, valuing the company at just over £15.5mln.

Shore Capital implies that there is some serious upside to this price though, suggesting a risked net asset value of 1 pence per share, or £58mln.



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