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Tower Resources attracts plenty of well-wishers

“Money’s too tight to mention” might as well be the theme tune of the resources sector, but Tower Resources has been singing a different tune. It has received strong backing for its plans to explore Africa, starting with the Welwitschia-1 well off the coast of Namibia

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“Money’s too tight to mention” might as well be the theme tune of the resources sector, but Tower Resources (LON:TRP) has been singing a different tune.

It has raised £9mln through a placing of shares at 1.125p each, after no less than 44 meetings with the great and the good of the City.

The placing saw two existing shareholders substantially increase their holdings, and a number of new institutional investors get on board.

It was also good to see the directors “put some skin in the game” and cough up for £1.2mln of shares, making their total investment to date over £8mln.

In a further example of how to do things right, the company is giving its loyal shareholders the chance to buy new shares at the same price by way of an open offer, on the basis of two new shares for every nine shares currently held, so this is no back-room City carve–up. They can also subscribe for further shares if they want to, subject to demand.

If fully supported by shareholders, the open offer could raise an additional £4.1mln. The company does not actually need the money per se, but the board thought it was the right thing to do to involve shareholders.

“It's shareholder democracy in action,” Tower's chief executive officer, Graeme Thomson told Proactive Investors.

So, what is the money for, and why was the City so obliging in providing it?

Primarily, the funds will cover Tower’s share of its costs this year for the Welwitschia-1 well off the coast of Namibia, where Spanish oil and gas giant Repsol is the operator.

Repsol’s involvement in the exploration of what is pretty much virgin territory for oil companies is a big reason why Tower’s share issue received the backing it did.

Repsol, with their technology, they are streets ahead of most companies,” asserted Thomson.

Tower is looking to “farm-down” its stake in the project to 20% from 30% for cash and a carry in order to cover any remaining drilling costs for 2014, but Thomson is more than happy to be working with such an accomplished big name.

“That’s the way we have to do it. The sector has changed. We have to assume we’ll be operating under cash constraints, so it makes sense to use someone else’s money,” Thomson explained.

It is through Repsol that the Namibian joint venture has secured the use of a spanking brand new oil rig, the Rowan Renaissance, which suggests there will be no corner cutting on the operation.

Thomson is keen for the company not to be a one-trick pony, however, and so some of the funds from the placing will be used to pursue new ventures.

“We want to diversify the asset base, but we’re staying in exploration; we don’t want to be in production. Ultimately, the intention is to build a portfolio of assets that someone else would buy,” Thomson said.

To this end, the company made a start in July with the acquisition of Wilton Petroleum, and with it a 20% interest in the Ophir Energy (LON:OPHR) operated Marovoay block, onshore Madagascar.

Madagascar is an area the team at Tower knows very well, and fits in with the strategy of having reasonably chunky stakes in African projects.

“We’ve all worked Madagascar before, so we understand the geology. It’s onshore, lower cost, and we’re carried.

“We don’t want small percentages all over the place, and we’re looking at near-term drilling prospects. To change the speedo, you have to drill,” Thomson believes.

In an ideal world, the company would get a 10-15-fold return on its investment over a period of 12 to 18 months.

First up on the drilling front, though, is the Welwitschia-1 well. Barely a dozen wells have been drilled off the coat of Namibia and, rather like a World War II dreadnought in a gun battle, it might take a few sighting shots for the explorers to find their mark.

HRT recently found oil off the Namibian coast, albeit not in sufficient quantities to be commercial, so that has been deemed encouraging by the Tower board, not least because it found oil and not gas.

“We are in the oil window. We kind of knew that. Where HRT are drilling it is very 'silty'. Where we are, our postulation is that we have bigger grains of sand - more porosity - so the oil should be more mobile and producible,” Thomson explains.

Tower's technical advisers put the chances of finding commercial quantities of oil at this well at up to 31%, which in oil industry terms is pretty good. If the drilling comes up trumps, then the results should be transformational for the company.

If drilling is not successful then it is a case of moving on to the next well. Thomson and his team, as evidenced by their participation in the fund raising, seem confident that they are fishing in the right hole, and with their track record, investors are prepared to back their expertise.

Thomson himself is a founder and former chief executive officer of Sterling Energy, and the former chief financial officer of Dragon Oil, where he found the now giant Turkmenistan asset.

The “two Peters” – Messrs Blakey and Taylor – are also well known to oil stock watchers. Both are non-executive directors and both were founders of TM Oil Production, which later became Dana Petroleum, one of the stars of the UK oil and gas scene before it was taken out for £2bn by KNOC.

Philip Swatman is the senior independent non-exec, and a former co-head of investment banking at NM Rothschild.

The board is chaired by Jeremy Asher, a director of several energy-related companies, including NYSE-listed Pacific Drilling.

“This is a fantastic team of people,” Thomson says.

Peel Hunt reckons the Welwitschia-1 well, with 496mln barrels of oil equivalent net risked resources, is “one of the most high impact wells being drilled by a UK explorer & producer over the coming 18 months”.

It initiated coverage in June with a ‘buy’ rating and a 4p target price and 70p upside.

“Recent third party drilling results from the HRT-operated Wingat-1 exploration well, also within the Walvis Basin, supported the presence of a regional oil-prone petroleum system. In our view, this has positive geological implications for Tower’s upcoming exploration efforts with the Welwitschia-1 well,” the broker said.

Of course, few things in life are sure things, but as Thomson says, “Repsol's technology, combined with a bit of Lady Luck …”

Quick facts: Tower Resources PLC

Price: 0.5925 GBX

AIM:TRP
Market: AIM
Market Cap: £6.54 m
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