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Agadem. All you can do is speculate what stabilise the company meant. I have taken it as simply getting paid for gas. Hence I view the RNS on 12th December as extremely positive, because any uncertainty about cash collections was removed. No prior RNS has provided this information. As it was in an RNS the statement was verified by the NOMAD before approval. There is also comment in November's Q&A about the asset, but nothing about the financials. Existing analyst reports are of no help in this regard .
For what it was worth AK did state, in reply to my written question for the last Retail Investor Call,
"the Nigerian assets are in good condition and no significant investment needed".
I’ve just watched Malcy’s interview of Andrew again.
It was recorded alongside the “operations and financial update” RNS of 12th December. My own worry over Malcy’s interview is that Andrew isn’t asked about Savannah’s guidance given for cash receipts within the Accugas business, which was to me the most important part of the RNS.
My other observation is that when discussing Accugas, Malcy says to Andrew that if “you combine costs down by 18% and production up by 33% that makes the profitability and the cashflow”. It isn’t true, as all three of Accugas contracts to supply gas have a Take-or-Pay volume of supply in the gas sales agreement, and in particular it is cash received from its largest customer under the Calabar GSA which is the main source of funds for Accugas. This doesn’t go up or down with the volume of gas supplied to Calabar NIPP. Only Ibom, the smallest customer is above Take-or-Pay.
The power plant at Calabar is owned by NDPHC. Despite Calabar taking an increased volume of gas in 2019, NDPHC has been and will continue for the foreseeable future to be invoiced by Accugas as if it had received the Take-or-Pay volume of gas. This is what makes Accugas very profitable. It is immaterial whether actual production goes up or down, because historically Calabar NIPP’s plant has not required any more gas than the Take-or-Pay volume set in the contract with Accugas. Indeed should supply to Calabar exceed Take-or-Pay in the future, then the excess will be ‘make-up gas’ so Accugas receives no additional cash as NDPHC has paid for unused gas in prior months.
Malcy has never mentioned Take-or-Pay in any interview with Andrew or queried how the cash collection model at Accugas has been working during the long period between announcement of the Seven Energy acquisition and its completion. Through this period Accugas has been relying on NDPHC paying the invoices it has received each month. The invoices will have been for the contracted Take-or-Pay volume of gas at Calabar NIPP and NDPHC has paid these despite the liquidity problems existing in the power sector.
Indeed Accugas has considerable leverage on NDPHC because, under the terms of the Calabar GSA, payment of Accugas’ invoices is guaranteed by JP Morgan, the World Bank and the Sovereign Government. A default in payment would be a Sovereign default.
As mentioned above Malcy could have asked about Savannah’s RNS’s guidance for “expected cash receipts of $190m” which is an extraordinarily high number compared to its historical cash collections. The $190m was sufficient to fund both operations at Accugas, as well as payments on the Accugas debt, resulting in a larger than expected $40m reduction in debt at the year end.