Solo Oil has announced that its joint venture partnership has signed a gas sales agreement with the Tanzania Petroleum Development Corporation (TPDC) relating to the partnership’s flagship well in Kiliwani North, Tanzania (Kiliwani North-1 well). This means gas production can now start, leading to first revenues from Solo’s investments in Tanzania, and we therefore see this news as an important milestone. Furthermore, we note that the agreed initial gas price of $3.00 per mmbtu (c.$3.07 per mcf) is in-line with the Portfolio Gas Supply Agreement well head price, and we therefore see the agreed price as fair. Based on a relative and sum of the parts valuation, we continue to estimate a value of £22.07 million or upside to its current market capitalisation of 24%.
Gas Sales Agreement Signed
Effective from 31st December 2015, the gas sales agreement requires TPDC to purchase a quantity of gas every year that represents an initial minimum 20 million standard cubic feet per day (mmscfd). At the agreed price, and based on its current working interest of 6.175%, this translates to minimum cash flows to Solo Oil of $115k per month, rising to $242k if it was to execute an option to increase its interest to 13% via a payment of $3.5 million. Gas from the well will be supplied to the newly built Songo Songo gas processing plant, before being transported, by pipeline, to the market in Dar es Salaam. Final well preparations are ongoing - with production being tested at various rates to establish optimum conditions - and commissioning of the plant and pipeline is expected to commence shortly. Until then, TPDC will be required to pay immediately when invoiced every month for any gas produced. Following the testing and commissioning phase, TPDC will be required each month to pay an estimate of one month’s revenue in advance. Monthly revenues will be calculated based on actual production at the end of the month. The initial gas price will increase in-line with an agreed United States Consumer Price Index that is not directly linked with the price of oil. The gas delivery point is the outlet flange of the Kiliwani North well head, and we therefore note that Solo Oil and its joint partners will not incur any pipeline transportation costs or processing fees.
In arriving at the above company valuation of £22.07m, we have estimated a value for Solo Oil’s two key projects (Ruvuma PSA and Kiliwani North Development Licence) by taking the estimated NPV to total proven reserves for other, similar projects (Mnazi Bay Concession Area and Orca Exploration’s PSA, respectively) and applying them to the Solo Oil projects.