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I think at an appropriate stage the farm in debt could be refinanced by a project finance debt at a lower interest rate.
J
"Secondly, at 12.3% you're almost talking credit card rates, so we'll have to agree to disagree on your interpretation."
I think the debt from Energean will be a "high yield loan", that carries a 12.3% interest rate at current market conditions.
And I still think the 7% royalty will be calculated based on the difference between realized gas prices and based prices. It´s a way for letting CHAR participate in the eventual surplus to be earned by Energean as a consequence of extraordinarily high natural gas prices.
The words "in excess of a base hurdle on the realised gas price" instead of "above a base hurdle on the realised gas price" supports that point of view, in my oppinion.
As always, time will tell who is right
Regards
Fernan,
That doesn't make much sense to me. Firstly, 7% over what if not SOFR?
Secondly, at 12.3% you're almost talking credit card rates, so we'll have to agree to disagree on your interpretation.
Also, nowhere in the RNS does it state any 'difference' in price. It simply states, and I quote “7% royalty payment on Energean's gas production revenues in excess of a base hurdle on the realised gas price (post transportation costs)” This to me implies that if Chariot can sign the GSAs above any such base hurdle rate, then the 7% of Energeans revenues apply. Also, when looking at other O&G deals structured this way, the hurdle rate usually represents the minimum required rate of return set by the partner who's making the investment in the project. i.e. if you can deliver above contracted rate 'X' we will return 'X%' revenue back to you. It's an incentive mechanism. Not only does this kind of structure help protect the farm in partners invested capital, it also secures the minor partner as a continued & active participant in the project negociations and administration rather than being a post farm out free rider who's not going to do anymore work on it.
Jimmy,
The more you look at the structure of the deal you see drivers for incentivising both parties throughout it. Chariot will need to keep working hard on the administrative, technical and exploration side in order to achieve the additional 7% revenue particularly with regards to the GSAs it signs.
I've generally been working on the assumption of 1Tcf @ $10 per mcf for the project, which is somewhat due to these figures simplifying my own calculations as well as what I think it'll take for Anchois to be a viable and thus attractive project to develop (1Tcf).
I also fully accept the entire Anchois/Rissana project could end up being priced anywhere from 7.5Tcf @ $15 per mcf to 638 Bcf @ $8 on a final outcome basis.
I therefore think 1Tcf @ $10 per mcf is reasonably conservative.
For the onshore gas going to power and industry, I'm going to assume a slightly lower rate of $8 per mcf (for the slightly lower grade of gas). Will wait to see what kind of quanitieis they find (or don't) in February before I start to put any revenue forecast together for onshore.
Gooner,
Everyone was hoping for 'an exceptional farm out deal'. What everyone got was 'an exceptional farm out deal on the proviso of 1 more successful carried drill'.
So there's still an element of risk hanging over the final outcome of the deal.
Hi BCD.
I don´t think I agree with some of your cals
"The interest rate on Chariots share of the carry is not 7%, it's 7% above SOFR which has varied between 3-5% over the last 24 months since inflation hit. It's currently at a peak rate of 5.3% (because interest rates are at a peak). Interest rate cuts are anticiapted to begin in 2024, but if they don't and instead continue to remain at around 5.3%, then 7% above this rate would be 5.67%."
I understand that the interest rate to be paid by CHAR to Energean for the carry amount will be:
SORF + 7%= 5,3% + 7% = 12,3 %
"This rate could well be nullified or even succeeded by a 7% royalty payment on Energean's gas production revenues in excess of a base hurdle on the realised gas price."
For the reasons explained below, it`s impossible to know if the royalty will nullify of even succeded the interest payments to Energean. I think it will be difficult for this to happen.
"Important to note: this 7% royalty is set on all of Energeans gas sales revenues which would represent a 55% (not 80%) stake in the asset (if they were to take up the additional 10% post drill). A 7% royalty payment on Energeans 55% stake would equate to a (2.75x, not 4x) compounded revenue uplift for Chariot, which could add up to and extra +19.25% in income from Anchois."
As Jimmy23 explained, the 7% royalty is going to be applied on the difference between the realised gas price and the hurdle defined in the farm out agreement.
If, for example, the realised gas price (net of transportation costs) is US$ 9/mcf, and the hurdle is US$ 8/mcf, then the calculation of the royalty will be as follows:
(US$ 9/mcf - US$ 8/mcf) X 7% X Energean production
Of course, no royalty will be earned by CHAR if realised prices are below the minimum hurdle set up in the farm out agreement
I don´t expect these royalty payments to materially change the fundamentals of the project, or to somewhat compensate the interest to be paid by CHAR to Energean. Personally, I´m not going to take that eventual royalty into account in any calc of the economics of the project.
Regards
BDC,
The 7% royalty only applies if the gas price exceeds an unspecified price.
In the presentations questions they said the royalty level was confidential.
Otherwise , your analysis is good.
Jimmy
"Some great postings here last few days from the posters at the top of the food chain since the news but sentiment is everything if you want to make decent money and sadly we don't have it."
Yes there has been some well constructed posts, and I agree sentiment is needed, but also we have had over 2000 trades over 2 days. I haven't seen that level on an Aim oily for a while.
OK, for sure there was a chunky seller, but as BDC noted in his last post, it is more a "changing of the guard", there will almost certainly be new blood in here as the seller created a bargain basement, sometimes it isn't always a bad thing.
Add to that all the pending activity about to be unleashed with typically much higher RNS flow, then although it will hopefully make a strong recovery and beyond, it's likely gonna be a fun & volatile ride too !!
Good post BDC but tech stocks and being 13 year ago was a whole different ball game as it was for Chariot too before our 2 drills during that period? You know, that metoric rise from low teens all the way up to the ÂŁ3's
Some great postings here last few days from the posters at the top of the food chain since the news but sentiment is everything if you want to make decent money and sadly we don't have it.
Still it should prove to be a solid investment long term but just not with the sizzle?
B-D-C
Thanks for the response
Agree on the 10 percent, that’s also how I see it and clearly good for Chariot too. They obviously believe there is an abundance of gas there otherwise they would have taken the bird in hand - so nothing to lose ..As Adonis said on the webcast it’s also not a binary choice - if things change
Interesting story on accretion - different industry but I saw something very similar with a Covid related share (SNG). Major institution heads for the hills, many followed, and 2 weeks later the stock factors up to an 8x glidepath!
DYOR
Surety,
The 10% option is meaningfully expensive because the deal very much looks to have been structured that way on purpose. For Energean, there's still a small amount of risk involved in the next drill and the read-through of more gas being correct/incorrect. It looks like they want to be 100% sure. It's my personal opinion that they would like this asset to be a minimum of 1Tcf before they'd be prepared to fund the entire thing.
I have also considered our seller being one of the recent 6%ers giving way. I remember holding a promising AIM tech stock back in 2010 when the only institution also holding it was blackrock. They held a 10% stake and they were... well... blackrock - the largest asset manager in the world by AUM & they held a 10% stake in this promising little AIM tech stock. That's until they sold the lot ~ within the space of about two weeks and the SP crashed to 13p. All the PI's thought something must be very wrong with the company as why would the only institutional investor sell its entire stake?? Talk about lemmings running off a cliff. So many of them sold out in blind panic.
Over the course of the following 12 months the share price climbed to ÂŁ2 without blackrock or any other insti remaining invested. It was a great lesson in doing ones own due diligence for those who sold in panic and also for those who held or kept buying.
Worth highlighting that both broker notes indicate the company could have a value of 67p and 71p respectively by end 2024 based on drilling success and the Energean exercising their option. That also doesnt really fully account for the adjacency benefit from the Anchois East drill either (from what I can see )- let alone any meaningful upside from the Loukos activity that Jimmy references earlier today
Whilst the 10% option is relatively expensive for Energean compared to the initial deal structure so far, it's a no brainer if the gas is there - and the Anchois East well looks relatively low risk..
Interestingly SP Angel also reference chariot in a broader industry note yesterday (no price target), stating that financing pressures (i.e. provision of funds against Fossil Fuel operators) would have also further impacted Chariots deal optionality in the farm out process and that M&A expectations were simply too high - inferring that that probably caused investors (potentially a 6% er ?!?) to dump or aggressively trim their holding!
From my side I am definitely sticking.. we have a very interesting 2024 ahead. ST view seems right - this will bounce when the dust settles.. with a lot of triggers in flight, not to mention the feasibility study of Project NOUR concluding which we know from the webcast is going well..
Sticking with the Gas though, the big action is clearly Q1 with Loukos and then Q2/Q3 on Anchois East (drill around the mid year).. and then onshore production hopefully at some point not to far off..
IMHO/DYOR
$3 million per exploration/developed well within Loukos (Although Duncan's response was a bit wishy-washy). Page 9 of the below presentation shows the existing onshore pipeline infrastructure already in place that feeds the industrial sector. Gas processing is minimal because it's already relatively clean gas out of the ground and the industry standard doesn't require gas to be as high-purity as the gas delivered into the GME needs to be. This looks like it's going to be the more speedy route to revenue generation for Chariot (providing drilling is a success).
https://chariotenergygroup.com/app/uploads/2023/12/Offshore-Partnering-slides.pdf
Thanks
I was very busy at work yesterday, so rushed through some of the figures in my head. Here are a couple of corrections involving my previous post...
The interest rate on Chariots share of the carry is not 7%, it's 7% above SOFR which has varied between 3-5% over the last 24 months since inflation hit. It's currently at a peak rate of 5.3% (because interest rates are at a peak). Interest rate cuts are anticiapted to begin in 2024, but if they don't and instead continue to remain at around 5.3%, then 7% above this rate would be 5.67%.
This rate could well be nullified or even succeeded by a 7% royalty payment on Energean's gas production revenues in excess of a base hurdle on the realised gas price.
Important to note: this 7% royalty is set on all of Energeans gas sales revenues which would represent a 55% (not 80%) stake in the asset (if they were to take up the additional 10% post drill). A 7% royalty payment on Energeans 55% stake would equate to a (2.75x, not 4x) compounded revenue uplift for Chariot, which could add up to and extra +19.25% in income from Anchois.
We need to know the minimum required rates of return Energean are looking for on this project to be sure, but if the base hurdle rate is realised, the income share from Anchois could look something like this...
Energean 55% stake - 7% royalty payable to Chariot = 51.15% of revenue from Anchois
Chariot 20% stake +7% of a 55% royalty payment = 23.85% of revenue from Anchois
Nice post Hockeyman and I agree with you, a lot of emotional posts from LTH and tbh to some extent I don't blame them. Picturing a dream scenario embedded in your head and it not coming about can present a sad outcome for some. It's like being told how good a movie is by so many people and you raise your expectations so high, but when you finally get to watch the movie, you're disappointed!
I like to invest in companies at a point when they've reduced their risks especially with regards to funding and IMV and IMO the farm-in with Energean is a brilliant outcome which de-risks the gas play by a huge margin and in CHARs favour as it stands currently. The share price will climb as we get closer to Q1 2024 it's inevitable as wise investors move in for the final picture.
Thanks also to Jimmy for his excellent knowledgeable posts which really show how BIG this deal could be for the company and have a better market cap in the very near future! As always, patience is the key here on in!
GLA
I am a relatively new investor in Chariot (due to a tip from a more experienced friend) and have a fair amount at stake. I've always appreciated that with almost all stock market investing there is an element of risk, particularly in the AIM market for all the obvious reasons. I have no knowledge whatsoever of the hydrocarbon industry (apart from an entry level pass in Geology at Uni) and little understanding of how the stock market works. I am gradually learning, not least through reading this BB and the presentations by Chariot. I gave myself a headache reading the huge outpouring of opinion and angst after last week's RNS. Whilst sharing the general surprise at the reaction of the share price, I have always felt that nothing will happen of significance until the gas is almost certain to start flowing with risk approaching zero. A lot of the negative comments have been based purely on emotion and I understand that, particularly if from LTHs. But it seems to me that patience is now needed in spades. It's really not so long ago that the gas was discovered and confirmed. I certainly wouldn't have expected production and revenue to start as rapidly as some seem to have hoped or expected. I find myself surprisingly relaxed and hopeful. And patient.
Onshore $3 million includes testing. It’s one principal reservoir of circa 10 meters that’s expected, but I think there could a good chance of a very thick reservoir of 300 meters as proven by the nearby lnb1 well, a nice surprise.
J
Hi Jimmy,
thanks for the confirmation.
One last question: Will they flow test on the on-shore prospects as part of the $3M cost, or is it not needed? Not sure how many zones there are in each onshore prospect.
thanks.
Hi jt,
There is a 150 meters of audited gas in anchois 2, which will be penetrated by anchois 3 plus a thick o sand below it.
The proven gas will at least flow at the average rate per meter of 1.1 mmcf per day, the key reason for the flow test is to measure both the flow rates and the pressures so that different zones with different gas water contacts can be completed seperately for production. The deeper O sand has been proven with gas and a very thick reservoir in anchois 2 and has a seismic amplitude anomaly which worked when drilling anchois 2 and similar seismic with similar geology onshore has an 85% success rate. In my view it’s a near certainty, so we will be looking at gross reserves of 1tcf which in turn will substantially de risk another 1tcf of gas in anchois north and west with plié prospect.
Jimmy
I have been holding long term and after the Namibia drill put it in the bottom draw, lucky I didnt sell. Once more, time to tuck this in the bottom draw for a while. Hopefully the drills in 2024 (onshore and offshore) will produce results and some momentum.... however for now no news for the foreseeable future .... perhaps a short term side hustle play on rig contract signing then an exit on spud (assuming the traditional spike which is not guaranteed these days)....
Hi Jimmy,
Energean state cos for the new target sands of 61% (o sand) and 49% (north flank) in their press release. Do you think that FID will depend upon success of those new targets? I assume as Energean are now the operators, they will decide the way forward and may not be interested in progressing with a smaller development, though I would have thought that spending up to $85M for the latest well etc, it would make sense to continue. Just trying to assess the risk to FID of this new well. How confident are you that the drill stem test is mainly for the purpose of the well development design and that we will have a decent flow from the sands?
thanks
Fraserd i read it in the Cavendish report.
We should also remember that BOTH Anchois 1 & 2 were basically suspended to be utilized in the future field development, which is actually a massive head start on planning, cost & time. I am sure that was of notable interest to Energean during their assessment and negotiations.
Hi
Does anybody have the broker note or know which one it was that said the offshore drilling would likely be in q2? Many thanks.