INTRODUCTION
In the news: Hummingbird Resources
RFC Ambrian has been appointed Nomad and Broker to Hummingbird Resources*† (LON:HUM). Hummingbird is developing the advanced Yanfolila Gold Project in Mali as a low-cost, high-grade open-pit mining operation, with first gold production targeted for 2016. Yanfolila has a current 1.8Moz gold inventory based on multiple high-grade pits, averaging 2.8 g/t Au. The project, which is fully permitted, is located in the prospective Sikasso Region, 40km to the west of the town of Yanfolila, and benefits from established infrastructure. A full report will follow in the near future.
Well, thanks to Glencore, I think we can safely assume that high levels of debt are now the focus for everybody. In the wonderful world of US fraccing, things may be about to get particularly nasty. The twice-yearly reset of borrowing is taking place; this will set the available limits of debt from lenders under Reserve Based Lending (RBL) facilities. If a company’s reserves are re-assessed at the new prevailing oil price and come down by, say, 30% then its available borrowing comes down accordingly and it will have to reduce its borrowing to match.
It’s like being margin called based on your reserve base. Companies typically then have 3-6 months to correct their default by paying down their debt in monthly instalments. Apparently the ‘spring’ redetermination of borrowing bases wasn’t too bad, but the ‘fall’ ones look a bit of a car crash. The consequence of all of this is, of course, that many US operators may not survive into 2016/17 (unless they can squeeze even more out of the high yield bond markets and hope to hang on for a price recovery), with the follow-on implication that there won’t be new capital available for drilling, fraccing or the completion of new wells. So, even if prices did improve some of these players might drop out of the game, at least until they are restructured or sold.
Oil & Gas
Onshore Nigeria — A Focus on Seplat and Eland
Nigeria has Africa’s largest oil and gas proven reserves (some 67Bboe) and we believe that the new APC government, led by President Buhari, is slowly addressing the severe corruption and mismanagement issues that have hindered the development of Nigeria’s oil sector for decades. Although the current low oil price has damaged the Federal Budget and lowered oil export receipts (causing the Naira to devalue), it is also focusing minds on how to address some of Nigeria’s structural problems. Low oil prices actually make reforms easier to sell to the public and other stakeholders as the results of past bad policy and practices are laid bare. Some structural reforms, such as ending fuel subsidies, become easier at low oil prices as the required adjustment to end prices is smaller.
In this report we are initiating coverage of Seplat (LON:SEPL) and Eland (LON:ELA) , both with BUY recommendations. We estimate that Seplat’s fair value is 145p, 92% above its 75.8p equity market price on 24 September 2015. Eland’s fair value is 116p according to our NAV model, 150% above its 46.5p market price. We believe the market is overestimating the problems that both the companies will face in the coming years. In particular, we think that while Nigerian regulatory change is inevitable, it is unlikely that indigenous companies such as Seplat and Eland’s JV subsidiary Elcrest E&P will be greatly affected. Getting paid their cash calls on the NPDC will be challenging, but both companies are working on payment structures to manage this risk. The continued divestiture of onshore/shallow water Nigerian licences by international oil companies, a new marginal field licence round and commercial domestic gas pricing should present great scope for creating value over the next few years.