Horse Hill-1 Oil Flows and Additional Investment in Kiliwani North

After commencing flow testing in the Horse Hill-1 oil discovery well, Solo Oil has been advised that light sweet oil has flowed naturally to surface from an 80-foot zone. Containing less than 0.42% sulphur, light sweet oil is the most sought-after version of crude oil as it holds a disproportionately large fraction that is directly processed into gasoline, kerosene, and high-quality diesel, and we therefore see the news as extremely encouraging. The UK-listed investment company also announced that it has increased its interest in the Kiliwani North Development Licence to 10% (from 6.175%) for a total consideration of $2.17m. With the consideration exceeding its net cash position (£0.87m) as at its most recent reporting (30th June 2015), the acquisition may require some additional funding, although with Kiliwani North revenues about to commence, these will provide some contribution to the consideration. Based on a relative and sum-of-the-parts valuation, we estimate a value of £20.40m.

Horse Hill-1 Oil Flows

The zone is located within the Lower Kimmeridge limestone interval at a depth of approximately 900 metres below ground level. The zone’s American Petroleum Institute (API) gravity was 40°. API gravity is a measure of how heavy or light a petroleum liquid is compared to water, and, generally speaking, oil with an API gravity between 40 and 45° commands the highest prices. Through a 1-inch choke, fluid flow commenced at an initial instantaneous rate in excess of 700 barrels of oil per day (bopd) in an appropriate mix of 50:50 oil to water. After reducing the choke to 32/64-inches, the well resulted in a steady oil rate equivalent to in excess of 460 bopd in a mixture consisting of 99% oil and less than 1% water. On the second day of testing, light dry oil continued to flow naturally at a stabilised rate of more than 450 bopd through a smaller 28/64-inch choke. Following the completion of testing at this zone, operations will move to the shallower Upper Kimmeridge limestone and Portland Sandstone zones at approximately 840 and 615 metres below ground level, respectively.

Additional Investment In Kiliwani North

As part of the agreement, Solo will forfeit its option to acquire a further 2.35%. Solo will pay $500k on completion of the agreement, which is expected to occur before 11th March 2016, and the balance on or before 30th April 2016.

Valuation

In arriving at the above company valuation, 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 Solo’s projects.