Scirocco Energy (SCIR) CEO Tom Reynolds has given London South East a detailed break down of the recent Ruvuma sale. The previous Solo management team had bought a 25% stake in Ruvuma, a prospective gas field in onshore Tanzania some time ago, and when Tom and his team took over the business and renamed it Scirocco Energy, they made it clear then that a sale which would fund a renewables strategy was on the cards rather than invest a lot of cash in a project with it's remaining uncertainties.
Tom began by explaining that the asset market in Tanzania is not deep, and the sale process hasn't been a fast one. It has taken two years to put together the best possible deal available.
The deal is a sale of the asset, with the price getting up to $16M depending on successful outcomes as the asset is developed over time.
So why is this the best price, the best deal available, and better than developing the asset as a 25% junior E&P partner?
"Firstly" said Tom "It frees Scirocco from the cash calls associated with the current activity plan, allows us to pursue the new strategy, and allows us to be paid more over time if the asset proves to be commercial over that time. The cash call to Scirocco was a net $6.25M , so quite meaningful, particularly relative to our current market cap."
And what were the funding options? "Simply put, it would be an equity raise, and part of the consideration here is that the asset doesn't sit within our owner approved investment strategy. Secondly that from a strategic perspective we want to sell, and three, the level of uncertain dilution that would be delivered to shareholders in the event we had to raise that money. Availability of cash in the public market is never guaranteed and it's certainly never guaranteed at a price we might find acceptable. It was that cocktail of considerations which we thought made this deal a very good alternative for shareholders."
"Risk is in the eye of the beholder" explained Tom. "We wanted to provide a sustainable growth story for our shareholders, and sticking with Ruvuma and Tanzania would make this effectively a bit of a binary bet on a single asset. If it doesn't go well you aren't really left with a sustainable story."
"This is a fundamental pivot for the business, which has three underlying principles. One is about risk/reward, next is about availability of capital and then the third part, which is probably the most important, is the extent to which the strategy is deliverable and under the board's control. Looking at Tanzania, a single asset risk, where the time frame of progress isn't under your control as a non-operator and there is remaining geological uncertainty, which is why there is new seismic and the well is being drilled.
So moving away from that binary bet, what we are offering with the alternative investment strategy is the ability to create a sustainable investment vehicle, focusing on cash generative assets, so when we put money to work we move straight to cash generation and cash comes back to us and is available for reinvestment in further acquisitions."
Please do view the full video for lots more detail.