Solo Oil has updated on the operational progress of Kiliwani North, a development licence in Tanzania in which it holds a minority interest of 7.175%. The key take-away from the announcement is that Kiliwani North is progressing as planned and the offtake rate is expected to be achieved in the next few months.
Kiliwani North Update
The testing of the power generation system and other related facilities is now complete. The testing of the gas plant and sub-sea pipeline commenced on 1st June 2016. First gas from the Kiliwani North has now entered the pipeline system that connects to the national pipeline. During the commissioning stage, gas rates are expected to increase to 30 million standard cubic feet of gas per day (4,500 barrels of oil equivalent per day), which, based on initial tests, is the rate that the operator expects to operate the well at. Nevertheless, optimal flow rates are being determined and a well test during the production build-up is expected to be carried out. Furthermore, in-line with the gas and sales agreement, the gas produced in April and May has been invoiced.
Given the available information, our view is that a transaction based valuation (rather than a NPV valuation) would be more appropriate for Kiliwani North, and the terms of Solo's sale and purchase agreement would suggest a valuation of $56.68 million, of which Solo's interest (7.175%) relates to a value of $4.07m (or £2.81m). In relation to the Horse-Hill Development asset, we note that Angus Energy recently (April 2016) sold its 12% interest in the Horse-Hill Development for £1.8m, which values Solo’s 10% interest in the development at £1.5m and represents a strong return on investment on the asset (c.150%). We understand that Angus Energy’s divestment represented a distressed sell and we therefore see this as a floor on the value of the asset. For the Ruvuma PSV asset, we have estimated a value by taking the estimated NPV to total proven reserves for a similar project (Mnazi Bay Concession Area) and applying it to Solo’s project. Wentworth Resources has a 31.94% interest in the Mnazi Bay Concession Area and its interest equates to a net present value after tax to total proven gross gas reserves of £0.93 per billion cubic feet when assuming a 10% discount rate. Applying this figure to the total proven gross reserves of Solo Oil’s Ntorya-1 discovery well equates to a NPV10 of £141m, of which Solo Oil’s 25% interest represents a value of £35m. For illustrative purposes, a lower figure of £0.74 (20% discount) would suggest a valuation of £28m for Ruvuma. Summing the above three assets (Ruvuma PSA, Kiliwani North Development Licence and Horse-Hill Developments) leads to a valuation of £40m, which compares to its market capitalisation of £14m. We continue to classify the shares as a growth stock.