Member Info for OofyProsser

Correction: the 15% interest on the Mercuria £12mm. loan to which I referred should have read 17%, but the result of the equation remains unchanged.

Mysteron: it’s not quite as simple as that. From the revenue, you have to deduct not only interest, but g&a spending (c. £4.5mm?), maintenance spending (36 days worth p.a.) the annual costs of their remaining leases, office rents and all the other costs of running the business. Then there’s the money they still owe Mr. Forrest. In addition, the prospective changes in the Mercuria loan covenants to which they refer in the RNS are likely to include an accelerated repayment programme on what remains of the £12mm loan. Once it’s down to c £1,8mm, Mercuria’s 8% royalty kicks in. Meanwhile, the pressure in the existing wells should start to reduce very soon, which means they’ll probably opt for another compressor, with all the expense and disruption this will cause (not to mention the potential compromising of the long term flow levels). The CPR and the earlier Wingas version of it suggested a fall of 10% p.a. after 12 months and 10% p.a. thereafter. They’ve already been producing for more than 10 months. Then there’s the known and unknown unknowns that can afflict any oil/gas business.

I haven’t mentioned the tax they’ll probably be liable for on the net profit remaining after some of the above deductions.

Mercuria’s agreeing to the terms of the prospective new loan can be explained by the fact that they get much less in interest of 15% on the remaining loan balance than they will make on the royalty. So the sooner it’s paid down to £1.8mm or repaid altogether, the better for them. The fact that the new loan is at 15%, with so far undisclosed arrangement, rollover, drawdown etc. fees and share options/warrants to the lenders demonstrates the impossibility of securing bank loans for Saltfleetby, and the unlikelihood of early dividends to shareholders.

A big, sustained rise in the gas price, at a time when Angus is actually producing gas at capacity rates, would be very useful and would change the equation in Angus’s favour. Without one, it may be that Angus will continue to pedal very hard just to stand still. The lenders and the Board will continue to get fat, of course.

Re the Apple comparison, Apple borrows money at AAA rates, not at SONIA + 15%.

Bubblepoint: the sidetrack was a bit over budget.

WG818: “I could guess that Mercuria would have inserted a caveat that if Angus failed to produce the required amount of gas they would have to pay Mercuria what they had sold it to someone else for? Around £7 million? …..I would be guessing but so are you!”

I think you can safely assume that Mercuria would expect Angus to pay the full amount that Angus owe under any and all of these contracts. If they fail to pay on the due date, you would expect a penalty payment to apply, which would exceed the interest rate on the loan. If for some reason Mercuria were to decide that Angus were no longer able to squeeze cash from the equity market sufficient to meet the hedge/loan payments, then Mercuria would probably cast a slide rule over the realisable value of Angus’s assets before arriving at a decision as to whether to continue supporting Angus. Whether the Aleph consortium would step in before such a situation arose would depend on their own analysis of the company’s value, net of Mercuria’s ongoing loan, hedges and royalty costs, and Aleph’s own ability to raise the finance required to rescue Angus. For now, however, Angus appears to have quite enough support to carry on, and a big, prolonged rise in the gas price and a sustained, uninterrupted flow of gas would change the picture in Angus’s favour. I’ve no doubt that Mercuria’s strong preference would be for Angus to prosper.

I should have added that in my view, Mercuria, as WG818 puts it, had Angus over a barrel, owing to the terms of their debenture. The reason Mercuria continues to back the management is that Angus and its financial advisers have proved themselves well able to date to get free money from the equity market to finance them over the short term. Mercuria are still getting their usurious interest, sums in excess of the value of the original loan have already been earned. From here, it’s all about the excellent returns still being made by Mercuria on the forward contracts and the 8% of turnover royalty they will receive once the debt is fully repaid. An excellent deal for them - as was Mr. Forrest’s deal, for him.

Gallder: I think that what HITS is asking is WHY did Mercuria sign Angus up to extremely generous hedge terms for the two “new” hedges? There must be some quid pro quo but they haven’t, as far as I can see, admitted to this. Either they didn’t know what they were signing up to and have stumbled on since then, trying to meet the terms of the new deal without disclosing them, or they did know and have misled shareholders.

You can, as a number of people have observed here this morning (and thank goodness for a string of more intelligent/informed posts) presume that Mercuria’s returns for whatever new arrangements were imposed on Angus last July/August will be in excess of what they would have achieved by their earlier hedge arrangements. There’s scope for disappointment among investors with net income over current months. In addition, the flow rates from the two initial wells were forecast by the company and its competent persons variously to start to fall off after 6 or 12 months. Gas has been flowing for over ten months now. The company predicts one day per month downtime: Wingas, for a much simpler plant, forecast 10% p.a.

HITS/gallder: below is Angus’s answer to an IQ on 1 August on the subject of the hedges. I’ve never heard of “rolled hedges” either. In the light of recent revelations, I wonder if they knew what they were doing - in spite of the financial expertise in the management team:

“The hedged volumes were lower in the first quarter but as advised we have a rolled a portion to give us leeway in the even that commissioning is more protracted. We have been fortunate enough to be able to roll hedged volumes into forward months with much higher prices without incurring upfront cost. This is not normally possible to do as generally speaking forward months are lower than front end months. So large is the difference at the present that this has been simple to trade.” “No upfront costs” was clearly a significant phrase.

Looking back over more recent IQ answers, I noticed this:

“Shareholders will have an opportunity of incidentally supporting the drilling works necessary to evaluate an eventual storage project in the Namurian”.

So cash flow won’t cover that and they acknowledge that debt won’t either. The projected cost to Wingas in 2011 of preparing Saltfleetby for gas storage was £200-225mm. So to develop this would result in a big cash call on shareholders. I can’t see them making any progress on this in the short or medium term as Angus itself is presently construed.

Mugabe’s diamonds..

Caposoka: the references to the diversifications into geothermal etc. are in my opinion an obfuscation. They need this money to meet their current and imminent obligations to their lenders/hedge counterparties.

I don’t understand the confusion over the apparently simple “new” hedges. These were negotiated before 30 September and, being cash-settled forward contracts, give Angus a profit as long as the cash price of gas is below the contract price. What the quid pro quo may have been for what looks like a free gift is unknown but there will be one, you can be sure. Perhaps it’s to do with these recently divulged liabilities which are the subject of the current discussion here. I think the bridging finance is necessary to meet the debt repayments and these and possibly other liabilities. Current net cash flow from gas sales is clearly insufficient to do so.

For the benefit of anyone who missed my research-based post yesterday, late Robert Mugabe, the late unprincipled dictator of Zimbabwe, really liked diamonds.

Garwool1: people own the shares will, presumably, say buy because they expect the price to go up. People who don’t own the shares will say sell presumably because they expect the share price to go down. They’re both equally logical and valid positions. Second-guessing posters’ motives is not a productive pursuit. Posting the fundamental and/or technical position is, though it does require some research.

Bubblepoint: Re water production and condensate: the 2011 Wingas report, if I remember it right, said that the wells on both site A and site B produced free water. Condensate was produced at 60bbls. per day, gas was produced at 21mmscfd. at the most recent recent reading. They were about to re-start production while they awaited economic conditions justifying turning the gas field into a gas storage field. Their prediction for gas flow was a rapid build-up to a peak at about 12 months, followed by a sharp, sustained, decline. They also predicted 10% annual downtime for maintenance, on a very much simpler set of plant than Angus have installed.

Wingas ran the wells until 2017, by which time they were substantially depleted. If gas production is now at 9.5.-10mmscfd. and condensate production is 120 bbls/day, with an increasing water cut, and if Wingas’s expected reduction in gas production after about twelve month sales prove correct (the Angus CPR’s make similar predictions), then the cash flow predictions of some posters here are likely to prove optimistic, while the debts and hedge requirements will remain.

Mr. Mugabe was very fond of diamonds.

I don’t think it’s very surprising that the market has taken fright somewhat at yesterday’s RNS. The initial announcement of the need for £6mm. more in bridging financing was a bolt from the blue for most investors and the reason for it (to finance still-unquantified deferred hedge payments) is alarming. The Board expected the terms of the new loan, apparently from the Aleph consortium, to be completed by 7 July. The further delay implies some issue either with the quantum or the price of the new financing. Angus expected the new loan to be on roughly similar terms to the 28 March 3-month loan (which has been rolled over, at c.20% annual interest) for a further 3 months. Therefore it’s quite unlikely that they’re seeking better terms. Much more likely is that the Lenders are looking for better terms themselves, either in a higher interest rate, convertibility or more shares/warrants, or a lower quantum. Presumably Angus needs this money to pay off what they owe Mercuria on the July/August 2022 hedges. We have no idea what will happen if they can’t meet these payments.

Bubblepoint: exactly. I agree with you in this in every respect.

Robday: HITS is as good at the financials as bubblepoint is at the technical aspects of gas drilling. His motives in posting here are irrelevant to me, I value his input. It’s nobody else’s business whether he owns shares in this or not. People who persist in asking this same question over and over again are very often merely avoiding answering the questions he raises and mark themselves as Nosey Parkers.

Please don’t now waste your time asking me my shareholding status.

Cynderlad: your final sentence nicely describes an Administrator, appointed to sort out an insolvency.

Laughoutloud: a large placing at the much higher levels prevailing until recently would have been a better idea. The Board must have seen the current scenario developing for many weeks now. It wasn’t very clever of them locking themselves into a “no new share issues” commitment in the first quarter. Yesterdays’s terse RNS was unnecessary and couched in terms that were open to an unfavourable conclusion. This kind of thing may just be the new CEO’s style but if so, he needs to learn quickly. I’m afraid it wasn’t a mistake and that there's something going on here.

Bubblepoint: I didn’t say the Lenders wouldn’t take it over. I said they wouldn’t for as long as Angus can raise equity finance, which is free money in that it reduces the future bills payable by the party taking Angus over. If Angus has reached that point now, then what you are suggesting is entirely possible.