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Having just agreed the waiver all things being as we have been informed there is a full year to deal with the bond. I have no idea why anyone thinks IOG should do anything in short term. They need to as they have stated stabilise, build up a cash buffer and see where the winter gas prices take them.
The puzzle that the half year report may yet explain is why they did not just pay the interest in June and September and instead left it in the bank. The obvious reason is either some accrued expenses to pay or needing a minimum cash buffer as operator for working capital.
Given where they are at as a shareholder I want to see them open the taps on whatever assets they can next winter and accumulate as much cash as possible to give them some room to work in 2024.
They have created a very difficult situation through a combination of poor choices and bad luck/poor execution. But there really is very little they can say or do at the moment but they can't hide for too long and will need to explain their plans to shareholders (not just their wider stakeholders) and we await some key explanations as to how you can get phase 1 so badly wrong.
Wolster it's probably as good an outcome for now as can be expected.
Few times last couple of days I've been tempted to post but then refrained.
The outright trolling and scare mongering and naked greed to feed trading objectives has been pretty depressing to watch.
So there has been no need to issue shares for interest - why would they do that anyway. Instead the proposal was to roll the interest forward and pay in sept. The appointment of a minder is something shareholders would have loved a NED director to do last year for them and sensible. The alteration on the terms is interesting - do they have half an eye on an offer here paying it off early?
I keep pondering the question why they have not just paid the interest. There must be a reason other than just maintaining working capital funds. If so what is it?
Keeping IOG afloat into sept means the license round gets announced which would add value to IOG even if in due course it were to end up in admin.
They should be able to get through to end of year and avoid requesting next waver and then up to when gas pricing drops off.
That won't give them capital to do much and so the bond in 2024 becomes the key and whether they choose to seek a raise at a later date to try and fund anything.
Getting this over the line should buy time to work out the next move.
The company remains in a poor position but this should get them to a more favourable gas pricing situation. Once the price rises another burst of Elgood and H1 would add some extra funds into higher prices.
I'm not happy with how the board have managed to take IOG to the brink(I'm actually livid with them) but given where they have taken it that RNS is ok. Shame they didn't issue a more measured RNS originally.
Well I don't know what to make of the strategy the IOg board are pursuing.
That was a terrible worded RNS to issue. Why?
First we don't know if the interest was paid or not and if not why not. They have the money. I think they my have paid.
Second surely the next bond test is later in the year. The only thing that comes to mind is the odd inclusion of the LOG default claim provision. Do LoG intend to try and promote their unsecured debt and in the process destroy what's left of equity in an attempt to extract some cash as a creditor?
So it's that waver that needs to be extended in my view.
Going forwards is hard. That has not changed. We knew about low gas prices and Bacton shut down. The flow rate settling back yet again hurts but that is not as significant as the price into winter.
So why the tone of this RNS?
Who is it aimed at? Government? Bondholders? Shareholders? LOG?
I don't understand what the IOG board are playing at. But it would be scandalous if LOG cause shareholders to lose any chance of recovering what they have left. The best option is clearly to get the waiver, rebuild cash and then put the company up for sale and see what interest there is. Someone can buy IOG pretty cheap at moment if they have some cash or can use tax losses even in an all share offer. That still seems the most likely outcome here but the previous and CURRENT board have created a horrible situation through a series of barely believable mistakes and miscalculations.
Very odd RNS that as ever leaves more questions than answers.
Deltalo LoG are about to have an option expire at nil value and my read of the loan note is it converts at 19p Into @ 65m shares ( so IOG balance sheet will reduce the debt for shares worth 19p not 2.5p). That's next year so that debt is not a problem as I read it unless the issues with the bond cross default and they can try and get cash rather than shares at 19p.
The bond is only part of the problem. Current production will mean they can fund interest. But they can't repay and can't fund much else. Hence the problem.
They have to progress future development and the only way to do that is borrow even more (unlikely), equity raise (hugely dillutive at 2.5p) or more likely obtain farm in. As the bondholders have security even a farm in is not straightforward.
If bondholders did a debt for equity then they would likely just want the business liquidated. So that being the case IOG board should in that scenario just find a buyer for the business. Either way shareholders are in a weak position when the board make such a huge overreach on the finances without delivering.
So I suspect a more interesting valuation is trying to work out a balance left after the bond less current cash say £60m and then what's left would be for shareholders of the assets 50% of Elgood and Blythe, nominal values on unproven assets and a value for Bacton and the pipe. The tax losses also have a value.
I just don't see a debt for equity swap here.
If they need to fund anything next 12 months to drill then maybe a bit of cash and a small equity raise for working capital is what they would do. If you are going to sell then doing so after one of the high impact drills increases reserves makes sense.
I suspect the current share price reflects the residue post debt of a breakup with a huge risk premium priced in. That is also what I suspect LOG admin would want an offer for their equity and debt nearer 19p than 2.5p! The board also have undemanding options under 10p to cash out. So won't take much of a premium to offer for IOG given the huge number of shares bought under 10p.
I just don't think there will be anything more than discussions with bondholders in 2023. Once the winter gas prices click up then cash cones in a bit quicker but still nowhere near enough to progress as if Southwark had provided even a small extra revenue contribution.
Week or so and we should get a bond interest paid RNS. We have 33rd license round of more assets to add to unproven reserves. Beyond that 2023 is about gas price for Blythe production.
Deeko I'm sure we would all be overjoyed to find out Southwark is actually not as bad as the company believe. The issue is the flow rate is nothing like what was expected and given the influx of water the prospect of handling even more water at Bacton for such low flows made no sense.
We await a review of the Southwark field but since the drill they have effectively written it off the reserves and the future strategy excludes all the non conventional fields for now due to risk. If Southwark has issues that could be overcome one would hope the company would have said something by now as it's the Southwark debacle that has crushed the share. The result was not expected.
SQZ your numbers are similar to mine.
It shows they have no issue covering interest as long as gas prices don't collapse. But they have to build back cash to pay for any future operations and rebuild the bond covenant buffer. That's why the drill has been released. They can't do much unless they raise equity or attract interest in Goddard.
They unfortunately need to consolidate and try and push the share price back up to make a raise a palatable option to fund anything. The more likely route they will try is what they are seeking which is to attract a farmin to part of the assets to fund the next development. Failing that in time they would effectively have to put themselves out for sale. The only other possibility is if there is someone willing to use the export facility (maybe something shut-in from threddlethorpe is in range?) Or there is a hidden gem in the 33rd license round.
Either way I agree the board should really hold some sort of shareholder meeting or communication event but they can only really do that once the dust settles. I'd like one now but not sure it would be able to say a great deal. But its the plans for the bond in 2024 and the long term idea of how to recapitalise that the board in time will have to address as a result of their woeful performance in delivering phase 1.
At some point they will realise some of the implications of what they are doing with the SNS and the profit levy. Fleecing the small SNS producers will simply import the same gas with no tax from abroad. The dangerous mix is the conflation of fiscal policy with climate emergency rhetoric and grand standing to justify it. The gas and oil price test on the levy is clearly inequitable and nonsense. The two have little to do with each other. But companies like IOG who do not produce oil could be taxed even when gas prices is uneconomic to produce!
As with EV at some point the fiscal penny will drop about road tax and petrol fuel duty. Energy and transport is key in the tax take for the govt.
Reducing UK production will only help climate change if it's not then imported. But imported gas will impact the balance of payments and tax take and leave UK at risk of future supply shocks.
Getting the balance between the two challenges involves some careful planning for the transition which it's questionable whether any of the politicians have grasped on all sides of the political spectrum.
TT the issue is not an immediate liquidity problem. They have cash and income.
The issue is that with high and rising interest rates and low gas price (and at some point in 2024 once the £21m ring fenced tax is used there is windfall tax) the cash balance will build too slowly.
They will accumulate but to stay right side of the bond covenants tests the cash can't easily be used to do the drills they need to prospect let alone fund something as big as phase 2. Those I hope will get new dates agreed to push out further any costs.
Should they find someone to help fund some exploration by farm in then that would help massively as would high gas prices.
Without that they will need the bond rolling over or refinancing and/or at some point raise equity to fund future activity.
It may be a combination. Either way it will take a bit of time given the wider macro economic picture. The bondholders are getting a very good return on the bond now and it is being paid.
So it's a bit of a waiting pattern for now. IOG will have to make a move at some point but in first instance I'd guess they may sit out LOG maturity next year and let that convert next year into shares. I remain of the view the company is as likely to be taken over by someone with available cash who can use the losses and income stream and assets as by the bondholders.
Either way the company has stabilized itself for now but off the back of immense shareholder value destruction and it's been weighed by the market accordingly attributing very little value.
The challenge is how they now progress anything. They could do with a bit of luck in the license round or a surprise request to use facilities to generate income. I'm not sure I'd expect any further news on the bond beyond confirmation interest paid in July any time soon either.
Well other than us longer term PI investors the LOG admin guys must be in a state of shock. The 32p warrant due Q3 is worthless. The share holding of 25% has taken a battering and the 2024 debt is convertible into 60m shares at 19p. so that £11.6m on paper is worth a fraction of that. I assume that as long as there is no cross default claim that they get the shares and not £11.6m cash. Even to do that and stay under 30% they may have to sell some.
The comment in the bondholder communication now perhaps makes a bit more sense.
So 2024 debt sept is the £80m bond needs refinancing. The £11.6m debt post sept 2024 is 60m shares. Per page 13 of presentation.
The immediate issue is getting agreement to move the Goddard date of 31st march 2024. Hence the Goddard farm out. But if they can't get a farmin for that then it's marked in the less attractive tight column of assets so not the end of the world as in the plan the southern and central blocks are the most attractive conventional assets.
So it's been a rubbish 12 months but they are not dead and live to fight the bondholders another day.
So the challenge is now working out how to fund beyond phase 1 assets while you still have a debt from phase 1. All the options have next development 2 to 3 years out to be online. So farmouts or enterprise sale remains the obvious 2 paths assuming there is not a huge spike in gas price (which windfall tax would cream off anyway).
The potential for a bid to take on the £80m debt less cash £20m and use the tax losses and fund future investment to offset windfall tax is a reasonable case. The question is how good the future assets are.
To survive IOG will have little choice but to trade on the future prospects.
Now we have the tax losses and interest need to rerun the finance numbers to see what free cash could be accumulated at the different average prices and assuming they get more out here of H1 and Elgood. Every little may count but they do need higher gas prices if possible to build up as much cash as possible.
A difficult 12 months to come. The lesson is if your going to borrow money make sure you can pay it back - the previous leadership on the board Fiona and Hockey should be not allowed near a company again. Everything could have been different but it's just not worked out like that. The marginal field hub concept is good. The choice of fields for phase 1 and understanding the risk and geology and the execution was not.
If IOG can pay the bond then it's likely in everyone interest to work out a way forward. But capital is now constraining IOG. Farmin difficult. Offer may be attractive to someone who has cash and wants some losses to use.
The other loser is of course UK SNS development through all this. IOG took the risk of developing these assets when it was unfashionable and have spent alot of money. That is now over till someone else develops some assets to production.
Well aside the gas flow rate which has dropped back to a lower stable flow which is normal but in the best tradition of IOG at the low end of the range.
That does make a difference. As does the new information that the formula for the royalty is giving calE more money no idea why that is the case.
That means revenue is tight. But that is not news.
The company remains very vulnerable to the gas pricing. They clearly are looking to see if they can progress a drill if they can eek out the cash @£15m.
The tax losses are significant value to IOG and indeed increasingly likely someone else in my opinion.
Southwark looks like it's unlikely to go anywhere and the focus sensibly is on the conventional fields so phase 2 and the £65m carry on that looks doubtful.its how you fund it all that's the problem.
So we end up post phase 1 with a pipeline, facilities and 30mscfd production. All 3 phase 1 fields have under performed.
They are not going to fold they have enough cash to keep going. But they are very vulnerable now to a bid. The cash, tax losses and assets mean that unless they can farm out some assets the only other option would be a huge dillution to fund a risky drill and I can't see the LOG admin agreeing to that. Higher gas prices will help but alot of the value here is the tax loss, cash, a producing asset and the facilities. Without a funded forward plan they will be as likely to get an offer as not.
RLL they have the money to pay the bond interest. It's the covenant tests around cash for interest cover and revenue that have been the issue. Lower gas price or stopping production to attach or dewater or whatever means it takes longer. The tests mean they have to keep quite a large buffer of cash which is why the rig has gone back. They can't run up more costs without breaching the next test or by raising more equity. That is the problem. They are being constrained now because they have not spent the capital they got wisely - poor choices and/or bad luck are now combined with adverse macro/political environment.
It's not a hopeless situation but it's difficult and the board have been taking huge risks as the foundation of the business model was that Southwark was commercial. Spending money on Harvey and Southwark was premised on whoever reviewed the geology. They were wrong.
At times like this it's vital that the board communicate clearly what the plan going forwards is. But they do need time as everything they say and even don't say is now being scrutinised.
Cjm yes it becomes a watch the gas price futures game.
They will be able to cover the interest on the bond but with high interest rates it's eroding free cash. They have to repay LOG in 2024 £10m so a good chunk of cash will be ring fenced for that and they still have to stay within the bond limits up to then. The only way to progress now is to attract additional farmin on other assets. 4p is pricing nothing in on any of the assets.
Lovelife IOG is hard to value! Beyond Blythe Southwark has cast such a cloud over the other assets that when combined with the unwelcome investment environment (created by interest rates and the govt\opposition you have to find someone with cash willing to invest in SNS assets rather than elsewhere in the world. The recent low LTIP awards with no real performance element makes me inclined to think something around that price might be what someone would try but there is no guarantee. LOG admin with £10m debt and 30% of the equity will have a firm view now on whether they simply need to extract what they can and at what prices. You would normally expect to trade at multiples of revenue but IOG is not doing that due to the debt position and takeovers are normally based on the P1 resources and revenue in the main. It's higher than 4p for sure but when it's tough you find offers tend to be what someone wants to pay. IOG is not in a firesale situation so for the moment they can continue to explore options to recapitalise.
Lovelife yes my brain being lazy when keying on the phone. It's 20% of IOG share of 50% so @40%.
Either way CalE are better shielded from phase 1 than IOG largely because IOG spent alot of the farmin cash on Harvey and Skipper debts both unsuccessful drills pre phase 1. Those are the reasons the failure of Southwark is so damaging as it's left IOG with debt - had they developed phase 1 and used the cash they had from calE and the placing for that the company would now be debt free. Unfortunately they have gambled on these marginal fields and Harvey, skipper and Southwark have consumed well over £100m and produced no results.
Calder I briefly agree with your numbers for 2023 into 2024. They demonstrate how important keeping production running at a high level over winter will be. IOG have failed to do that in the last 2 years. Missing 2021 into 2022 and losing up time on pipeline through teeth by problems, Southwark valve failure (yes kit failure on new items is a recurring theme) and connection time and Barton shutdown.
The only realistic way forward at lower gas price is to effectively give away more future reserves and revenue through a farmin to obtain funding. They can't borrow more as they already have too much debt. They might be able to attract some traffic onto the pipeline and get a bit of traffic income.
My gut feeling is that they are vulnerable to a low ball offer. Why farm in when you could buy the lot and obtain losses to use and get Barton plus 2 plus years of Blythe and @£20m cash. With LOG holding 30% equity it's not hard to see how that can occur.
Not enough if it's 20% of IOG and the cap is on the additional royalty ONLY rather than total revenue calE are getting. £16m royalty on £80m IOG revenue in 2022 would be about right.
Another example of where phase 1 has gone wrong without Southwark and Elgood delivering all the royalty is coming out of Blythe. I'd guess by year end 2023 we will still be only £30 to £40m paid down on the £91m cap.
It really hurts to look back at the numbers. The £40m calE gave was wasted on Harvey (unsuccessful drill) and LOG debt for skipper (unsuccessful drill) which was supplemented by a hugely diluting placing as well. The £80m bond has then been spent along with a good amount of the £80m revenue on phase 1 to leave us with just £15m in the bank, still owing £80m on the bond and £10m to LOG and a single producing asset that we will get 30% of revenue only!
Irrespective of whether you think the current configuration of the board has done a good job or not overall they have collectively failed shareholders. But without any doubt it's Southwark that has undermined the company financials. To get no production from there in phase 1 after 2 drills and all the cost sunk into it is a disaster.
CalE will have faired slightly better but still be at a loss. They must have got best part of £100m in 2022 having put in £160/£170m plus £15m n 2023 for H2. So they stand a fair chance of recovering a good chunk by end of 2023 unlike IOG they won't be being hit by borrowing costs. But having got money out it's easy to see why they will also be keen to not see phase 2 progress any time soon without phase 1 revenues on a 50/50 basis given the risks.
Hence IOG will have to manage with whatever balances they can build up this year from their 30% of Blythe. Most of that will have to be used to pay down debt and interest in 2024 and hope they attract a farmin on another asset.
That is why it's at 4p. Priced pretty much for someone to come in who can buy the debt to save the interest and turn a profit on Blythe revenue.
Only if significantly less and a good reason. You get into a gray area with things like that.
As for the tax question yes they can offset allowable expenditure like any business but there are rules to follow around this sector and it's taxes - the windfall tax I've not researched in depth as to the allowances but in theory future expenditure would attract enhanced allowances to offset. That might be part of the problem for IOG if they don't invest and just sit on H2 production and exhaust allowances - they would pay more tax.
There is nothing to RNS that will make a great deal of difference.
The rig departing is no longer newsworthy. They could RNS stable flow but they may as well wait till end of month to do that at same time as confirmation that bond interest paid (in addition that there has not been an attempt by LOG to claim a cross default).
We are waiting on the Southwark post drill field review but there is no timeline on that. We await 33rd license round.
With the rig off hire nothing will happen operationally in terms of drilling this year. They may find a partner for Goddard but that will take time.
In meantime all they can do is hope gas price is higher and rebuild cash balances.
Nothing is expected but you can always get some left field news but I doubt anyone knows anything. The leaky posting here has always been around the operations on the rig.
The extra 20% royalty must be close to being done its clear once CalE have £91m back I believe. That's about as good as it gets for now. IOG now need the authorities to give them some time on any commitments on existing licenses as it's in large part govt fault with windfall tax and high interest rates that North sea marginal fields are now difficult to fund.
And so endeth phase 1.....
While they may RNS the rig and the stable flow (please no more surprises IOG!) It's really now about waiting for the license round and the final word on the Southwark review while waiting for the cash to build up to try again.
It's almost unbelievable that they have developed 3 fields and reduced the share price from 44p to 4p.
There is no way the bond will be paid back next year indeed. They will repay LOG first in Q3 2024. Then the bond could be extended rolling it over for a other term in full or part of refinanced. The calc of free cash is hard not knowing what is allowable to avoid the windfall tax. Is H2 allowable and Southwark on the windfall element. It's allowable on the normal tax it's the windfall element I'm not sure of. It makes a big difference in tax. In addition the models need to look at different gas pricing. The models at 1.50 is very different to where we have been recently at 80p or 60p or £2.
Once they have rebuilt the cash the issue then really is can they spend what they have on the right asset. It's been choosing the assets badly that very nearly bankrupt the company. If it takes 2 years to develop next location to production then IOG will need to find a way to progress at least 1 asset.
Correct dunderhead. The issue is quite clearly the interrelationship between the debt and future revenue.
The debt is made up of the bond £80m and £10m of LOG unsecured.
The revenue is highly volatile based on the gas price. But the revenue is 50% calE plus their extra 20.2 % till they have received £91m. Now they must be done by now. Year end accounts showed £80m revenue to IOG.so that must be nearly fulfilled and IOG close to getting 50%.
Unfortunately the revenue has been clobbered by the high costs in phase 1, interest rates rising and tax. So the free cash is not the same revenue. The interest is now over 13%. The windfall tax is hard to quantify as I don't know what is allowable or not. But I suspect not all expenditure is offsetable.
So what you need to do is model out the free cash post interest and tax. The free cash is the key as that is where the debt ratio is going to get measured, the debt principle could be repaid and future operations funded.
Phase 2 was £400m with £265m funded by calE and balance IOG. The plan was to fund from phase 1 revenue. That needed Southwark and Elgood. Without it can't be funded. The exploration plays are £12 to £15m a well for IOG and would add to reserves but not revenue. Hence why they are seeking to farmout Goddard as again to stay inside the debt ratios they need to rebuild balances.
So at the moment IOG is marooned. Rise in gas price would help but if the windfall tax creams it then IOG will take a while to rebuild balance sheet with free cash. People need to do the sums and having done that you will see the problem.
They have to make a move to add production at some point as Blythe will decline. That is the problem. If they can't generate enough free cash then they are stuck with the phase 1 revenue paying interest and tax. Until we get some clarity of future plans it's hard to value IOG. The danger is they raise equity to fund some activities but they seem to be looking at farm in first. Even CalE want to farmout which says alot. A left field update on license or a farmin or Southwark review is possible. But for the moment it's all about managing the debt. That's why we have a short - they are betting IOG will either raise equity or default.
Project121 bad luck is a euphemism here for many reasons things have gone wrong. It's been happening for so long and predates even phase 1 operations. It is of course not bad luck but that doesn't matter. However, they could not drill without raising more cash. Sending the rig back is as good an indication as you will get they intend to try and work within the cash resources they have. Not guaranteed but with £15m and ratio requiring interest cover way above that to then go and spend £12.5m on next drill on an exploration not production asset would have been crazy. So the rig going back is no surprise to me. But I'm pleased it is short term to conserve cash and AVOID a placing.
But it does mean we have now entered a period as phase 1 concludes where after 1 year we have 1 producing field.(it should have been 3) and no firm plan of what to do next.
As a holder who has watched this go up to 44p and in one year crash to 3p then bad luck is very much how it feels to have witnessed the quite unbelievable turn of events here.
But for the avoidance of doubt I would prefer going forwards not to see the frequency and severity of bad luck IOG experience again.