Solo Oil Plc (Solo) is not your average energy production company. Instead they have a strategy to invest primarily in oil and gas assets, be it at an exploration or production phase. This has created the company a portfolio of assets across the world, with excitement growing in Africa, as the Kiliwani North-1 well, Tanzania, has move into production. This was a key milestone for the company as it will be bringing in revenue for the first time.
Even with good results at Horse Hill earlier this year, Solo will still have a busy calendar with the other projects in their portfolio. Having caught up with the company at the Master Investor show, we thought it could be a good opportunity to put questions from investors to Solo so they could be brought up to date with current and future projects.
As an investment Company rather than a producer, what involvement do you have in deciding the direction the bigger partners wish to take with regards to the future of the projects Solo is invested in?
Solo is an active partner, often providing technical expertise to the group. We have a long-established track record of working proactively with operators to enhance the value of assets and projects that we have invested in; this results in the company having more influence than may otherwise be anticipated from simply looking at Solo’s equity share.
With the option to increase the stake in Kiliwani to 10%, do you have enough funds to pay for the increased stake from the placing announced on the 7th of April?
A portion of the funds from the April 7th placing were used to increase equity in Kiliwani, some was also used to cover other working capital needs. The option to further increase Solo’s stake will be triggered by announcement of commercial production. ): A decision will then be made at that point whether it is in the shareholders’ best interest to take up the option or maintain the current equity level.
With the Kiliwani North-1 well now flowing gas, do you project that the company will be able to fund further assets from revenue generated in Tanzania?
We are pleased that Kiliwani North is now cash generative. Income will increase throughout the commissioning phase and we anticipate reaching a level of over $100,000 per month from the third quarter of 2016. The money will then be re-invested to grow the business.
Ruvuma has been described as having massive potential for the company. Can Solo and Aminex advance Ruvuma without the need for a larger partner?
Aminex is a competent operator and has an established good working relationships in Tanzania with contractors, the government and the state oil company, TPDC. Technically, Aminex and Solo could develop the Ruvuma basin assets without the need for a larger partner. The project will, however, need to be funded and that is where there may be a role for partners. Solo typically aims to hold a stake of 5-15% and is therefore “overweight” in Ruvuma where the company owns a 25% stake. We feel that this means that the stakeholders would ultimately be best served by financing the development of the asset by farming down this stake at the appropriate time to maximise return, which may be after drilling of the next phase of wells.
Recently, someone referred to Tanzania as “The Qatar of Africa” with fast-growing economy, population and high demand for Energy, the next sweet spot for gas production as an emerging market opportunity. There is a strong support from the new elected Government and also China is making considerable investments in infrastructure projects. Would you like to tell us your views on this, particularly on the local gas demandand export potential?
These are certainly exciting times for investments into Tanzania. Historically the country has had to rely on importing fuel or use electricity generated from ageing hydroelectric power stations.
Since the discovery of gas in the country and along its coast, the government has actively encouraged the development of power generation facilities and the demand for power has been growing at an accelerated pace.
The Chinese have invested heavily in gas infrastructure such as pipelines and processing facilities and these mean that new developments can be tied in and connected with the power-hungry market in cities such as the country’s capital, Dar es Salaam. As gas availability increases, more power stations are being built, electricity supplies are becoming more reliable so businesses are growing, and with them so too is the demand for more gas.
In addition to domestic demand, Tanzania has recognised the potential of exporting power to neighbouring countries that have a less well-developed infrastructure and work has already begun to start generating power for export to Kenya.
The demand for gas has been a case of “chicken and egg” in that gas is needed to create demand for more gas but now that that cycle has started, demand will keep growing.
When are you planning the next trip to Tanzania?
Solo’s Chairman, Neil Ritson, will be visiting Tanzania with Aminex’s CEO, Jay Bhattacherjee, at the end of May. During the trip, Mr Ritson will visit Kiliwani North and the Ruvuma Basin as well as meet influential business leaders and representatives of the government and TPDC.
Moving on to Nigeria, when do you anticipate that the licenses for the two marginal fields will be obtained?
The current oil price environment has hit the industry in Nigeria very hard. This has been exacerbated by political upheaval and social unrest. As a result, the government has not progressed the marginal field programme at this point. Solo’s investment into Burj Petroleum has, however, positioned the company to make investments once the situation improves and we will be monitoring the situation closely to ensure that we are well placed to apply for the marginal field licenses when they are made available.
With the success of the discovery well at Horse Hill, are you anticipating similar results from the Isle of Wight?
We would love the successes from Horse Hill to be replicated in our interests in the Isle of Wight. The acreage awarded to Solo in the 14th Onshore Licensing Round earlier this year is highly prospective and already contains a discovery at Arreton, which was drilled during the 1970’s but never tested. Only time will tell if the IOW will prove to have large reserves. But the initial indications are very encouraging.
Have the Company actively attempted to divest interests in Reef Resources or look for methods to try and advance the asset? Considering that this has been a stagnant asset on the Balance sheet for several years, do you see any value creation in the medium term?
Solo has not sought to divest its interests in the Ontario Reefs project. Althoughe still believe in the technical merits of the project, the problems lie with the operator, Reef Resources, who have run into financial difficulties. We are seeking ways to unlock the potential of the project and move it forward, but that has been hampered by the current oil price environment. Nevertheless we believe that a solution can be found so that value can be created in the future.
What do you feel are the biggest challenges that Solo will face in 2016?
Markets do not like uncertainty. Oil prices have increased by almost 70% since their lows in January of this year however the volatility created by the rapid swings in price and lack of stability have caused many investors to stay on the sidelines or leave the commodity sector, irrespective of the quality of underlying assets. This is of course something that is affecting the whole industry.
Solo is far better placed than many companies in this economic environment. The company is run with very low overheads and benefits from a diversified portfolio of assets which are both geographically diverse and include significant gas assets, which have a long-term stable price. The company is therefore well placed to weather the current industry downturn and to look for opportunities to grow as things improve.
We thank Solo for taking the time to answer the questions that many current, and potentially new shareholders, wanted to ask. The company certainly has a lot going on so we will undoubtably have more news following the excitement surrounding Tanzania and revenue improvement.
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