Independent Resources
(IRG LN)
Stock Data Share Price: 0.65p Market Cap (M): £1.3m EV (M): £1.3m Free float 79.8%Liquidity (30 day ave) 7.8m Price Chart 52 Week Range 0.53p 0.65p 3.63p Company Summary
Independent Resources is an oil and gas exploration company with assets in Egypt, Italy and Tunisia.
William Arnstein Tel: +44 (0)20 3463 5020 [email protected] www.brandonhillcapital.com
Capital Raising
Event
To finance the transformational East Ghazalat acquisition Independent Resources (“IRG”) has successfully raised, subject to shareholder approval, £800,000 in funding through an equity placing. The acquisition will secure net production to IRG of 220bopd at a transaction cost of US$3.5/bbl for 2P reserves (0.5mmbbl net to IRG). This is comparatively cheap compared to other recent transactions in the same jurisdiction and provides a platform for additional investment opportunities currently being evaluated.
Summary of transaction
■ On 6 October 2015, Independent Resources announced that a joint venture company owned 50-50 with Nostra Terra Oil & Gas (“NTOG”) had reached agreement with TransGlobe Energy to acquire a 50% non-operated interest in the East Ghazalat concession in Egypt.
■ The headline consideration for the transaction is US$3.5m satisfied by US$1.0m in cash at legal completion and a US$2.5m loan note from TransGlobe Energy. The loan note will be adjusted for net working capital at the effective date of 30 June 2015 and subsequent net cash flows and is repayable within two years. The loan note will bear interest at 10% per annum. Debt financing at the JV level will be used to fund future capex. ■ The East Ghazalat concession is located in the Western Desert
region of Egypt and is operated by North Petroleum, a subsidiary of ZhenHua Oil. The concession consists of two development licences covering the producing Safwa oil field and the undeveloped North Dabaa gas/condensate discovery.
■ Current gross production from the Safwa oil field is approximately 880bopd (220bopd net to IRG) and gross 2P reserves are estimated at 2.0mmbbl (0.5mmbbl net to IRG). Management estimate an additional 5.6mmbbl (1.4mmbbl net to IRG) is recoverable from further development of the Safwa oil field. Contingent resources of 0.6mmboe (0.14mmboe net to IRG) are attributed to the North Dabaa discovery.
■ Headline acquisition multiples of US$3.5/bbl (per 2P reserves) and US$8,000/bopd compare favourably to other transactions in Egypt during 2015. 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
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Conditional placing Conditional placingConditional placing Conditional placing
IRG has announced a conditional share placing raising gross proceeds of £800,000 through the issue of 133,333,333 new ordinary shares at a placing price of 0.6p/sh (16.7% discount to the previous closing price). Net proceeds after expenses are estimated at £740,000. Management and directors of the company have subscribed for £26,000 in the placing and £54,000 (net of taxes) through the conversion of accrued salaries and consultancy fees. An equal number of placing warrants (133,333,333), with an exercise price of 1p/sh, will also be issued potentially raising a further £1.33m. A general meeting will be held on 16 November 2015 to approve the placing.
East Ghazalat concession East Ghazalat concessionEast Ghazalat concession East Ghazalat concession
The East Ghazalat concession is located in the Western Desert region of Egypt. The concession was originally awarded to Vegas Oil & Gas in 2007. Since then a number of exploration and appraisal wells have been drilled and two discoveries made. TransGlobe Energy farmed into the acreage in 2010 and ZhenHua Oil acquired Vegas Oil & Gas interest in 2014 as part of a US$750m transaction. Two development areas have been awarded totalling 62km2, with the remaining exploration acreage
relinquished in 2014.
The Safwa field was the first discovery made on the concession in 2010 and brought onstream in 2012. The field (made up of two distinct oil pools, Safwa and Sabbar, with 33/38oAPI oil) currently has 8 wells in
operation, which are tied into an early production system, with production averaging 1,248bopd in 2014. Oil is trucked 35km to the South Dabaa facilities, where exclusive facilities exist for the oil from East Ghazalat, before being co-mingled with other production and exported via pipeline. The Safwa development licence is due to expire in July 2031 and has a 5 year extension beyond this.
Exhibit 1: East Ghazalat concession
Source: Independent Resources
The North Dabaa field was discovered in 2013 and successfully appraised in 2014. The field consists of both oil and gas bearing reservoirs and production testing demonstrated high productivity (the North Dabaa-1X well flowed at 16mmcfpd and 1,620bopd of condensate). The North Dabaa development licence is due to expire in February 2034 and has a 5 year extension beyond this.
Reserves and resources Reserves and resourcesReserves and resources Reserves and resources
A reserves assessment by Degolyer & McNaughton estimate that at 30 June 2015 remaining 2P reserves attributable to the Safwa field amount to 2.0mmbbl. Management believe an additional 5.6mmbbl of resources could be recovered by an expanded drilling programme and water flood. There are also some lower cost well optimisation opportunities to exploit such as recompletions and missed pay.
Exhibit 1: East Ghazalat reserves and resources
mmbbl Gross 100% Net 25% WI
1P 0.612 0.153
2P 2.000 0.500
3P 2.528 0.632
2C (mmboe) 0.558 0.140
Source: Independent Resources
Due to marginal economics, there are only contingent resources attributed to the North Dabaa gas discovery. These are currently estimated at 0.56mmboe, although there is considerable uncertainty due to potentially anomalous flow test results. To fully evaluate this potential a request has been made to the Government for a six month extension to complete subsurface studies and the outcome of this process, along with the economic implications of new gas prices, will determine the future work programme. As this could include dropping the licence, we consider the North Dabaa as optionality.
Financials FinancialsFinancials Financials
Oil & gas concessions in Egypt are governed by production sharing agreements (“PSC”) with the Egyptian General Petroleum Corporation (“EGPC”). The principal terms of the contracts allow for 25% cost recovery and a 20% profit share (variable between 17% and 20% depending on the level of production), with operating costs recovered in the period incurred and capex recovered over a five year period. As at the effective date of the transaction, an unrecovered cost pool of US$27m exists. Management anticipates a three month receivable period, which seems reasonable given the improving payment cycles reported by other operators in the country.
For 2014, TransGlobe reported revenues and a profit before tax and impairments from the East Ghazalat concession of US$11.0m and US$1.1m respectively. For 2015, the financial performance is expected to be substantially weaker due to lower oil prices and production volumes (currently averaging 880bopd). The production decline reflects the sharp drop in investment during the period.
As mentioned above, a number of options to increase production exist. To ensure that these plans can be executed in a cost effective manner, IRG will seek to renegotiate key elements of the joint operating agreement (“JOA”) with ZhenHua Oil, including an audit of past expenditure. As this will take some time to complete, the nearer term objective is to agree a 2016 budget that adequately reflects the lower oil price environment.
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In an upside case, requiring a further gross investment of US$13m in 2018, management forecast that gross production could peak at 3.3mbopd, increasing net operating cash flows to US$5.1m pa. Using the same oil price deck, the NPV10 to IRG in this scenario is US$9.1m. Exhibit 1: East Ghazalat economics
Net to IRG Unit Base case Management
Production mmbbl 1.1 1.9
Capex US$m 2.4 5.7
Peak funding requirement US$m 4.7 4.7
Cum. operating cash flows US$m 10.3 25.3
Payback Year 2019 2019
NPV10 US$m 3.0 9.1
IRR % 38.9 58.0
Source: Independent Resources
Tunisia TunisiaTunisia Tunisia
IRG has an 86.345% working interest in the Ksar Hadada licence, located onshore in south-eastern Tunisia. During 2015, an RSDD-H satellite survey has been acquired with the results used to remotely detect potential petroleum accumulations. The technology achieves this by comparing variations in surface landscapes with analogous proven discoveries. According to the company the results of the survey has de-risked the Gazelle prospect and a number of other leads. Work is now ongoing to integrate the data acquired with existing 2D seismic. A farm-in process is befarm-ing targeted farm-in November 2015 ahead of potential drilling in early 2016.
Brandon Hill view
The East Ghazalat transaction appears an attractive deal for IRG, securing a revenue generating asset and moving towards an appropriate portfolio given the oil price environment and the impact this will have on exploration activity within the industry. With that in mind, renegotiating the JOA is a sensible step in securing the value of the asset and ensuring that the cost structure is appropriate.
Ultimately the success of the transaction will be determined by the future of oil prices, which the company cannot influence, and the outcome of the technical evaluation of the asset and future investment programme. With significant operational and commercial experience in Egypt, we believe the IRG management team is well placed to assess this potential and exploit the opportunity to grow the resource base significantly.
Research Disclosures
William Arnstein William Arnstein William Arnstein William Arnstein
Will is a CFA charterholder and has more than 10 years’ experience as a sell-side equity research analyst having previously worked at Dresdner Kleinwort, Jefferies International and finnCap. In his last role, he co-founded the Oil & Gas franchise at finnCap and later became Head of Oil & Gas, where he also coordinated corporate finance and corporate broking in addition to his responsibilities as a Research Director. During his career, Will has worked closely with many international E&P companies, both listed and private, evaluating assets across the globe and has developed particular expertise in petroleum economics and asset valuation. In 2010, Will was awarded No.1 stock picker for the European energy sector in the FT/Starmine Awards.
Tel: +44 (0)20 3463 5020
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Research disclosure as of 26 October 2015
Company Name Disclosure
Independent Resources (IRG LN) 1,2,5,7,8,9
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