Solo Oil – Investor returns floating out of reach?

Since last writing about solo oil in October last year there have been a few developments in the company, so I thought it high time for a re-visit.

oil-well
Oil pumps at sunset

First a recap:-

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 remains my opinion that the UK and Tanzanian investments that are the most interesting, and hold the most promise for the company, and much of the content of my original article stands. The Horse Hill Oil Field Development, a field that has made national headlines over the past couple of years, is the largest onshore oil find in the UK, whose production could represent 8.5% of all onshore UK oil production.

The operator, Horse Hill Developments Limited, has confirmed that on the 4th April 2017 it obtained extensions to licences EDL137 and PEDL246 out to September and June 2021 respectively, giving the company more time to appraise the development and plan accordingly. Solo retains has an effective 6.5% stake in the Horse Hill Field and, given the potential scope of the project, this is not insignificant.

Solo’s Tanzanian assets are far more exciting. Production is ongoing commenced at the Kiliwani Gas Field, in which Solo has a 7.175% interest which, subject to clarification in Solos next set of accounts, should be netting the company £100,000 to £123,000 per month, pushing the company into a small profit going forward. Its fairly uncommon for a O&G Exploration/Development company to actually have an income to keep the lights running, so this de-risks Solo from an investment perspective.

 

Solo also holds a 25% stake in the Ruvuma Basin in Tanzania . following positive results from Ntorya-1, a second appraisal well aptly names Ntorya-2 has been drilled and yielded further positive results of 2833 boe per day, with this flow restricted by technical problems. Craig Howie, analyst at Shore Capital, house broker to Aminex, said: “this, in our view, is an extremely satisfactory result from Ntorya-2, which has significantly exceeded pre-drill expectations and (combined with the Ntorya-1 discovery well and mapped seismic features) clearly indicates a commercially significant volume of gas-in-place.” Indeed Solo declared that these results are highly indicative of commercially viable volumes being in place.

All of the above is very positive for the company. There are two significant projects making headway, with Solo riding the wave as allowing bigger entities with bigger purses battle through the bureaucracy. In turn this keeps the company’s overheads low and limits the need to raise funds except for at certain milestones.

 

Which brings me to the main negative.

For reasons I cannot Fathom Solo has made the decision to make a significant investment of £2.55m in Helium One Limited, with a 90 day call option to invest a further £4m. To me this is a dangerous move, particularly as it goes against the company’s mission statement and s outside the area of expertise of the board. Likewise Solo does not boast an acquisition warchest to enable it to make such significant investments without wiping out shareholder value. This project is literally years away from being commercially viable as detailed in the RNS of 9th May:-

 

“-      Planning of a second phase Rukwa soil gas and groundwater geochemistry survey is in progress for field work to start in the third quarter of 2017

–      This second phase follows on from the 2016 Rukwa soil gas geochemistry survey which confirmed widespread helium micro-seepage characteristic of subsurface trapped accumulations

–      Dan Maling, Solo’s Finance Director, has joined the Helium One Board of Directors as Solo’s non-executive representative

Helium One have now completed the acquisition of extensive airborne geophysical data with the preliminary grids expected to be received later in May 2017.  In parallel with this and to complement that data, after successful analysis of the soil micro-seepage survey completed in 2016, a further more detailed soil geochemistry survey is expected to commence in the third quarter of 2017.  So far Helium One has collected and analysed almost 1,500 soil samples for helium, CO2, hydrogen, nitrogen and hydrocarbons in the most advanced project in the Rukwa licence area. The work programme being undertaken in 2017 is intended to identify drillable prospects as soon as practical with drilling planned for 2018.”

 So drilling wont begin until some time in 2018. If we say it could be mid 2018 the programme wouldn’t complete until early 2019, and that’s for the first appraisal wells. Certainly this investment is a very long term one. 

Shares Shares Shares, lets issue more Shares

Since my original article the number of shares in issue has risen from 6,987,961,682 shares in issue to 7,846,760,000. If the 90 day call option is fully exercised then points to consider are:-

  • The call option is for 156% of the original investment at £4m higher.
  • There is no evidence to suggest that Solo has that amount in cash.
  • The share price has dropped by 25% since the previous investment price.

So, worst case on the above, we’re looking at around 1.14b shares being issued to fund the call option, a further 14% dilution.

Solo are getting it right on several levels but the investment into Helium One is a real curve ball and to me casts doubt on the managements ability to generate shareholder value. A shareholder invested prior to the September 2016 fundraising will have seen over 27% dilution as at today’s date, with a further 14% dilution on the horizon, whilst the share price languishes at similar levels comparing today’s price of 0.355p to October 2016.

Is it worth investing?

 

For me, the persevering problems with Solo are that there are too many shares currently in issue and too many continue to be pumped into the market with disregard for current investors. When the Company raised a rather small sum of £2m in September 2016 the total shares in issue were increased by over 1bn, with further dilution between September and April leading to the current 7.846b shares in issue. We’re looking at upto 1.16b more hitting the market within the next three months, and that’s on top of any further cash required towards Horse Hill or Ntorya.

 

The Share price and capital dilution will continue to keep large investors away, as will a lack of project information on when a return is expected to be made on any of Solos main investments.

It remains my belief that Solo needs to conduct a consolidation exercise of at least 50:1 to take them comfortably out of the sub 1p zone. Likewise Solo needs to increase its cash position by allowing its gas sales revenue to build before making any further investments. Better yet, solo should allow one of its major projects to advance to the point of being cash generative before seeking a new opportunity.

Solo is a company whose share price spikes on news surrounding its project milestones. I see a short term opportunity to invest in Solo in order to reap the benefit of the next spike, taking a 25-50% gain in the process. A shrewd investor would repeat this process each time the share price breaks over 0.4p with a view to selling at 0.5-0.6. The heady days of 0.87p are behind us with the dilution investors have endured.

I do not believe there is a case for long term investment at this time, and this will remain my opinion until the company ceases eroding shareholder value. I would personally recommend that those interested in the long term prospects of the company take their cash and wait it out until the time is right. Solo has some big exciting projects that will benefit shareholders, just not the ones who have let dilution and time obliterate their capital.

 

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.

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