Solo (AIM: SOLO), the AIM investing company targeting attractive production and development opportunities within the European gas market, provides the following strategy, corporate and operations update in light of the fall in global oil prices and the ongoing situation of the global COVID-19 pandemic (“COVID-19”).
In early 2019, the Board outlined a plan to establish the Company as a sustainable gas-focused production and development company within the European gas market. At that time, the Board announced a 3-year net production target of 5,000 boepd which was, subsequently, increased to 20,000 boepd in October 2019, when the deal was announced with ONE-Dyas to acquire a package of offshore producing and development assets in the Netherlands. As Shareholders are aware, at the end of February 2020, the Board took the decision to terminate the sale and purchase agreement with ONE-Dyas as there had been a significant shift in the underlying value of the assets. This was driven by an increase in operating costs associated with the assets and a significant reduction in the European gas price environment which saw the Dutch benchmark gas price (“TTF”) fall from approximately €16 / MWh in October to approximately €7 / MWh by the end of Q1 2020. The Board remains extremely disappointed not to have closed its first acquisition in the European gas market. However, the decision was made to ensure the Company only engages in opportunities which create sensible risk-weighted value for shareholders. Events in the latter part of Q1 2020 and early Q2 further vindicate and support the decision to terminate the acquisition, in particular:
· forecast European gas demand has fallen 6%, relative to 2019 levels, in part attributable to COVID-19 and successive impact of lower heating demand from warm winters;
· European gas market is facing severe challenges, with significantly medium-term oversupply, including spec LNG cargoes “hunting” for end markets;
· weaker demand from the power and industrial sectors in 2020 has compounded deteriorating market conditions, with European gas storage looking set to fill in the coming months; and
· 5-year low spot price of approximately €4 / MWh in May 2020.
The challenges presented by COVID-19 are accelerating the dialogue on a green European economy. In the coming months, the Board believes this will further expedite the industry-wide dialogue and action plan towards a zero-carbon energy market in continental Europe, reducing the reliance on traditional sources of energy. Given the ongoing structural difficulties and high volatility experienced in the European gas market, the Board has commenced a broader European energy market review to identify opportunities which meet the following criteria:
· cash generative, with the potential to re-invest operational cash flow in further growth;
· situated within the broad energy space, a market which the Board knows well;
· primary targets within the natural gas space, augmented by opportunities which may benefit from low carbon and electrification dynamics;
· assets which can attract the necessary investment capital, taking appropriate account of growing investor sentiment towards ESG and SRI indicators; and
· assets which deliver stable returns, with lower exposure to global commodity prices.
The global oil price crisis and the COVID-19 epidemic have made new business development activities challenging due to restricted travel, low forward curve pricing (restricting the accessibility to debt capital), reduced investment appetite from equity capital markets and a divergence in buyer and seller expectations on price. Despite these challenges, the Board continues to diligently seek opportunities to grow a sustainable investment business focused on cash generative energy assets.
With the inevitable increase of renewables replacing traditional hydrocarbon sources of energy, there will be an increased frequency of imbalance in European national grids due to the requirement of flexibility of supply from renewable energy generation. The Board, will therefore, consider broadening the remit of the Company’s acquisition and investment strategy to consider energy transition opportunities in the European power sector including gas storage, gas peaking and battery storage which are complimentary to producing gas assets and meet the above objectives.
Following today’s announcement that the Company has secured, on attractive commercial terms, a US$5 million financing facility, combined with the cost cutting exercise and the right sizing of the organisation to reflect the macro economic environment, the Board is confident that the Company is well positioned to both extract maximum value from its existing gas portfolio and continue its business development work to deliver value additive revenue generating opportunities.
The Board has acted rapidly in response to COVID-19, taking a number of immediate measures to manage the Company’s cost base and cash flows to ensure resilience. The Board is highly focused on cost discipline and has made considerable progress over the past 18 months in reducing the Company’s normal course G&A, accelerating an aggressive cost cutting exercise in recent months in order to preserve the Company’s existing cash position. These actions have included:
· c. 50% reduction in Directors’ fees in February and March 2020;
· 100% reduction in Directors’ fees since April 2020;
· Executive Management unpaid since December 2019;
· implementation of a share option scheme in lieu of fees for the Board and Executive Management which will support the Board’s desire to preserve the Company’s cash position;
· reduced costs further by transitioning finance function to a fully outsourced third-party service provider; and
· Romina Mele-Cornish will stand down as CFO (currently a non-Board position) from 30 June 2020.
The Company has been working to adopt a plan that will help to conserve the Company’s cash position in the near term and seeks to maximise alignment between the Board, Executive Management and the Company’s Shareholders. Accordingly, the Company proposes to grant the following nominal cost options (“Director Options”) over new ordinary shares of 0.2p each in the Company (“Ordinary Shares”) to Directors and member of the Executive Management team (excluding Alastair Ferguson). The Director Options have been granted over a total of 8,990,039 Ordinary Shares and have an aggregate value equal (on a net basis, after deduction of the nominal exercise price per Ordinary Share) to the salary and/or fees due to the relevant option holder up to 31 May 2020.
Details of the Director Options granted are outlined in the table below:
Further nominal cost options will be granted to all Directors in settlement of future salary and / or Directors’ fees that would be due to be paid to the relevant individual over the period to 30 June 2021. Going forward, the relevant individual will receive additional Director Options on a month-by-month basis. The amount will be equal (in value terms, by reference to the volume weighted average share price over the relevant month) to the salary and / or Directors’ fees that would otherwise have been payable to the relevant individual for the relevant month. This arrangement has been put in place to preserve the Company’s financial position and reflects a cash saving to the Company in excess of £200,000 to 30 June 2021.
The Director Options granted today represent approximately 1.4 per cent. of the Company’s currently issued share capital.
One-off Share Award to Alastair Ferguson
In recognition of the work undertaken by Alastair Ferguson in his role as Executive Chairman since February 2019 and the progress the Company has made under his leadership towards delivery of the Company’s new strategy, the Board has agreed that Alastair Ferguson shall be awarded a one-time discretionary share award of 7,500,000 Ordinary Shares (the “Share Award”) (which has a value of approximately £79,000 as at close of trading on Friday 26 June 2020).
The Ordinary Shares that comprise the Share Award will be delivered from the existing Ordinary Shares held as trust assets within the Company’s Employee Benefit Trust.
It has been agreed with Alastair Ferguson that the Share Award shall be delivered to him in full and final settlement of any salary and / or Director’s fees owed to him by the Company up to 30 June 2020, noting that Mr Ferguson did not draw the Executive Chairman salary from the business during his time as Executive Chairman.
It is also proposed that the Company grants the following incentive awards (“Incentive Awards”) to each Director and Douglas Rycroft, the Company’s Chief Operating Officer, as part of their normal incentivisation arrangements to align them with the future share price performance of the Company:
Each Incentive Award will be delivered as an option over an Ordinary Share with an exercise price of 1.3p per Option, which is approximately a 24 per cent premium to the closing mid-market price of the Company’s Ordinary Shares on 26 June 2020.
Each Incentive Option will ordinarily become exercisable on the second anniversary of the grant date (being 30 June 2022), except in the event of specified corporate events or, exceptionally, if the option holder leaves as a ‘good leaver’.
Following the grant of the Director Options and Incentive Awards, existing options and warrants over 108,206,949 Ordinary Shares, in aggregate, are outstanding (including historical options and warrants and those issued to Prolific Basins LLC), representing approximately 16.7 per cent. of the Company’s current issued share capital. Whilst the Board recognises that this represents a higher percentage of the Company’s share capital under option than is typically recommended, options over 5.5 per cent. of the Company’s currently issued share capital are significantly underwater and are expected to lapse unexercised on or before 31 October 2021 (over 60% of these expire on or before 31 December 2020). The Board notes that over 92 % of these options and warrants were granted between 2009 and 2018 to individuals who are no longer associated with the Company. Additionally, Non-Executive Director, Jon Fitzpatrick, has, with effect from today, surrendered options over 2,500,000 Ordinary Shares previously granted to him.
The Incentive Awards granted today to Directors represent approximately 7.9 per cent. of the Company’s currently issued share capital (excluding warrants issued to Prolific Basins LLC). The Board has retained additional headroom for future Incentive Awards as it recognises that the future performance of the Company will, to a significant extent, be dependent on its ability to retain the services of key executives and to attract, recruit, motivate and retain other suitably skilled, qualified and industry experienced personnel to form a high calibre management team.
Tanzania operations update
Following the update provided by the Company on 27 April 2020 noting that it had received confirmation from the Operator, Ndovu Resources Limited, that the Mtwara Exploration Licence, which sits within the Ruvuma PSA, and contains the Ntorya Gas field, has been formally extended by the Ministry of Energy of Tanzania, the Company continues to work with Aminex to prepare for the next operational planning steps.
It is noted that receipt of this extension was one of the last remaining conditions required for Aminex PLC (the owner of Ndovu Resources Limited) to close the farm-out agreement with ARA Petroleum Tanzania Limited (“ARA”) and Aminex has provided subsequent updates to the market on the progress of completion. Once the deal is completed there will be a process to install ARA as operator under the JOA and Solo looks forward to having ARA actively leading the development of the Ntorya Gas Field in the coming months.
Commenting on the update, CEO Tom Reynolds said:
“We want to reassure shareholders that we are working hard to deliver our strategy, whilst running the Company as cost-efficiently and effectively as possible. Our ongoing sales process is progressing and we are encouraged by the interest in the Company’s natural gas assets in Tanzania. The Board will base any decision on what is in the best interests of Solo’s shareholders, updating the market when we can with any developments. In parallel, we continue to screen opportunities in line with our augmented growth strategy and believe that the recalibration of the European gas market in light of the current turmoil will present the Company with an increased pipeline of compelling opportunities a broader range of revenue generating gas and power opportunities.
I would like to extend the thanks of the Board to Romina Mele-Cornish for her support and commitment to Solo since her appointment. Romina has been instrumental in helping to further strengthen the finance function that will now operate on a fully outsourced basis with our long-standing provider and we thank her for her dedication and contribution during her tenure as CFO.
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