Member Info for MarketGunslinger

I haven’t posted here in some time, but with news on the first arbitration potentially imminent and Zengas’ posts yesterday, there’s finally something substantial to discuss.

I agree with one of the key points Zengas that has raised. He’s correct that companies rarely receive the full amount they seek in arbitration. However, his suggested recovery range of 25%-33% of the claim seems overly conservative.

If we examine Rockhopper’s claim against Italy for the Ombrina Mare project, they initially requested €275 million and ultimately secured €190 million plus interest after arbitration – approximately 70% of the claimed value, considerably higher than the 25%-30% Zengas referenced.

Further, Rockhopper’s approach to monetising their award shows the financial benefits of structured settlements. They arranged with a specialist fund to receive €45 million up-front (though €30 million of this was allocated to their arbitration legal funder). They have also secured agreement for a second payment of €65 million (once the annulment situation is finalised) along with a third payment of 20% of the remaining €80 million plus interest, minus 200% of the funder’s recovery costs. In essence, they were able to capitalise on around €120 million, or 65% of the award’s value, by the sale of the debt to a third-party agent.

It is also worth noting that the interest in these cases can be very significant often up to 9% which would mean that the value of the award is increasing by almost €20 million a year.

Taking a conservative approach, if Zenith were to receive 50% of its current $503 million claims, that would equate to a compensation of $250 million. Following Rockhopper’s strategy with a specialist fund could yield approximately €160 million in immediate cash; if Zenith secured the same 70% as Rockhopper, this would rise to around €225 million. These are significant figures.

Even if we consider Zengas’s lowest projection of 25%, an award would still amount to €125 million, with a potential up-front payment of approximately $80 million – over ten times Zenith’s current market capitalisation.

Regarding Zenith’s debt obligations, while they are relatively large compared to the company’s current valuation, they are minimal in relation to the potential compensation Zenith may secure. I do agree with Zengas’s observation that market reaction remains muted due to the uncertainty around a favourable award outcome. This is why the outcome of the initial $6.5 million case, including damages and interest, is crucial; a successful result here could serve as a compelling indicator to the market that Zenith’s larger claims also have a strong likelihood of success.

I look forward to seeing it soon.

Ultimately I do believe that Zenith will end up being compensated via arbitration for the losses that have occurred in Tunisia as they had the contract to produce and the Tunisian government broke it. However, we also have to be realistic and accept the fact that these arbitrations usually take around 2 years to complete so I do not expect that we will receive any financial recompense until 2025.

The following potential positives are on the horizon (both short-term and long-term):

1. Zenith acquiring between 1-3 assets in Kazakhstan that they have signed MOUs for

2. Zenith acquiring any of the three US assets that they have said that they are bidding for.

3. Zenith win approx $10 million in damages from the court case vs the SNP in Paris.

4. Zenith win the arbitration against the Tunisian government for up to $48 million.

5. Zenith win the arbitration vs ETAP for $6.5 million.

7. Zenith win the additional arbitration (that has been mentioned) against the Tunisian government for mote tens of millions.

8. Zenith recover the $4.8 million that they are owed from the SMPC in Congo.

9. The acquisition of the licenses in South Sudan.

So I am still optimistic about Zenith’s future, and I believe that the company will acquire assets In Kazkhstan and the USA before the end of the year. At this point sentiment will improve significantly and the company share price will increase. I still hold here and will be buying more share between now and the announcement of acquisitions.

Best wishes, MG.

I’m still around and still invested and I still believe that the future of the company is bright, However, I now post on the Norwegian forums as the standard of discussion is better there. The trouble with this forum is that nobody is willing to engage in sensible discussion and so it felt like it became a bit of a waste of time.

For what it is worth, and before I disappear from here again, my current synopsis of the state of play with Zenith is as follows:

The company was in a very good position back before the Tunisian government stopped letting them sell the oil that they produced. In my calculations at the time I posted that this would deliver a revenue to Zenith of between $13-16 million per annum to Zenith. It would appear that I was somewhat out in these as the recent interviews with AC suggest that this would have been $20 million per year totalling $40 million to date.

Obviously, the position that the company would be in today (and more importantly the position that the share price would be in today) with an additional $40 million in the bank is considerably different to the position that we find ourselves in now. This is a massive frustration to me because in principle, the strategy that the company put in place was correct. The money from Tunisia would have provided the cash-flow to acquire and develop other assets and to keep pushing Zenith forwards in its development towards becoming a mid-tier energy company. I genuinely believe that if Zenith had been bringing in $20 million per annum from Tunisia when AC was negotiating with the Yemenis then we would have had a decent chance to acquire that asset.

However, it was not to be. For reasons that are unknown to us and will only become clear as the arbitration goes on, the Tunisians broke the contract allowing Zenith to sell their Tunisian oil and the cash-flow dried up. This has put us in the position that we are today – which is basically about two years behind where I hoped we would be.

Now the company is having to go back to the drawing board and repeat the principles behind the Tunisian development (that of acquiring producing assets and using the cash-flow from them to fund further acquisitions) in different jurisdictions where the government will not simply ignore the rule of law. These are Kazakhstan and the USA.

Assuming that they do acquire at least some of the three assets that they are negotiating for in these two countries (and I have every faith that they will manage to close at least one deal in both jurisdictions since they appear to have around $4 million to spend on the acquisitions) then we will be back to we were in 2021. The cash revenue from these producing assets will allow the company to grow and acquire other assets and the company and it’s share price will grow.

Paul1Deano – I feel that the quality of postings on this board has gone down significantly. I do not feel that links to pictures of oatckaes or lingerie add much of use to any debate. Obviously, others here disagree.

My opinion on Zenith has not changed. As I have said repeatedly, the share price will continue to stay at these current levels until a major asset is required at the moment either Yemen or Benin. If you believe that the company will acquire one of these assets then stay invested, if you do not think that they are able to do this then you should cut your losses and run.

Personally, I feel that we are currently in a fairly similar situation to where we were in December 2020. Back then the share price was actually a little lower, approx. 0.35p in memory serves me right, everything seemed pretty bleak and then the company announced that they had been chosen as the preferred bidder on Tilapia and the share-price soared. It then followed up with the announcement of the acquisition of the Tunisian assets and everything became more positive.

I feel that we are in a similar situation now. We know that we are negotiating the acquisition of Benin and Yemen and if we can bring one of them over the line then we are looking at a complete re-rate of the company and a significant increase in share price.

I would prefer Yemen over Benin as it has always looked like the best of all the assets that Zenith have been negotiation and it would be able to deliver cash-flow very quickly once the wells were turned back on. However, Benin is not far behind in terms of potential and it is also looking the most likely to be the one that is closed first. It is notable that Zenith have put our fairly regular updates about Benin on their twitter recently but have not really mentioned anything about Yemen. So I think that Benin is much further along the path to acquisition.

With luck we hear about Benin soon and then we start to get a share-price re-rate.

The tweet today said:

Hedi Hfef, Technical and Operations Director of Zenith, has been making positive progress in Cotonou, Benin, as we work towards finalising the terms of a Production Sharing Contract for Block 1 containing the Sèmè #oilfield, offshore Republic of #Benin

So this does not say that it is finalising the agreement, just that they are progressing in the normal way. Hopefully we should have some good news in the near future.

With regard to Yemen, I think that although it is (in my opinion) the better asset, it may well also be the harder deal to close. In our favour, we have the fact that we have agreed the sale with OMV and paid a fee for doing this. However, weighing against us is the fact that kelsbells pointed out yesterday that back in January it appeared that the Yemeni minister of oil was not in favour of the deal. However, the issue seems to be with a single person, not the government as a whole and there is an considerable amount of evidence available that suggests that the deal may well still go ahead.

Firstly - On November 14th 2022 Zenith released the RNS entitled Opening of Representative Office in Yemen where Andrea stated that: “We are very pleased to have opened a representative office in Yemen. The team and I have had the opportunity to visit Aden and to have fruitful interactions with the country's local authorities”. This clearly shows that the company had been in discussions with Yemeni officials before they issued the sale announcement or they would not have proceeded with the deal.

Secondly - OMV would not have signed the SPA with Zenith unless both they and Zenith had had a conversation the Yemeni authorities that would have given some degree of positive indication that the transaction could be approved.

Thirdly - There is the following tweet from a Yemeni geologist and consultant on the matter which states that negotiations between all parties have been ongoing for the last four months: https://twitter.com/1Gaghman/status/1610522134123528193?t=3ms7ZWcpJUUPJzf2MzTT5A&s=19

Fourthly - The following link https://www.dailyyemen.net/2023/01/06/aden-oil-commissions-spark-disputes-between-pm-and-oil-minister/ shows that the Yemeni authorities were fully aware of the transaction going through right up to presidential level. It explains that the current position of the oil ministry is due to a dispute between the President and the oil minister about the distribution of funds from the sale:

Does this all mean that the Yemeni deal will definitely go ahead – no it doesn’t. Even Andrea has said that in his opinion all of the deals that Zenith are working on only have a 50-60% chance of being finalised. Just because we have a tweet on Benin it does not mean it is definitely going to happen and just because we have heard nothing on Yemen it doesn’t mean that it isn’t.

flashgarden, I think Ezhik has summed it up pretty succinctly in his post below:

1. There is value in the potential of having both the Yemen and the Benin deals on the table at the moment because it shows that the company is actively trying to implement their stated strategy of acquiring major assets producing many thousands of barrels of oil per day as they are divested by major oil companies who regard them as marginal fields. However, to move the share price up significantly will require one of them to be completed.

2. The value of the Italian revenue is currently running at the level of the last 12 months revenues. The income may be less in the future but this depends on many factors including changes in the price of gas and the amount of gas produced. To continue your analogy, we have been travelling at 100 miles an hour for 12 hours and 20 miles an hour for two hours. The current average speed on our journey is 89 mph. Simple really.

Zengas, the original point that you made on pulling out of deals was that you referred to them as having “ended without success “ clearly implying that each exclusivity deal is like a football match that the team “must win” or it is a failure.

You now say that “exclusivity agreements don't mean they are over the line until signed and sealed whether its on the part of the buyer or the seller.” I agree with this. In fact it is exactly what I said on my response to you on Tuesday when I wrote that: “(exclusivity) agreements themselves mean nothing more that the fact that an exclusivity has been agreed for a potential transaction (and I stress the word potential).”

The completion of an exclusivity agreement is not in itself a case of success or failure. Success or failure is acquiring the right asset for the right price and not acquiring the wrong asset for the wrong price.

With regard to the Italian gas production You still appear to be forward forecasting what you estimate (in your opinion) will be the revenue generation for the forthcoming year. You are perfectly entitled to do this but as you quite rightly correct in your recent post these figures will change based on both the movement in gas price and volume of gas that the Italian assets produce - which it is worth pointing out that the company have stated that they intend to increase. However, the facts of the matter are that the figures published by the company show that over the past 12 months from March 2022 until February 2023 Italy has generates €3,076,465 in revenue (excluding the June data which was never published).

I agree that Yemen is potentially a massive game-changer for the company, assuming the deal does get over the line, but as I have said before it would be wrong for us to pin all of our hopes for the company on a single deal. This is why it is important that they are negotiating both Benin and Yemen at the same time. If Yemen does not come in but Benin does then that is still a significant result for the company (albeit certainly my second choice out of the two). I would also like to see at least one other deal on the table too. At the beginning of the year we have three potential deal on the table (Yemen, Benin and Congo) and we now only have two, We don’t know which of them (if either) will complete and given that Andrea has stated that there is only a 50%-60% chance of any deal going through then I think that the more options we have on the table the better.

Zengas,. I notice that you have made no reference to the points I addressed about the company pulling out of deals that did not work after due diligence. I shall assume from this that you agree that it is actually not a bad thing to pull out of an exclusivity agreement when the proposed asset does not pass due diligence.

You raise many points about matters that have happened between 10 and 15 years ago which I am not aware of, having not been an investor at that point in time. However, since you have raised them, I will look through the annual reports (which I have for Zenith going back to 2009) and see if I agree with your assessment.

I suspect that events that happened 15 years ago in the company history will have very little relevance to what is occurring today, but it never does any harm to increase one’s knowledge of an investment so it will not be a waste of time.

Finally, with regard to your point about the Italian income being reduced to $1.8 million a year, that information is erroneous. You appear to have got this number simply by multiplying the Jan/Feb production figures by 6 when in fact over the last 12 months from March 2022 until February 2023 Italy has generates €3,076,465 in revenue (and this excludes the data for June which the company never published – though July was €417,000).

I look forward to continuing this debate with you soon once I have looked through the old annual reports.

When the company do complete deals that mee their due diligence requirements these tend to be incredibly good deals. We only have to look at the Tunisian deals that were acquired in Covid for a bargain price to see how the company has successfully spent £200k to acquire assets that generate approximately $13 million per annum. If we go further back we can look at even the Italian assets which now generate about €3.5 million per annum. These have both transpired to be superb details but you ignore them to address deals that did not happen for reasons that were clearly explained and that most investors would surely agree with.

The thing I really like about Zenith is that, unlike most small-cap oilers, the company actually has revenue that covers its costs and more, from both Tunisia and Italy, and they have ambitions to acquire much much larger company-changing assets. We can see this from the proposed Nigerian acquisition in 2021 and the potential Yemen and Benin acquisitions from this year.

Andrea has been completely open about his desire to acquire transformational assets delivering thousands of barrels of oil per day. He has also spelled it out clearly in the last interview that not all of these acquisitions will be successful. He explicitly said that “as governments change and ministers change and an agreement that you have made with one individual is not followed by their successor… The cure for this is to have many many transactions (in play at any one time) so that a proportion of them, say 50-60%, will end up being completed.”

This is the game that small-cap oil and gas companies play. They go out looking for undervalued assets that they can acquire for a good deal (just like Zenith have done with Italy and Tunisia) and if they can’t get that deal then they move onto the next one until they do acquire an asset. But the key job of management is to buy a good asset at a good price – not a bad one at a bad price. If the company did not have any potential deals in the pipeline to replace Tilapia then we would all be in a position to moan about wasting money of a lifestyle company, but they are clearly busy trying to get things done.

Zenith have been successful in making great acquisitions in the past. As soon as one of the big acquisitions that are in progress gets over the line then the share price will explode. I believe that they will deliver on one or more of these which is why I am invested. If you don’t believe that they can do this then there is no point in being in the stock.

Zengas, I’d like to take issue with some of the comments that you raised on this board the other day. Primarily your complaint about the fact that the company has, since it’s inception in Canada, issued shares in order to raise capital and that it has entered exclusivity agreements that do not result in a del lbeing struck.

Companies list on public markets to issue shares for cash to fund their development. That is the whole point of being a PLC is the only reason for a company to establish themselves as a listed entity in the first place. To complain about a public company doing what a public company is set up to do is frankly bizarre. How are they meant to acquire assets unless they can raise money?

The point about the “failure” of the exclusivity agreements is equally bizarre. These exclusivity agreements are, by their very name designed to give a potential buyer the chance to carry out due diligence on an asset without fear of being gazumped by another party. There is usually a fee paid for the exclusivity time-period and the agreements themselves mean nothing more that the fact that an exclusivity has been agreed for a potential transaction (and I stress the word potential).

How can it be considered a failure on the part of Zenith for them to walk away from a potential transaction after they have carried out their due diligence and decided that it is not for them? The Central Asian example that you cite was (according to the 13th April 2018 RNS) “terminated by the Company because it has not received the required financial information from the vendor for the due diligence process to be successfully completed.” Are you really telling me that the company should have signed the deal without having the relevant financial details and just hoped for the best? Frankly that would be idiotic.

The Indonesian example you cite actually states in the 28th March 2018 RNS that “he Proposed Acquisition remains at an early stage and there can be no guarantee that it will be successfully completed. Completion of the Proposed Acquisition remains conditional on, inter alia, satisfactory completion of the Due-Diligence, the entering into a share purchase agreement and financing of the Consideration.”

The July 16th 2018 RNS also then pointed out that “the accounting due diligence process evidenced negative discrepancies largely exceeding 5% of the book values declared in the Proposed Acquisition's financial statements dated February 28, 2018.” The RNS makes it clear that due to these discrepancies the company wished to renegotiate the acquisition fee and the vendor refused to do this, so they walked away. Walking away from an overpriced asset is not a failure, it is good business. It is pretty much the same with the Norwegian deal where the RNS quotes: “unexpected complications and potentially high costs to complete the Proposed Acquisition”

In my opinion, there is no problem with a share consolidation.

Fundamentally the amount of shares in issue makes no difference to us as shareholders. The value of our shares remains the same and the value of the company remains the same. The only difference is that we have ten times less shares but each share is worth ten times more in value. So somebody who had £1,000 worth of shares at 0.55p (181,818 shares) would still have £1,000 worth of shares, they would just be worth 5.5p each and so they would have 18,182 shares.

However, I would still say that there are some practical advantages to shareholders of the consolidation that are more abstract (but nonetheless still important). The big advantage is that the share price will be higher. By being in the “pence” category rather than the “fraction of a pence” category then the company has a share-price puts it in a different category to micro-cap companies such as ADME, Scirocco and these other tiny companies that have market caps of under £10 million.

It also has the second advantage that now when the share-price moves it will move significantly more than it did previous. This means that if the price was previously moving from 0.5p to 1p (a movement of 0.5p) then it would now move from 5p to 10p (an increase of 5p). As I said before, the value of our shareholdings would still remain the same but it looks like a more significant increase. I think that this will also encourage more investors into the stock.

Overall, the big advantage of the consolidation is that it makes the company look more substantial, which is important especially when we are close to bringing big projects like Benin and Yemen on board. A company that is operating those kind of assets should not have a share price trading at a penny or less and this way it will not.

In my opinion, there are no disadvantages to the consolidation. I have seen here people mention that it allows the company to issue more shares in future but this is a straw-man argument. The very fact that the company is a listed entity allows it to issue more shares – that is the whole point of being a PLC and there is nothing to stop the company issuing more shares at the current price. UKOG, for example, has 21 billion shares in issue so there is nothing to stop Zenith doing the same. It is an illogical argument.

I am happy to discuss with anyone who thinks that the consolidation is a bad idea, but from my point of view it is definitely a positive move.

Ezhik, bet wishes and absolute respect to you too. It is a pleasure to politely and sensibly engage with somebody who has a differing opinion and your opinion is always worth listening to. Fingers crossed for the future. I think that it looks bright but only time will tell.

Andrea tell us also about the fundraising that you have recently completed.

We have strategically planned for a while to do something before the end of our financial year which is 31st March 2023. It is sad that this period of lower share price came but we carried out the exercise and it was comforting to see that two institutions that were already in our shareholder list have continued to invest. The one most known to our shareholders is the fund Premier Miton and this showed the confidence and even the additional attraction that the lower share price has given to these long-term investors for investing in Zenith.

What can we expect to hear next from Zenith?

Our policy has adapted with the case of assets like Tilapia because of two factors. One, the great mortality of deals as governments change and ministers change and an agreement that you have made with one individual is not followed by their successor. So there is a variety of casualties that happen. Investors often remain very puzzled by this but it is statistical and it is constant and little Zenith will not change this by ourselves. It is a worldwide trend of governments.

The cure for this is to have many many transactions (in play at any one time) so that a proportion of them, say 50-60%, will end up being completed. This means that the newsflow for Zenith will be to bring additional opportunities to our portfolio which may take time to be completed but in the meantime I will assure our investors that we will always have a sound portfolio supporting our share price.

You announced in December plans to develop Zenith’s Italian gas production portfolio. Tell us about the developments here

We should first have a resume of what has happened in our gas activity in the last ten years. Zenith purchased from Meditraaneo oil and gas, then a PLC in London, all of the activity onshore and then we started producing. The last ten years before Dec 2020 were satisfactory but not very exciting because the price of gas was very low. There was a tremendous amount of gas in Canada and the USA which they could not easily export because gas is not easy to transport across oceans. And Europe was supplied by Russian gas. Then the resumption of consumption of gas and electricity after covid brought a good rise in the price which made us very profitable. Then the Russian Ukrainian invasion made the gas price skyrocket to $300 so that made our Italian operations very exciting and making a fantastic profit because the operational margins are enormous and the operational costs are low. So we obviously immediately put in motion the activity to revamp additional fields and to purchase additional fields. The revamping, as announced, is already in progress. The only thing is that in Italy there are a variety of local and regional and provincial and governmental steps before opening the wellheads. This is the only reason for the delay but we hope that this will happen soon.

The government, who sees that we are only producing in Italy 10% of the gas the we produced 10 years ago is, of course, trying to shortcut the process and to make it easier to produce gas but these changes in an environmentally conscious country like Italy are not very quick to happen. Nevertheless we believe that the price of gas going down and the supertax for extra profits on hydrocarbons having been levied in Italy at the end of 2022 and charged this month to foreign operators means that a variety of foreign operators may rethink their enthusiastic approach to gas production in Italy and so we will have more opportunities to buy gas assets there. We have been in Italy for 10 years and we plan to stay long into the future and so we may acquire other fields and steadily make a nice income and a nice net revenue.

With your development plans in place tell us a bit about your management team and the board that you have in place.

The management team continues to grow as any time that me make an acquisition, for example Yemen or Benin, we will acquire a lot of managers from the previous company that we have taken over. In Benin it will be more interesting as it is a country that is not at the moment producing oil so we are bringing in additional technicians that we are associated with who are familiar with these kind of platforms and have the ability to manage all the security and processes of offshore.

With respect to the board of Zenith at the moment it does not contain any women so for good governance we are looking for a lady to appoint to our board to, in due course, have the right percentages between genders. This will possibly include somebody from Norway which is our biggest market in terms of volume and somebody from London. So we are looking for two additional candidates.

So lets move on and talk about your latest exciting opportunities for acquisitions in Yemen and Benin

I was very distressed that people selling their shares because of Tilapia did not consider the importance of the Yemen and Benin cases. Analysing them, Yemen is indeed a complicated country in terms of politics at the moment. Hence the difficulty of getting the final approval (of the asset acquisition) swiftly. This is still in the course of being obtained, but we should remember that Yemen would be the biggest producer in the company with more than 2,000 barrels per day net to Zenith. With our drilling rig transported there then we will have the ability to increase production possibly two times. OMV for various strategic decisions has not drilled a well there for the last ten years so our arrival with our ZEN260 deep drilling rig would permit the development of this production. Then of course, a field like the Yemen one in Nigeria or Egypt, a territory that is less controversial, would have cost Zenith more than $100 million to buy. Our plan is to buy a license that is highly producing but in a controversial country so that the price is greatly reduced.

The case of Benin is different. We have a long-standing relationship with CNPC who we bought some properties from in North Africa (Tunisia) and CNPC is now the cause of the Benin’s reconversion to oil. The new CNPC pipeline that is coming from Niger and running through the whole of Benin to arrive in a place that is 3km away from the base of Seme 1. When we learned that in Feb/March 2022 we recontacted our partners in the region, visited the government and participated in the tender which we announced in April. We then became the exclusivity holder for the period necessary to complete the PSA. This is what we are doing at the moment. We are also bringing in technical partners who we are forging a relationship with because this is only our second offshore experience. We have gone for shallow waters and there are these advantages: there is a terminal for oil 3km away; a flow of ships going in and out toward China and other places; there is also great technical competence available from Nigeria because Nigeria, which is near the border with Benin has a terrible petroleum crisis and so lots of activity is suspended: (a) for the elections and (b) because the amount of theft from local pipelines by gangsters have increased to 12% of national production. So there is a stalled situation in Nigeria. A lot of equipment is not used and a lot of technicians are not working, so they are available for our Benin operation.

The company recently announced some disappointing news on the Tilapia license in the Republic of Congo. Could you provide an overview of what happened there?
I am please to do this clarification because the damage that this news brought to the stock price has been quite large and our feelings inside the company is that this is one of the possibilities when you deal in emerging markets – their perception and way of doing thing. This is something that has been badly received by investors as Tilapia was an asset we inherited from AAOG in a deal that we made very cheaply £200,000 which it cost us to take the license (which ran for a few months) the credit owed by SNPC and the legal case against SMP. It was a very good deal that let us enter into Congo where we still think we have a future. We will be much more cautious in future about announcing deals before they have the final seal of the Parliament but we are still there and we are still in negotiations and the government understands what has happened to us because of the choice taken to give it (Tilapia) to someone else. The reasons that this happened are mysterious and are the secrets of the country’s internal cuisine (??). Ourselves we are proud to have done the maximum. I stayed in the country for two months and negotiated with great effort and we will have other opportunities. I insist that shareholders understand that I got the guarantees that I presented to shareholders from the highest level in the country. I did not misinform, I did not misrepresent, I got it from the top of the country and then I told it to the shareholders. They then let us down but we are going on in the country with patience and understanding that this is the environment.

What is the plan for the recovery of funds from the SNPC and the SMP. How much would this come to and do you think that there is a realistic chance of receiving this?
The credit from the SNPC (the national oil company of the country) has the advantage of being part of the state so they can never go bust and this money is certainly recoverable. How and when is the question. Because we are continuing negotiating additional fields in Congo our negotiations will be diplomatic and firm but polite because we can have the use of this credit for other purposes while gaining new licenses. It is a completely different story with the SMP which is a commercial relationship with a company that badly performed for our predecessor AAOG and caused to them tremendous damage. We should remember that AAOG PLC shareholders invested more than £28 million in this venture and so we are firm to recover this wrongdoing which now amounts to $9 million American dollars. The court case is very advanced over four years and so we are convinced that something good will come out of the decision of the Paris court. Paris is aiming to become an international court system and so their equality towards even a French defender such as Bordeaux company SMP is, in my opinion, assured.

As many of you know I am fond of writing up a transcript of any Zenith interviews in order that I can quickly refer to what has been said in the future and do not miss any key point that are made. I have now done this with today’s interview (it takes a while).

These are the key points IMO

1) The company is still negotiating for new assets in Congo. The are not pursuing the SNPC debt at the moment because they hope to use this money as leverage in these agreements.

I am not sure how I feel about this tbh. I think that Zenith have been completely screwed over by the Congolese with Tilapia and at the moment I would be happier just to leave the country and sue them for the cash. But I guess if we get a good asset then that might be better. However, I definitely reserve judgement on this one.

2) SMP money – company is confident in a good result and are claiming $9 million. The court case is advanced.

3) Yemen is a huge assets (as I have been saying) that would have cost $100+ million if it was in a safer jurisdiction as opposed to the $21 million that is the price in Yemen. If we get the asset it would immediately produce 2,000 bopd net to Zenith with the potential of this doubling as OMV have not drilled any new wells for 10 years.. We would use our own rig to drill there.

4) Benin became attractive because of then CNPC building a terminal just 3kn away from the Seme field. They are able to bring in lots of offshore technical expertise and equipment for neighbouring Nigeria.

5) The intend to appoint one Norwegian and one Brit to the board. One will be a woman.

6) They are going to try and acquire new gas licenses in Italy. The field revamp is awaiting various governmental approvals.

7) The fundraising had been strategically planned for before the financial year end. They were pleased that existing institutional investors re-invested and think that this shows the potential of the company especially from the current share price.

8) They have learned the lesson from Tilapia and intend to always have several acquisitions on the go aiming for an overall success rate of 50-60%. They (and we) have to accept that not all deals will be successfully completed but they will keep bringing new ones to the table.

Transcript to follow

Ezhik, I see where you are coming from in your post and respect the fact that you were there having these conversations with other investors when I was not. However, I completely disagree with you over the risk factor. Maybe this is where the fundamental problem comes in.

I cannot see how you can define operating in a single jurisdiction (Azerbaijan) that is known for corruption and where the President was named ‘Corruption's 'Person Of The Year' by Organized Crime and Corruption Reporting Project in 2012 as being low risk. It is definitely he sort of place that was worth a punt, as it is the sort of place that small cap oil and gas companies have to operate in order that they have the chance to make big money but it is not low risk. When you look at the amount of people that Zenith had to employ in Azerbaijan to operate it was well over 200 and this was without the costs of actually carrying out the work. When you add in that the soviet era data that the company was relying on turned out to be wrong, you can again see that it was not low risk.

This does not make it an un-worthwhile project, but it does make it a high risk one as all of the company’s risk was tied up in a single jurisdiction that is effectively an authoritarian state. Azerbaijan could afford to be without Zenith but because Azerbaijan was Zenith’s only asset, Zenith could not afford to be without Azerbaijan. This was exactly the same problem that AAOG had in Congo. It was their only asset and so things went wrong (like SNPC not paying their share of the drilling costs) then the company was screwed.

A small cap oil and gas company can only afford to put all of their eggs in one jurisdictional basket when that jurisdiction is legally reliable and the government enforces laws and does not allow state owned companies to get away with whatever they want. Developed world countries basically.

However, small cap oilers are not likely to make their fortunes in the developed world so they have to spread their risk in the developing world so that a problem in a single jurisdiction does not bring the entire company to a halt.

The only truly “safe” jurisdiction that Zenith currently operate in or are talking about operating in is Italy. But Italy will not make the share price fly. Tunisia is risky (but less so than many other places), Congo was risky, Benin is risky and Yemen is risky. But by having assets in more than one place, the risk is balanced out. Issues that will cause problems with production (usually with politicians) are likely to occur in all of these places (except Italy) but they are not likely to occur in all of these places at the same time and therefore the risk is spread out over the company portfolio. This is why I feel that Zenith is much more of a low risk company now than it was in the Azerbaijan days.