The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
Rating BUY
Target Price 170p
Today it was announced the two discoveries, Joe and Jethro, have been assessed and found to be heavy and not light oil, though very mobile (due to high reservoir pressure) and in high quality reservoirs. The high reservoir temperatures, 2600 psi of overpressure and high quality reservoir parameters, are expected to support crude mobility, with further appraisal drilling anticipated in 2020.
Key Points Today’s news that the Joe and Jethro discoveries contain high-sulphur heavy crude is unexpected in that the Exxon-operated Stabroek block immediately outboard is said to contain “high quality” crude, typically shorthand for low sulphur + light/medium gravity. At this early stage of exploration it is difficult to know the precise significance of the observation. We see two possibilities: • It could be that the Tertiary reservoirs (i.e. Joe/Jethro) contain oils sourced from a different interval to the (principally Cretaceous) discoveries outboard. The implication would then be that the Cretaceous play at Orinduik would produce the same light sweet grades as are found in Stabroek. • The second possibility is for a geological discontinuity or gradation between near-shore to farshore environments: high-sulphur oils are generated from carbonate rather than sand/shale source rocks, the former only being found in locations close to land where carbonate rocks can form. It is possible that these influences dominate in the Orinduik block and far-shore, marine source rocks (that typically generate sweet crudes) are prevalent in locations further away from shore such as Stabroek. We would regard this as the more unattractive outcome as this would increase the risk that the Cretaceous reservoirs in the Orinduik block also contain heavier crude. We also note that heavy oil, especially in productive reservoirs such as have been seen in these discoveries, is commercial - Grane in Norway, Mariner in UK North Sea, Mars in Gulf of Mexico and Peregrino in Brazil are four examples. We estimate that a development scenario based on a $10/ bbl discount to Brent and 25% higher capex than our current estimates still gives a 20% IRR and a PV/I (a measure of value-added) in excess of 2x. This increases the significance of the Cretaceous play in the Orinduik block in our view, which will likely see exploration drilling next year. This also raises the importance of the read-through from the Carapa well (targeting the Cretaceous) currently being drilled in the Kanuku block to the south by Repsol and Tullow. Our (unchanged) NAV summary is overleaf.
Savannah Petroleum (SAVP LN) has entered into a key 3 month, unsecured bridge facility of up to US$10m with credit funds Riverfort and Yorkville Advisors. The company will draw an initial sum of US$5m immediately, with any further amount to be mutually agreed with the lenders, in the unlikely event it is needed. The proceeds will be used to fund corporate cash burn (estimated at ~US$0.6k/month) in the lead up to completion of the Seven deal, on which, incidentally, good progress is being made. An update on the remaining completion workstreams (predominantly the final Seven Energy financial restructuring) is anticipated in the coming weeks, and completion is expected to occur well before year-end. At this point, SAVP will receive a fresh cash injection of US$74m from Nigerian partner AIIM and former Seven SSN holders, which will be used to repay the new facility in due course.
Turning to the details, the loan carries a 7% interest premium (US$350k on US$5m initial draw) payable, together with the principal, at any point up until maturity on 17 Jan 2019. Under certain (unforeseen) circumstances, including the facility not being repaid by maturity or the Seven deal being terminated, the loan and interest premium will convert into SAVP shares – though this is unlikely to occur in practice. The conversion price is between 93-125% of 7-10 day VWAP, depending on multiple factors. Overall, the headline facility terms are relatively benign (non-dilutive), in our view, and provide SAVP with headroom to close the Seven deal, thus removing any market concerns around short term liquidity.
SAVANNAH PETROLEUM (BUY, PT 41p/sh) – Signature of up to $10m loan facility – as expected. Savannah has announced that it has secured a loan facility at 7% under which it will draw $5m immediately and can, subject to mutual agreement with the provider (Riverfort Global Capital and Yorkville Advisors Global), draw an additional tranche of $5m for up to a 2 year period. The purpose is for WC and general corporate needs ahead of the expected closing of the Seven assets acquisition in Nigeria. Savannah expects completion of the Seven deal, upon which it will receive $74m of cash inflows related to the transaction, well before the initial loan maturity date of 17th Jan 2020. In the event that the loan is not repaid or if the Seven deal is cancelled, the loan holders have the right to convert (at a price of either 125% 10 day VWAP as of either facility agreement date or 16th Jan 2020) or 93% of the lowest VWAP of 7 days prior to any conversion notice issued. As a reminder following our recent initiation report (‘Ready for Liftoff’, 16th Sept) our 41p/sh Discovered Resource NAV for Savannah is uses a 15% WACC and $75/bbl oil price and even at a more conservative $50/bbl, this NAV would still be 34p/sh, i.e. 55% above the current share price – Savannah will be very oil price resilient upon the Seven deal completion. We see material further potential valuation upside from: 1) de-risking ~1bn bbls of Niger prospects (worth an estimated 115p/sh on an un-risked basis); and/or, 2) from increasing Nigeria downstream gas sales via the currently under-utilized Accugas pipeline network, worth up to 31p/sh. We see multiple potential near-medium catalysts, including Seven deal completion, continued positive Niger oil export pipeline news, Niger farm-down news flow and additional Accugas sales contracts.
The Telegraph
Investing
£1bn investor: ‘We’re insured if shares crash the way they did last October’
Harry Brennan
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What have been your best and worst investments?
Our best performer in recent months has been Savannah Petroleum. It was buying cheap oil assets in Nigeria, pending approval from the government. Since approval was given its shares have gone up and we think there is more money to be made yet.
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• SAVANNAH PETROLEUM (BUY, PT 41p/sh) – Niger oil export pipeline progress – positive. The President of Niger’s twitter feed is highlighting that he attended the ‘first stone’ ceremony marking the start of construction of the PetroChina-led oil export pipeline (that will be 1892kms long and will take crude oil from PetroChina/Savannah’s prolific oil fields in S.E. Niger via Benin to the Atlantic coast). This follows an announcement on Monday of this week (that was seemingly lost to the market amidst the Saudi oil production loss news) that PetroChina had signed contractual terms for the Niger side of the pipeline, which in turn followed a similar announcement a month earlier confirming contractual terms between PetroChina and Benin for the pipeline – i.e. great progress has been made on something that a few months ago was considered by most to be literally ‘a pipe dream’. For Niger it is extremely important - it means ~$7bn of investments, major job creation and becoming a significant oil exporter. The project is also very significant for Savannah as it will provide a pathway for it to monetise its Niger oil resources way beyond what is possible from simply selling into the (limited scale) domestic market. For context, simply assuming that the 146 prospects that Savannah has currently identified on its acreage (following 5/5 exploration successes in 2018) each have a modest 8mmb of prospective recoverable oil, then the implied potential unrisked value to Savannah is 115p/sh (as in our initiation report published yesterday ‘Ready for Liftoff’). Our current ‘Discovered Resource NAV’ PT is 41p/sh and for now includes none of this upside.
SAVANNAH PETROLEUM: NIGER OIL EXPORT PIPELINE CONSTRUCTION STARTS
The greenlight has been given to a major export pipeline which will unlock the oil-rich Agadem rift basin in southeast Niger. Over the weekend, CNPC and Niger's Minister of Petroleum signed the Niger-Benin Export Pipeline Transportation Convention, and an official ceremony is being held this week to mark the start of construction, attended by the good and the great of Niger's oil industry. This follows the signature of a similar deal in August between the Chinese and the Benin side. The pipeline will run ~2,000km from the Agadem basin in Niger, skirting Nigeria, to Benin's Port Seme on the Atlantic coast, and is expected to be completed in 2021 with an initial capacity of ~200 kbopd (expandable with compression). It is CNPC largest ever cross-border crude oil pipeline investment, costing an estimated US$4.5bn.
The agreement between CNPC and Niger is a major milestone for the country and all involved in Agadem's oil development. In our view, it is a key de-risking event for Savannah (SAVP LN), as it provides a second outlet for existing and (any) future oil discoveries in the R1/R2 and R3/R4 PSCs, alongside domestic sales (which are capped at ~5 kbopd). It will also provide more transparency around domestic realisations which are priced off export net backs under local sales contracts. We understand that CNPC will initially produce ~100 kbopd through the new pipeline as part of a phased development of 1bn bbls+ in the basin. This leaves plenty of scope for Savannah to deliver third party volumes, as it has the right to do under the terms of its PSCs. Furthermore, in our view, the formal start of pipeline construction should aid Savannah’s partnering process, with potential farminees more likely to transact on better terms now they know the infrastructure is coming.
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SAVANNAH PETROLEUM: NIGER OIL EXPORT PIPELINE CONSTRUCTION STARTS
The greenlight has been given to a major export pipeline which will unlock the oil-rich Agadem rift basin in southeast Niger. Over the weekend, CNPC and Niger's Minister of Petroleum signed the Niger-Benin Export Pipeline Transportation Convention, and an official ceremony is being held this week to mark the start of construction, attended by the good and the great of Niger's oil industry. This follows the signature of a similar deal in August between the Chinese and the Benin side. The pipeline will run ~2,000km from the Agadem basin in Niger, skirting Nigeria, to Benin's Port Seme on the Atlantic coast, and is expected to be completed in 2021 with an initial capacity of ~200 kbopd (expandable with compression). It is CNPC largest ever cross-border crude oil pipeline investment, costing an estimated US$4.5bn.
The agreement between CNPC and Niger is a major milestone for the country and all involved in Agadem's oil development. In our view, it is a key de-risking event for Savannah (SAVP LN), as it provides a second outlet for existing and (any) future oil discoveries in the R1/R2 and R3/R4 PSCs, alongside domestic sales (which are capped at ~5 kbopd). It will also provide more transparency around domestic realisations which are priced off export net backs under local sales contracts. We understand that CNPC will initially produce ~100 kbopd through the new pipeline as part of a phased development of 1bn bbls+ in the basin. This leaves plenty of scope for Savannah to deliver third party volumes, as it has the right to do under the terms of its PSCs. Furthermore, in our view, the formal start of pipeline construction should aid Savannah’s partnering process, with potential farminees more likely to transact on better terms now they know the infrastructure is coming.
SAVANNAH PETROLEUM+ (SAVP, 24.7p, BUY)
On the home straight
We have this morning published a note on Savannah Petroleum, entitled “On the home straight”. This follows an important announcement from the company on 4 February, when Savannah confirmed successful signature of the Seven Energy implementation agreement, paving the way for ministerial consent and final completion of this transformational deal in Q1 2019. Highly accretive transaction amendments have resulted in an extended completion timetable although, with these changes now incorporated into the signed implementation agreement, we share Savannah’s confidence that the transaction will be fully consummated in the current quarter (in line with prior guidance). We had been of the view that delivery of deal-related milestones could provide some important event-driven catalysts for investors, and have therefore been slightly disappointed to see the muted share price response following Monday’s news. Notwithstanding this, final Seven completion remains the main corporate event for Savannah in the shorter term and we fully anticipate a much higher share price once the deal is done and dusted. In the meantime, we have overhauled our models to reflect the final transaction terms and timing and confidently upgrade our Risked NAV estimate to 80p/share (from 75p/share). We firmly reiterate our BUY recommendation.
Shares Magazine
Savannah raises funds as it targets Seven deal completion
By Tom Sieber
31 January 2019
Nigerian assets should generate healthy cash flow once the acquisition finally goes through
Savannah Petroleum (SAVP:AIM) 27.1p
Gain to date: 1.9%
Original entry price: Buy at 26.6p, 6 September 2018
The decline in oil prices and news of a dilutive share placing (24 Jan) have taken some of the wind out of the sails of oil and gas producer Savannah Petroleum (SAVP:AIM). As a result, the healthy early gains we recorded following our positive call have largely been erased.
Delays in concluding the acquisition of a basket of assets from Seven Energy in Nigeria have also not helped the share price; this acquisition is now anticipated to complete before the end of the first quarter.
The company expects to receive $90m in cash when this deal goes through. For now it has raised around $23m through a placing at 28p per share. Investors can take some comfort from the fact the board itself had a healthy participation in the fundraising.
Regardless of the frustration at the hold-up in getting the Seven deal over the line, we continue to like the medium-term story, where the company should be able to generate significant cash flow from the Seven Energy portfolio which it can invest in developing its exploration and appraisal assets in both Nigeria and Niger.
SHARES SAYS:
Investors should (eventually) be rewarded for their patience.
Keep buying.
Savannah Petroleum ? (SAVP.L, 24.2p, £198m) said that it has made further amendments to the overall acquisition of Seven Energy in Nigeria, with the announced acquisition of a further 55% stake in Accugas, meaning that SAVP will now own 75% of the business. SAVP has also subsequently agreed to sell a 25% stake in both Accugas and SUGL to African Infrastructure Investment Managers Limited (AIIM) for $70m – boosting liquidity and freeing up cash for the Niger operations. Revised terms have been agreed with all of the Accugas lenders and noteholders. SAVP has also agreed to acquire the Creek Town to Calabar pipeline in Nigeria, which will allow SAVP full control over the gas flow from Uquo to the transfer point at the Calabar power station. A new customer has also been added – the Alaoji power station. In Niger the well test of the Amdigh-1 well is expected to take place in 1H/19, with reprocessing to the seismic data over the R3 block well underway. This deal helps tidy up a very complex structure in Nigeria, and the additional cash freed up will allow for the acceleration of the operations in Niger. It also grants SAVP more control over Accugas which is a key component in the ability to control the assets and ergo cashflow from the new business. This latest amendments/agreements means that all of the commercial CPs of the Seven acquisition have now been met, with legals the final outstanding item to clear up. This is a clearly accretive move and the enlarged business should be throwing off significant cash with which to develop the portfolio. Positive
Niger well test by mid-19
In Niger, Savannah is waiting for results of seismic to enable it to recommence all operations (e.g. well test and next drilling campaign). Savannah announced that the planned well test at the Amdigh well is now set to take place in mid-H1’19 meaning subsequent production from the Early Production system is now likely in Q2’19 versus previous expectations of first production in Q1’19. Our 14p/sh risked NAV for the EPS is unchanged.
Valuation: increasing our risked NAV by 11% to 89p/sh
As a result of the new structure of the deal, we have upped our risked NAV to 89p/sh from 80p/sh. The stock trades at 50% discount to our core NAV of 55p/sh. SAVP is trading on relatively low cash flow multiples already in 2019 before substantial growth in earnings and cash flow in 2020 puts it on very low multiples (e.g. EV/EBITDA multiple of 4x in 2019, dropping to just 2.5x in 2020). We also note that the valuation of Uquo/Accugas has virtually no exposure to oil prices since contracted gas prices are escalated by some 6% p.a.
Hannam note:
Further enhancing the Nigerian acquisition
Improving terms of the Seven Energy Transaction
SAVP has recut the terms of its proposed partnership with African Infrastructure Investment Managers (AIIM), as it looks to finalise the acquisition of Nigerian assets previously owned by Seven Energy. Savannah estimates a 67% increase in cash flow as a result over the 2019 – 2022 period. Under the new terms, Savannah will gain control of the Accugas midstream assets while also receiving US$70mm in cash, in exchange for AIIM taking a 25% stake in the Uquo upstream assets. SAVP will now have 75% of the upstream and midstream versus 100% upstream and 20% midstream in the original deal. As well as gaining a larger share of the assets, the unit cashflow generation from the midstream is higher due to lower costs/capex as well as being in a tax loss position for longer. Importantly, now all commercial terms conditions precedent have been agreed, the deal should progress to completion in Q1’19.
The AIIM transaction is accretive to NAV, cashflow and liquidity
The AIIM deal for Uquo provides an implied value for SAVP’s remaining stake in the asset of US$210m, which along with the US$70m cash to be received exceeds SAVP’s current market cap. This effectively implies that the rest of SAVP’s portfolio (Stubb Creek, Niger) is a free option. SAVP’s buy out of the upstream minority partners, along with improved gas market conditions in Nigeria and Accugas’ lenders allowing debt repayment deferral, have allowed Savannah to negotiate from a position of strength, significantly improving the deal it has with AIIM. The deal is beneficial to Savannah in a number of ways: it is value-accretive, on our estimates, as the NAV of the 25% stake in Uquo given up by SAVP is more than offset by the US$70mm cash proceeds and 55% increase in the Accugas stake; the receipt of cash upfront will provide a welcome liquidity boost; and ongoing cash flow generation will also improve.
Accugas growth outlook improving
Accugas has managed to add a new customer to the business - the Alaoji power plant, which comes in under the Calabar GSA. The addition of Alaoji is expected to enable supply to grow beyond the current contracted Calabar quantities (c.250 mmscf/d total supply potential for both plants vs. 131 mmscf/d Calabar DCQ). We estimate that an additional 50mmcf/d would generate ~$75mm in revenue net to SAVP in 2020. We expect SAVP to look to access additional gas resources to meet this and further gas demand. A potential expansion of the Accugas processing facilities provides significant further medium-term expansion potential. .....
BIGGER PIECE OF THE PIE
Savannah Petroleum (SAVP LN) has published a positive update on the Seven Energy transaction, unveiling substantial improvements to the deal. As well as being materially cash flow and NAV accretive, the agreed changes deliver control of the gas value chain and a substantial cash injection upfront.
Revised structure: SAVP will acquire an additional 55% of Accugas lifting its interest in Seven’s midstream arm to 75% – from just 20% previously – for nil cash consideration. Importantly, this gives SAVP control of a key piece of regional infrastructure which acts as the gateway to energy hungry gas customers in southeast Nigeria. In conjunction, SAVP will sell 25% of the Uquo gas field and Accugas to AIIM for US$70m in cash, aligning its interests across the upstream and midstream divisions at 75%. Valuation wise, the deal franks the value of Seven’s integrated gas business at US$280m (gross) – versus SAVP’s market cap of ~US$250m – implying little if any value for the Stubb Creek field or the potential in Niger. To put this in context, our risked NAV for the Niger portfolio alone stands at US$373m.
3Q results are in line with market expectations with EBITDA of $10.8M vs $10.5M Refinitiv consensus, with c. 25% sequential growth in 3Q. Outlook has been reiterated for the main Egypt assets (NW Gemsa and Meseda) with Morocco just below the 8-10mcf/d sales gas volume for 2018 though with strong new contract wins, and South Disouq first gas now 1H19, with a gas sales agreement now signed.
SDX 3Q results show the operational and financial progress the business is making; there is no comment on the negotiations over acquisition of BP Egypt assets, talks that were terminated on 18 October.
• Production: 3889boe/d 3Q vs 3430boe/d 2Q and 3036boe/d 1Q illustrates the improvement in volumes across both Egypt and Morocco, with new wells and field remediation in Egypt contributing the growth.
• EBITDAX progression also shows the production growth translating into profit and cash: $11M EBITDAX 3Q18, vs $8.6M 2Q and $7.6M 1Q, with EBITDAX/boe up c. 10% at $30.42/boe vs $27.50/boe in 2Q18. The well write-offs in Egypt and Morocco were already disclosed in 2Q18 results. The company maintains its net cash position, c. $18M at end 3Q, the $6M decline vs. 2Q due to, we believe, timing of capex spending, tax payments, and a >$3M working capital build.
• Egypt: Guidance for both NW Gemsa and Meseda has been reiterated, with NW Gemsa at 2kb/d gross vs 1.7kb/d in 2Q18, and Mededa at 802b/d vs 706b/d in 2Q18. The South Ramadan well (SDX 12.75%) is drilling, net cost to SDX is c. $3M, $2M of which will fall in 4Q.
• Morocco: gas price has exceeded $11/mcf in 3Q, offsetting the slightly surprising sequential fall in gas sales, we believe due to fluctuations at the Peugeot plant during its testing phase, given the company has stated production will be just under their 8-10mcf/d range by year end due to the contracted gas sales signed with six new customers in the quarter. The importance of Peugeot in underpinning future gas demand is underlined by two of the new customers: Dicastal, manufacturers of aluminium wheels, and Plastic Ominium, manufacturing plastic car parts, part of the car plant supply chain.
• Outlook has been reiterated except for two points: 1) it is slightly disappointing that South Disouq gas production start-up is pushed into 1H19, though the previously guided December 2018 startup meant little volume produced in 2018. The newly-agreed $2.85/mcf gas price is in line with estimates; 2) Morocco's gas sales run-rate will be just under >8mcf/d by year end, but given the pent-up demand, we are not concerned about gas demand growth in 2019.
https://www.brrmedia.co.uk/broadcasts-embed/5bf2e15455433b0e0cf6a11c/event
As well as undertaking more direct investments themselves, DFIs are becoming more heavily engaged with a fund’s investment process. In the case of first-time managers, DFIs are requesting to review ESG due diligence and giving feedback to the investment committee — this is certainly a new development. Their increasingly hands-on approach also includes providing grants, information sharing or training to investment companies where required. As DFIs’ focus broadens from purely risk mitigation towards value creation, demonstrating a record of positive ESG outcomes is becoming more valuable for future fundraising.
Simply put, the more sophisticated investors become regarding ESG, the more sophisticated managers become. And in Africa, where the scope for impact is enormous, the outcome of these developments can have significant consequences that extend beyond investee companies to the communities and countries they operate in.
Corruption, for example, is often cited as one of the major risks associated with investing in Africa. While the perceived risk may be greater than the actual risk, there is no denying that good governance is a major problem for some of Africa’s 54 countries, particularly when compared with more developed markets. Here is where ESG-focused private equity managers can, and do, make a tangible difference. As mostly closed-ended funds with a limited number of investments, the fund manager has real scope for influence — often sitting on a company’s board and present in forums like the remuneration and audit committee, where governance takes place.
Another area where the ESG focus of African private equity is delivering significant outcomes is in the renewable energy sector. The capital for the majority of deals here has come from private equity managers because banks and other sponsors are unwilling, or unable, to put the 20-25 per cent equity cheque that is required for such deals on to their balance sheets.
Due to their DFI origins and Africa’s investment profile, African PE mangers typically invest for developmental outcomes in addition to financial returns. According to a report from the African Private Equity and Venture Capital Association, fund managers on the continent allocate more time and effort to ESG issues than in more developed markets, even for funds that are not explicitly impact focused.
Taking a lead from veteran DFIs, African managers are well positioned to remain ahead of the curve when it comes to ESG integration.
Financial Times
African PE leads the way in ESG investment
19 October 2018
Paul Boynton
Enduring role of development finance has made responsible investment a priority
Adoption of environmental, social and governance criteria in private equity is on the rise. At the beginning of this year, a Preqin survey of more than 300 fund managers globally showed that 53 per cent of respondents had established an ESG policy or had one pending. As well as a tool to mitigate risk and provide downside protection, managers are increasingly embracing the upside potential of investing in sustainable businesses.
But while the debate rages on about whether impact and other forms of responsible or ESG investing compromise or propel financial returns, what seems to be missing from the discussion is how different markets compare with each other in terms of ESG integration. When it comes to this, I’d argue that African private equity has been ahead of the curve for over 20 years, all thanks to its origins.
The industry is rooted in funding from the world’s development finance institutions, which have a major, longstanding focus on ESG principles as the key to sustainable development in African countries. The UK’s CDC Group, among other DFIs, which has been involved in African private equity since the beginning, announced in August plans to increase significantly its investment into Africa — aiming to invest up to £3.5bn on the continent over four years. So, it’s clear that although the African private equity industry continues to grow and mature, the role and influence of DFIs in this space is strengthening, not diminishing. In fact, DFIs would still account for a significant majority of the capital in many of the funds that have been raised.
Since the 1990s, the number of funds has grown from around a dozen Africa-focused PE firms, managing about $1bn, to more than 200 firms with some level of focus on Africa, managing more than $30bn. However, it remains the case that for many of these funds, including the very biggest, DFIs are still the first source of capital, and the first barrier to it. They understand that if they’re not serious about ESG, they’re not going to raise capital.
Furthermore, DFIs — which exist to promote sustainable development — are themselves becoming more sophisticated in their ESG requirements. Rather than narrowly monitoring a manager’s ESG systems and capabilities, their emphasis is increasingly on identifying broader ESG risks and opportunities in the context of Africa’s urbanising and industrialising economies.