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In the news with RFC Ambrian: Antrim Energy, Highfield Resources, Schlumberger and Sierra Rutile

In the news with RFC Ambrian: Antrim Energy, Highfield Resources, Schlumberger and Sierra Rutile

INTRODUCTION

In the news: The Oil Services Industry, Highfield Resources (ASX:HFR), Sierra Rutile (LON:SRX) & Antrim Energy (LON:AEY)
Schlumberger (NYSE:SLB) has bid approximately US$15bn for Cameron Intl Corp. Whilst oil company mergers have not taken off recently as was generally expected (Shell’s bid for BG being the obvious exception), as can be seen in this move, mergers amongst oil service companies have gathered pace. The deal should help Schlumberger to become a one-stop shop for oil companies, adding Cameron’s valves, pumps and blow-out preventers to its in-house engineering expertise. This deal follows Halliburton’s US$35bn merger with Baker Hughes. Although The Times is fretting about hefty job losses in the sector, in the short term we believe the consolidation of the service companies should have a positive knock-on effect for oil companies. It should allow the service companies to cut costs more quickly, which will thus get passed on to oil companies given today’s oil price environment. It is true though that over the longer term this increased pricing power for the service companies could lead to higher rates when the good times return. What the Lord giveth, etc.

Meanwhile, Maersk Oil says it will close one of its production units in the North Sea. The Janice installation, which produces 7,000bpd from three UK North Sea oilfields, is targeted for closure in 3Q16.

I see that Highfield Resources, which owns a potash project in Spain, has received debt funding from a syndicate of four European banks. In total, the facility will total €222m, giving the project a maximum debt-to-equity ratio of 65%. The facility has a tenor of eight years (further details remain confidential). This shows that the debt markets are very much open for business for the best projects, and this is how it should be, really. Quality assets and with strong management are the only projects that are going to move forward in this environment. Best to stick with the specialists in natural resources (like RFC Ambrian) as the weakest are culled.

METALS & MINING EQUITIES

Sierra Rutile — 1H15 Results Sierra Rutile (SRX: AIM: £0.20), the mineral sands producer with operations in Sierra Leone, has announced its financial results for 1H15. The company’s sales mix is dominated by rutile, but also includes ilmenite, zircon and other concentrates. Sales during 1H15 were US$46m (-29% YoY); this was due to lower volumes (rutile -30% and ilmenite +8%) and lower prices (a rutile price of US$809/t, -1.1%). All-in cash costs (net opex, corporate costs and sustaining capex) were US$721/t (+15%).

Reported EBITDA was US$7m and net cashflow from operations was US$11m (after a release of US$5m from working capital). Capex was US$10m, of which US$8m was spent on the Gangama dry mining expansion.

The company ended the period with cash of US$9m and total debt of US$45m (comprising US$22m from the Government of Sierra Leone and US$23m from Nedbank), for net debt of US$36m, unchanged from the end of 2014.

RFC Ambrian Comment: Positively, despite lower-than-planned production during 1H15, the company reiterated that it remains confident of achieving its guidance for production (120-130,000t rutile) and all-in cash costs (US$650-670/t) that were originally stated in January 2015.

It also commented that in spite of the impact of the rainy season on some of the project’s earthworks, the Gangama dry mining project was expected to be delivered on time and on budget, with first production in 2Q16.

The company stated on a conference call to discuss the results that it expected that the ongoing reduction in pigment capacity would lead to lower pigment inventories and that this could have a positive impact on feedstock pricing by 2H16.

Background

Sierra Rutile is the world’s second largest producer of rutile. The company produced 114,000t of rutile in 2014 at operating cash costs of US$646/t, net of by-product credits. Production is derived from dredge and dry mining operations at Lanti, which feed a mineral separation plant that has a capacity to produce 225,000t pa of rutile, and is therefore significantly underutilised.

On 21 April 2015 the company announced that it was to embark on the development of Stage 1 of the Gangama Dry Mining Project. The project is planned to cost US$44m (of which US$8m had been spent by the end of 1H15) and to be completed by 2Q16.

Although Stage 1 will produce an additional 46,000tpa of rutile, the company’s net increase in output will be limited to 20,000tpa owing to reductions in output elsewhere. Stage 1 is planned to have operating costs of just US$295/t during its first five years of operation, reducing the company’s overall total cash costs to US$595/t. Stage 1 is planned to take 12 months to construct at a capital cost of US$44m.

Stage 2 would double output from Gangama to 93,000tpa of rutile and would cost an additional US$33m to develop. Assuming the development of Stage 2 goes ahead, the project has a life in excess of 20 years.

The Stage 1 development is fully funded from cashflow and finance facilities and will include the additional liquidity created by the deferral of repayments on the government debt that was announced on 12 January 2015. Sierra Rutile also has access to a US$30m loan facility from Nedbank that remains undrawn and of which the company only expects to have to draw down US$15m. Also, the company’s 55% shareholder Pala Investments has provided a stand-by facility for another US$15m.

OIL & GAS EQUITIES

ANTRIM ENERGY*† — 2Q14 Results — Antrim Energy (AIM: AEY, TSX.V: AEN) has released its 2Q14 financial results; these were in line with our expectations. The company had a strong working capital position at the end of the quarter (C$10.4m), including net cash of US$13.5m.

In the announcement the Antrim repeated the results of an evaluation of FEL1/13 (Porcupine Basin, offshore Ireland) prospective resources by McDaniel & Associates Consultants Ltd. The two largest leads (‘C’ and ‘M-3’) represent 42.7% of the total unrisked property best estimate prospective boe resources. They are estimated to have unrisked gross best estimate prospective resources of 126MMbbl oil, 1.9Tcf of gas and 35MMbbl of condensate. Antrim owns 25% of this licence and is thus estimated to have risked mean net prospective resources from these two of 14.8MMbbl of oil, 248Bcf of gas and 5.6MMbbl of condensate. In December 2014 Kosmos prepared a prospect inventory that included several leads previously identified and highlighted three prospects, including two tilted Jurassic fault blocks and a Cretaceous submarine fan. Two of the three prospects were included as leads in the prospective resources evaluated by McDaniel & Associates.

In June 2015 Antrim contracted Offshore Installation Services to plug and abandon permanently three suspended wells on the Fyne Licence and one suspended well on the Erne Licence in the Central North Sea. The well abandonment campaign commenced on 8 July 2015, including six Central North Sea wells from another operator, allowing Antrim to share certain common costs. The first phase of the ten-well abandonment programme was completed on 15 August 2015 and the final phase is expected to be completed in early September 2015. The estimated total gross cost for abandonment of Antrim’s four wells is £5.0m (C$7.9m), with the estimated net cost to Antrim totalling £2.1m (C$3.25m).

RFC Ambrian Comment: The working capital position was as expected. We believe the FEL1/13 prospective resources are large enough to be of interest to most large/mid-cap oil companies and should allow Antrim to farm out part of its 25% interest in the licence for carry on an exploration well once oil market conditions improve.

This content has been approved under section 21(1) of the FMSA 2000 by RFC Ambrian Limited ("RFC Ambrian") for communication only to eligible counterparties and professional clients as those terms are defined by the rules of Financial Conduct Authority. The contents are not directed at retail clients as RFC Ambrian does not provide investment advisory services to retail clients.  RFC Ambrian publishes this document as non-independent research which is a marketing communication under the Conduct of Business rules. It has not been prepared in accordance with the regulatory rules relating to independent research, nor is it subject to the prohibition on dealing ahead of the dissemination of investment research. It does not constitute a personal recommendation and does not constitute an offer or a solicitation to buy or sell any security. Neither RFC Ambrian nor any of its directors, officers, employees or agents shall have any liability, howsoever arising, for any error or incompleteness of fact or opinion in it or lack of care in its preparation or publication; provided that this shall not exclude liability to the extent that this is impermissible under the law relating to financial services. All statements and opinions are made as of the date on the face of this document and are not held out as applicable thereafter. This document is intended for distribution only in those jurisdictions where RFC Ambrian is permitted to distribute its research. In particular, it is not intended for distribution in and is not directed as persons in the United States.  On the date of this document, RFC Ambrian, RFC Ambrian's holding company, persons connected with it and their respective directors may have a long or short position in any of the investments mentioned in this document.
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