Another interesting week in the UK small-cap oil and gas company market:
Hurricane Energy (HUR) announced an operational and corporate update. It’s considering a new production well at an estimated cost of around $60 million and a water injection programme at an estimated cost of around $75 million. Suitable funding arrangements will need to be entered into, which HUR says present a risk of dilution to existing shareholders from a possible restructuring and/or partial equitisation of the convertible bonds. If no agreement can be reached with the stakeholders on additional investment, the field may then be decommissioned, with potentially no value returned to shareholders. HUR is one I was cautioning about a year ago when it was in the low 30s and problems started to become apparent. It’s now down to just over 2.5p. Perhaps remember those touting this over the past year and recall the abuse they and their associates hurled at those who were mentioning the facts. Hard reality here is that the only choice left for shareholders now is between a rock and a hard place.
Bahamas Petroleum Company (BPC) announced belatedly, and perhaps not wholly voluntarily, the details of a remarkable funding agreement with the Cayman Islands based 1798 Volantis Fund Ltd, which is managed on a discretionary basis by Lombard Odier Asset Management. It’s an agreement of a type which all looking for guaranteed profit should aspire to be entering. 1798 has bought shares at 2p, a good discount to market value, and if the Perseverance #1 comes in, they could well be selling those shares for several times the price they paid. If it doesn’t and the price collapses, BPC has to reimburse them for any loss. It’s actually even better than that for 1798, since Bahamas has to pay them for any shortfall under 2.3p, ensuring they make a minimum 15% profit, even in the event of failure. It’s a guaranteed reward for an investor without any risk with the benefit of unlimited upside and it turns out this is not the first time BPC has entered into such an agreement. It will be fascinating to see the subsequent litigation when/if this goes wrong. If you’re puzzled as to why institutions invest in some of these low-quality, high-risk companies and why some companies’ cash appears to be consumed so quickly, perhaps you now start to see the answer. It’s another reason why some of these companies are such appalling investments: guaranteed profits for one preferred shareholder results in massively geared up losses for all the others.
Lekoil (LEK) announced receipt of a statement letter from the requisitioner of the Extraordinary General Meeting, Metallon Corporation Limited. Lekoil has raised over $264 million of equity from shareholders since listing in 2013 and the shares were suspended last month with a market cap of $13 million. During this period Lekoil has spent $129 million on general and administrative expenses, but Otakikpo, its only asset generating returns, has been starved of investment whilst G&A and other costs remain at extremely elevated levels. Since its listing, the Board has awarded the CEO a total remuneration of over $10 million, close to the current market capitalisation of Lekoil and it also recently entered into a related party transaction to extend a material part of the longstanding $1.8 million directors loan to the CEO at a time when the Company is short of cash. Metallon also reminds shareholders of the $187 million fake loan agreement in January 2020, as part of which LEK paid $450,000 of fees to a fake intermediary. It turns out the extension of the director loan to the CEO did not follow the correct process under the AIM rules and ignored a clear message from shareholders to the board, via the previous NOMAD, who as we know resigned, resulting in the suspension in trading of the company’s shares. Metallon is further concerned by the board’s loose interpretation of the dissemination of price sensitive information. The real scandal with all of this is that it’s all pretty much just par for the course at many of these London quoted companies. Metallon is proposing that some new directors be appointed to the board and not unreasonably suggests that the current board’s reluctance to do so indicates a desire by certain directors to avoid both the board and management team being held to account. It’s looking like heads might roll here at last.
Canadian Overseas Petroleum (COPL) announced the acquisition of Atomic Oil & Gas LLC for a consideration of $54 million. The challenge of course is paying for it and COPL already has had to announce that it will not be via an “equity sharing” agreement, the type of financing which finally put Anglo African Oil & Gas (AAOG) in the grave. That leaves plenty of other abusive options open though, in particular convertible loan note finance. The headline numbers for the acquisition appear superficially attractive, but whether there actually will be any profit in the deal for retail shareholders is highly questionable.
UK Oil & Gas (UKOG) announced that it will launch an appeal against Surrey County Council’s decision to refuse planning consent for its Loxley gas appraisal project. UKOG plans to submit an appeal to the Planning Inspectorate early in the New Year, with an expectation that a public hearing or inquiry will be held in the following six to nine months. The cited grounds for refusal were in direct conflict with both the planning and highway officer’s reports and the officers’ two separate recommendations for approval. An appeal will enable an independent professional inspector from the Planning Inspectorate to consider the evidence and come to an “objective, evidence-based decision.” Unfortunately, we don’t come across too many of those these days.
On the brighter side, Global Petroleum (GBP) announced that interpretation of the seismic data recently acquired is progressing well and it expects to be able to publish an updated prospective resources estimate for PEL0094 in the latter part of January 2021. The farm out process for this licence has now commenced and the data room will open next month. Jersey Oil & Gas (JOG) announced that four of its prospects have been matured to drill-ready status. These are Verbier Deep, Cortina NE, Wengen and Zermatt with aggregate P50 prospective resources of 222 million barrels of oil equivalent. Individual probabilities of geological success range from 16% to 30%. Subject to funding, a drilling campaign is planned from 2022. Chariot Oil & Gas (CHAR) announced that key terms have been agreed on a new licence offshore Morocco. The Rissana licence will completely surround the offshore boundaries of Chariot’s existing Lixus licence, which contains the Anchois gas discovery, as well as covering the most prospective northern areas of the previously held Mohammedia licence and Kenitra licence. Tower Resources (TRP) announced it has now formally agreed to enter the second exploration period of the Algoa-Gamtoos license, offshore South Africa, adjacent to Block 11B/12B, where Total’s Luiperd-1X well encountered 73 meters of good quality net pay and reached a maximum constrained flow-rate of 33 million cubic feet per day of natural gas and 4,320 barrels of condensate per day, an aggregate of approximately 9,820 barrels of oil equivalent per day.
That’s the main announcements for the week. The next issue of the blog will be out on Sunday 3 January 2021. In the meantime, I wish everyone a very Merry Christmas and a Happy New Year.
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The author may hold one or more investments in one or more of the companies mentioned so this post cannot be viewed as independent research. This post does not constitute investment advice or a recommendation to buy or sell and may be incorrect or outdated.