Full-Year Results In-Line with Expectations

Solo Oil has announced its results for the year ended 31st December 2015. Main highlights include a 20% reduction in operating losses, reported cash of £398k (including derivative financial instruments) and unchanged net assets of £13.3 million. Updating the valuation with our estimated cash figure as at 30th June 2016 leads to a valuation of £39m, which compares to its market capitalisation of £14m. We continue to classify the shares as a growth stock.

Full-Year Results

As expected, zero revenues were recorded. Operating loss reduced by 20% to £906k (FY14: £1.13m). Net losses increased by 50% to £2.77 million (FY14: £1.85 million), mainly due to an impairment of its Nigerian and Canadian investments ($606k) and losses incurred on its equity swap agreement. Net assets remained relatively unchanged at £13.27 million (FY14: £13.33 million). Including derivative financial instruments, net cash reduced to £398k (FY14: £2.73 million), with the biggest outflows coming from the acquisition of intangible assets (£2.65 million) and administrative expenses (£906k). The company raised £2.7 million during the year. Since year-end, the company raised £800k of additional funds and spent $567k (or £392k) to increase its interest in the Kiliwani North Development licence to 7.175%.

Valuation

Assuming administrative costs remain unchanged at £906k would suggest a net debt figure of £100k by 30th June 2016. Nevertheless, we note that once production at Kiliwani North begins, Solo is expected to receive around $134k (£93k) per month for its 7.175% interest. In order to increase its interest in Kiliwani North by 1.25pp and then by a further 1.575pp, Solo will have to make a payment of $709k (£489k) and $893k (£617k), respectively. It’s not clear at this stage whether there is enough cash to increase its interest without additional funding, but Solo can always elect to increase its interest via debt until it receives enough income from Kiliwani North to pay the debt off. It could also elect to not make payment and therefore not increase its interest if it chooses to. As this is unclear at this stage, we have assumed that Solo retains only a 7.175% interest (rather than the full 10%). Overall, we are pleased by the progress that has been made by a number of Solo’s investments, in particular Kiliwani North Development Licence, the Ruvuma PSA and Horse Hill Developments Limited.