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yes - any breach of covenants in a loan can create a big headache. Unless the debt can be repaid from cash, it can accelerate a refinancing need at a point of weakness. This can lead to a loan restructuring and a debt/equity swap in extremis . All depends on the nature of the debt/loan agreements. I'm not familiar with the Nordic Bond market, and the details of the bond, but its a sub investment grade product aimed at this sector, so the lenders understand the issues faced by the borrower which is helpful.
Unfortunately we're now into option valuation territory , rather than discounted cashflow. On the downside there's the risk of covenant breach and/or equity dilution, whilst on the upside there may be some NAV in these fields (and any other assets/licences) the company owns. But the uncertainty is huge. I don't know how regularly the covenants are tested, and what they actually relate to, but IOG will need to start communicating on financial sustainability issues as well as operational updates. I hope some value can be salvaged for shareholders, but the reality is that from here we are hugely leveraged in both directions.
Once they get a clear picture of the reservoir architecture (through ongoing logging and reservoir modelling), it should be possible (and probably economic at high gas prices) to workover/redrill the production well (s) to minimise water production. But the reservoir may be sufficiently small/complex and interconnected that this would still leave a big risk of water production. From the press release, it sounds like the mitigation in the first instance lies in increasing the capacity and flexibility of water handling facilities, both offshore and onshore. I don't think we should assume that Southwark will necessarily have the same issues.
There is a reason why these assets remained undeveloped for decades after their original discovery by major oil companies. They were known to be technically challenging from a reservoir management perspective, and needed high commodity prices to justify the risks. IOG was able to put together a hub development and export portfolio with negligible outlay, but couldn't dodge the geology. The project economics have been bailed out by high commodity prices , but the technical risk remains. The fields have positive risked NPV, but this was never going to be straightforward. Trade sale Exit is the best outcome for all stakeholders IMHO.
Interesting debate - a possible downside would be that LOG would then have to sell a greater % of the reduced free float to create the headroom they need for warrant exercise....The main issue we have is that LOG is tap stock on the market, and although not long term holders, they appear happy to work their position slowly . We'd all like to see their block placed or sold to a strategic investor (inc CalEnergy), but uncertainty over existing and new windfall taxes complicates valuation. Eventually the widening price/NAV value gap is gong to be a catalyst for some changes over the next 6 months as cash grows - but we've been saying this for a while....
Agree Wolster- CalE should be taking the stake for defensive reasons at the very least - at the moment their main asset investment is exposed to change of control risk that they could easily remove and add value to their overall portfolio at the same time - it really is a no-brainer so long as capital is available. I can only imagine that these conversations have taken place but LOG would not sell at CalE's price. LOG need to get real - the market is not going to give them NAV.
Dell - I fear that until the technical overhang of the LOG stake is placed or sold down, we will not see fundamental value drivers establish themselves. This overhang is having big impact on market perception IMHO. In addition (and frustrated by this phenomenon ) many PI's and some II's are looking for exit points having made some acceptable, but not exceptional returns . So taken together with AIM regulatory disclosure weakness , and some remaining operational challenges (remember we still have quite concentrated portfolio/reservoir risk), IOG is going to struggle to close the NAV/share gap. LOG seem to be hanging on to try and extract NAV, but they'll never actually be able to achieve it as they are a known , large seller. Sooner or later I reckon they'll capitulate and someone (either II or strategic buyer) will take the block at discount to NAV and we can then move higher.
Over the past 2/3 years IG has attracted a number of ‘value’ investors ( Odier/ Griffith) and unnatural holders ( LOG). They have different time horizons and strategies to some PI’s. IOG has moved from being a ‘special situation’ to a genuine sustainable business, and the company needs aligned institutional shareholders. So I would expect to see an investor relations push to help the sellers find a home. Significant Discount to NAV , cashflow and willing sellers will attract new II’s IMHO, but this transition could be bumpy.
Excellent post Toro - IOG just happens to have arrived at first gas at exactly the moment when the issue of security of energy supply across Europe is becoming a strategic imperative. ANY domestic producer with operating capability is now a critical national asset. IOG has made its share of mistakes, but now its really well placed. NAV/share gap will be closed with or without LOG placing - as you say, a new chapter is about to open.
Ali - but that still leaves the mystery of who the seller was? If it was LOG (or any shareholder over 3%) , then they should have issued TR1 by now?
This is good news. LOG is not a long term shareholder, although they have been very supportive of management, and the sooner they're out the better. It makes total sense for them to sell down to create headroom and cash for warrant exercise (which is also some useful cash for IOG). Its also good to see the market taking these volumes . The unwinding of LOG position will happen sooner rather than later, and its definitely an opportunity for a strategic investor (the maths now even probably work for a PE backed leveraged buyout - which I hope we don't see). What is more important is the value being created through bringing gas on stream into such a strong market. That will be the driver of significant upside for us long term, shareholders.
It’s possible to speculate on future gas prices at any time ( so long as you are able to post collateral if prices move against you ). Price risk management is slightly different . IOG still have a small ( and reducing) production risk on timing of first gas. But They may well start to sell futures ahead of first has as their confidence increases . Thereafter it’s sensible for a leveraged business to hedge production cash flows . They will need to keep investors informed as it changes the risk reward profile.
Hi Toro - I share your optimism, and will take a look at the numbers. Whats clear though is early cashflows are going to be well ahead of managements expectations. They will hedge some production once first gas is inevitable, which is sensible as they have some debt too clear. But this is now looking very positive from a valuation perspective. Its also great to see so many new shareholders and the increased liquidity will also help narrow the valuation discount imho.
Correction - LOG TR1 was reduction in interest due to placing not selling . I need to read the small print!
Sensible of LOG administrator to sell into this demand - they are not a long term holder. They will have some pressure from creditors to cover the costs of the administration whilst playing the upside. I still think the remaining block will be placed eventually or sold to a strategic investor. dyor
There aren't many pure plays on the UK gas market that are so clearly undervalued for historic technical reasons. Anyone who does any reading of this board will see that. Profit taking soon, but this rerating has further to go imho.
IOG was clearly undervalued even before the recent rise in gas prices. The undervaluation was ,and still is, driven mainly by the 29.9% LOG administrator overhang (and they have to sell at some point ). They will be feeling good about their decision to be patient (which incurs continued administration running costs), and the market is beginning to find it impossible to ignore the valuation gap - particularly when analysts recalculate short term cashflows post first gas. LOG will exit in the medium term (1-2 years) or sooner if they get a premium offer. The block might get placed with institutions, but my hunch is that it will go to an industrial investor looking for gas reserves and an operating infrastructure. CAL energy will be watching events like a hawk - they will get a call if and when the block changes hands. However it plays out, things are about to get interesting.
Mechanical problems could be to do with unexpected downhole conditions/temperature/pressure, lost circulation. This has been a learning curve for the subcontract team on this location, but nothing new in industry terms.
Elgood is a separate structure, and has come in deeper (and hence will be smaller), but with better reservoir characteristics (permeability and porosity), and will produce reserves/cash faster but clearly for a shorter peak. So mixed results.
IOG trading and valuation has become a victim of its history. It’s become accepted wisdom that it trades at a discount to NAV ( a bit like some investment trusts). The only basis for this to is if management have consistently destroyed value and will continue to do so . No doubt the company has had a chequered past, through the LOG debacle that overhangs today, and I’m sure that is still affecting market dynamics . Selling may also come from former management and other shareholders who had large historic shareholding’s and could never be bothered to disclose( note weak AIM oversight ) Notwithstanding this theory, I am a value fundamentalist and I believe that ultimately NAV will be realised though cash flow and dividends or takeover . If course NAV could be wrong , but I doubt it given the location of the assets notwithstanding reservoir performance risk .
Its always seemed to me that CE would want equity control of the company at some stage. They have a seat at the table as development partner and funder, this gives them some leverage but without actual equity control, they cant use the operating infrastructure to support their strategy. LOG is building out a neat operating capability - not something that happens overnight. LOG administrator's equity position is probably the key for CE, and the administrator is playing a long game hoping for increased valuation accretion before the block is placed/sold. CE should fear it falling into the wrong hands. I had thought it would happen by now, but its still the most likely outcome IMHO.