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Solo Oil has a wealth of options as new Ntorya estimates exceed expectations

The better-than-expected estimate for Ntorya is obviously good news, increasing the project's size by around 40% from the operator’s previous estimate.
oil and gas operations
A third Ntorya well will be drilled later this year

Solo Oil PLC’s (LON:SOLO) share price shot up in the moments following the news of a major gas resource upgrade for the group’s Ntorya project in Tanzania.

Clearly, the news represents a very significant milestone, but, now, the question for investors is what happens next?

Ntorya operator Aminex on Monday morning released the findings of an independent competent persons report, produced by RPS Energy, which estimated some 1.87 trillion cubic feet of gas-initially-in-place and confirmed 762.8bn cubic feet of contingent gas resources.

The better-than-expected estimate for Ntorya - which is now more than 40% larger than the operator’s previous estimate - is obviously good news.

At the same time, though, for Solo Oil specifically it brings to the fore the issue of project funding.

Solo owns 25% of Ntorya, and, while two of three wells envisaged for the field development are already in place, there’s still a meaningful amount of capital needed to bring the increasingly large Ntorya project to fruition.

Deal-making could provide an answer

A potential new partnership deal, via a farm-out, has been long talked about both by Solo’s management and its investor base.

Solo’s negotiating position has undoubtedly been strengthened by the resource upgrade as the increased scale may well solidify interest from potential new investors and partners.

Moreover, the company has previously admitted that a complete divestment of the Tanzania assets could be possible.

In September, Solo said it was considering its options for monetising its stake in the project.

Speculative investors may now wonder whether that is now more of a live possibility. There’s probably a solid argument for selling either part or all of Ntorya, particularly as the company has a stake in the Horse Hill project, back in the UK, and pre-production capital is required there also.

Solo has been fortunate to have had two significant successes. For a management team that has had to steer through recent oil market difficulties, deciding which success to prioritise presents something of a good problem to have – nonetheless, investors will likely have their own views on which project should take precedence.

Will Solo be able fund its 25% stake?

If a deal is not sought, or one can’t be agreed, the question is then whether or how Solo Oil can afford to not only fund its share of the capital bill, but, also whether its finances can keep pace with the operator’s ambitions.

Aminex owns 75% of the project and, having food a stronger financial footing in recent years, the project operator has been keen to advance the project as quickly as possible. Aminex now intends to drill the third Ntorya well later this year, and at that point the main elements of the initial field development will be in place.

Investors may wonder whether Aminex will now want a bigger project (beyond the three wells) sooner.

The new CPR details some 80.6bn cubic feet of gas described as ‘pending development’, meanwhile, a further 682bn cubic feet of contingent gas resource are seen outside the three-well development and are marked as ‘development unclarified’.

A field development plan for the initial three-well Ntorya field was submitted to the Tanzanian authorities back in September and talks have taken place to advance the process since then.

The stated plan is to begin the phased field start-up and add additional wells according to gas demand in Tanzania.

Development via the planned early production system would open up revenue-generating production into the largely in place infrastructure. As a result, the partners are expecting to swerve a significant amount of the upfront capital requirements that would ordinarily be tied to a new field start up.

Nonetheless, the third well will need to be paid for. The first two wells cost around US$12mln gross, as such Solo could expect to cough up around US$3mln for the third, before further infrastructure and development spending to get the gas production to market.

A loan deal is in place but some equity dilution is possible

In November, Solo agreed a US$5mln loan facility with RiverFort Global Capital and that saw an initial draw down of US$1.5mln.

Solo can dictate the subsequent draw-downs and the debt is convertible to equity.

For context, following Monday’s share price advance, Solo Oil has a market capitalisation of almost £20mln.

The company’s most recent financial results statement (released last September) showed that it finished the first half of 2017 (on June 30) with £526,000 of cash and equivalents and generating £451,000 of revenue from its share of the single-well Kiliwani North field it made a £306,000 loss from operations.

At the time of the Riverfort arrangement, Solo boss Neil Ritson told investors that the loan was decided upon following a “thorough review of the funding options available to Solo” and that the facility’s first tranche gave the company the ability to cover its share of the anticipated costs related to its multiple activities for the “near future”.

He added: “Should we seek to raise significant operational funds, for example to drill additional wells in Ruvuma, we will open that funding round to existing shareholders to participate.”

This prospect of equity dilution may well account for at least some of the pullback in the Solo share price since the CPR numbers were first released. At around midday, Solo shares were up 0.43p or 10% changing hands at 4.55p (the day’s high was marked just below 5p per share).

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