Research Note – SOLO Oil (AIM: SOLO)

 

Given the news out about the company this morning, I felt it would be prudent to compile some information on Solo for my readers.

Oil Well.jpg

First about Solo to the uninitiated. This is an AIM listed company which states that its goal is to acquire a portfolio of direct and indirect interests in exploration, development and production oil and gas assets. Geographically speaking they currently deal with the UK, Canada and Tanzania. The Company states that they are prepared to acquire both onshore and offshore assets, and their intention is to acquire a mix of oil and gas development and production assets.

It is the UK and Tanzanian investments that are the most interesting and on which this article is based. Today the Company announced the next step in the Horse Hill Oil Field Development, a field that has made national headlines over the past year as the largest onshore oil find in the UK, whose production could represent 8.5% of all onshore UK oil production. Riveting headline figures there!  The operator, Horse Hill Developments Limited, has confirmed that it has submitted a planning application to conduct further appraisal testing at the Horse Hill 1 oil discovery, which has previously reported 1688 bopd from all zones during initial testing. Solo has an effective 6.5% stake in the Horse Hill Field and, given the potential scope of the project, this is not insignificant. This project is several years away from production so this part of Solos portfolio is arguably dismissed from the share price entirely at present, and will be for a while to come.

 

Solo’s Tanzanian assets are far more exciting. Production has commenced at the Kiliwani Gas Field, in which Solo has a 7.175% interest. From this asset the Company made its first ever revenue in August this year when the initial payment for gas was received under a Gas Sale Agreement. No figure was provided, but Neil Ritson, Solo’s Chairman commented “At a production rate of 25 million cubic feet per day and Solo’s current interest these payments equate to approximately US$150,000 per month”. Interesting to note is that with the pounds recent devaluation, these forecast payments have risen in value from £100,000 to £123,000 per month. Given that Solo made a £412k loss in the 6 months to 30th June, the payments expected to be received will push the company into a small profit moving forward, making it ever easier for the company to raise funds for other projects.

 

Solo also holds a 25% stake in the Ruvuma Basin in Tanzania, where two appraisals wells are being prepared following the discovery of gas condensate in 2012. Aminex, Solos partner in Tanzania, has commenced groundwork (stated as being civil work for its construction) for an appraisal well, Ntorya-2, following an extension to the Mtwara licence. This well will test the 70bcf of gas recorded, whilst an option is in place to drill a second and third appraisal well, testing the additional resources which analysts say could be up to 1.5trln cubic feet of gas.

The Company has listed highlights in its half year report to 30th June 2016 as:-

Tanzania

  • Gas Sales Agreement (“GSA”) was executed with the Tanzanian Petroleum Development Corporation (“TPDC”) for a price of US$3.00 per mmBTU
  • Commissioning of the Song Songo Island Gas Plant was completed and testing of the KN-1 well up to over 30 mmscfd was undertaken
  • Solo increased its interest in KN-1 7.175% and holds an option to increase its interest to up to 8.75% as project performance milestones are achieved
  • In August, first revenue from Kiliwani North was received in line with the GSA
  • A 12-month extension of the Ruvuma PSA was granted by TPDC and endorsed by the Tanzanian Minister of Petroleum, and Ruvuma PSA operator Aminex plc announced its intention to drill two Ntorya appraisal wells starting in 2016 and that site preparation for the first well, Ntorya-2, is underway

United Kingdom

  • Horse Hill-1 well (“HH-1”) was tested with the Kimmeridge Limestones produced at natural flow rates of over 460 and 900 barrels of oil per day gross (“bopd”) from naturally fractured intervals in the Lower and Upper Kimmeridge respectively
  • Pumped production, constrained by pump size, of up to a gross 320 bopd was obtained from the Portland Sandstone reservoir during testing of that interval at HH-1 in March
  • The Company was formally awarded a 30% working interest in PEDL 331 on the Isle of Wight and announced its intention, with operator UK Oil and Gas Investments (“UKOG”), to pursue the previously discovered Arreton-2 field as part of an initial work program
  • The resources of the HH-1 Portland discovery were upgraded in July by 200% in a reserves report by Xodus for UKOG

 The Investment Case

 

For me, the main problem with Solo is that there are too many shares in issue. When the Company raised a rather small sum of £2m in September the total shares in issue were increased by over 1bn to now stand at a whopping 6,987,961,682. That capital raising exercise alone diluted investor’s holdings by a significant 16% – and dilutions will continue to keep large investors away. By consequence Solo will remain in the realm of speculative ‘punter’ territory until this can be addressed. I believe that Solo needs to conduct a consolidation exercise of at least 50:1 to take them out of the sub 1p zone.

Compounding my above concern, Solo will need to approach the market for further funding to continue beyond Ntorya 2, which we should expect to see in 2017. The risk to investors at this time is yet more dilution to the share price.

The above being said, there is certainly a case to invest now the company is cash flow positive as to its general operating costs. As long as investors perceive any fundraising as value generative as well, the dilution could be deemed a necessary course of action to unlock that value.

Solo’s market cap is currently £16.25m. On a PE of 10 based on profit from its current operations alone the company has £12.3m of value in the Kiliwani gas Field.

What would I do? I personally am not looking for speculative investments so would not invest in Solo at this time. However, I consider that Solo represents an interesting case as it benefits from the luxury of Revenue, which is uncommon amongst AIM listed exploration companies.  An investor getting in now would have a stake in what could be a very significant oil play in southern England, as well as what could be a world class gas asset in Tanzania.

Shore Capital have suggested a net asset value of 1p per share, representing a 434% upside to the share price. Of course, Shore Capital is employed as a joint broker for Solo, so bias should be assumed. But I agree that should Solo pull it off, as long as dilution is kept under control an investor with the stomach for it could see a significant return.

Would you like me to research another company

I’m happy to take requests to research other companies, whether it be FTSE or AIM – just leave me a message on the contact page and I’ll either get back to you with a rough time frame , or do crack on with it straight away.

3 thoughts on “Research Note – SOLO Oil (AIM: SOLO)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s