Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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Energean's announcement on the agreement:
https://www.energean.com/media/5612/morocco-country-entry-and-farm-in-to-gas-development.pdf
JT
It says “some new oil and gas projects”. CHAR’s project is not a new project ,it’s an existing project that has already completed a successful drill and undertaken extensive analysis. So it appears to me that Soc Gens policy does not have any effect on its relationship with CHAR. They want to fund the energy transition and all 3 pillars of CHARS business are focused on the Energy Transition.
'planning to halt lending to some new oil and gas projects'
Choosing to employ such strategies as defunding oil & gas developments makes my mind boggle. It's only going to make the stuff more expensive and the companies that produce it more profitable.
SocGen is planning to halt funding oil and gas projects.
https://www.bloomberg.com/news/articles/2023-09-18/socgen-plans-to-halt-loans-to-new-oil-and-gas-in-strategy-update
Correction, I meant to say high yielding commercial bonds, not paper. i.e. B grade or junk bonds that yield about 8.31%.
Hi Jimmy,
I'm not so sure. High yielding commercial paper is currently being issued at around 6-7% and what Chariot were offered from Energean was a better deal than what the banks lead by SocGen could offer them under a debt finance agreement (which would have also come with recourse clauses).
Hi Jimmy. Thought your reservoir comment was really interesting re the onshore. If it does provide to be thicker, to that magnitude, any sense of how valuable that could be ? Cheers
Fernan,
The RNS states that the cost has a coupon of 7% over the SOFR rate, not in addition too.
With regards the 7% royalty, we don't know any other details other than what it states in the RNS. Like I said, there's no mention of a price difference for when the 7% royalty kicks in. It just says there's a hurdle rate to exceed. With such vague language it's difficult to know.
In addition, production at 200 mmcf per day would repay the debt in about 3 years.
J
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 £3'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 £2 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