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Buying into the Promise

Buying into the Promise

SacOil has reached an agreement to convert the US$17,6m (about R162m) it owes Gairloch – a private investment holding company registered in the British Virgin Islands – into shares by the end of May. It will leave SacOil “debt free, reducing financing costs and significantly improving its balance sheet position,” CE Robin Vela says.

The Gairloch loan was transferred from Renaissance Capital, the Russian investment bank that had initially provided the loan. SacOil had raised the loan to buy into an oil field in Nigeria. Gairloch will be issued with 488,8m new shares at 32c/share, more than half the 953m listed in Johannesburg, but which can also be bought via London’s AIM. Gairloch had already potentially lost R35m as the shares were worth R127m at the 27c/share closing price last Friday, exactly two weeks after the announcement of the agreement.

Vela says Gairloch’s action demonstrates confidence in his company’s ability to convert its exploration activities in Nigeria into fuel in the near future. But the company has yet to produce a single drop of oil, despite the many exploration rights it has won in Malawi, the Democratic Republic of Congo and Nigeria since 2008.

Converting the Gairloch debt to equity brings to SacOil a strong and long-term shareholder that understands the region well and will support the ongoing growth of the business “towards first production and beyond”, Vela says. “By the end of 2014 we expect to be producing some oil from our fields in Nigeria.”

Vela won’t reveal what volumes are expected, except to say that Chevron is producing 100000 barrels/day in a neighbouring oil field. “Even if we get a fraction of that we’ll be happy.” SacOil’s exploration assets in Malawi and the DRC are on some of Africa’s wealthiest oil real estate and the company expects the oil to start flowing soon. Its oil exploration licence in Malawi falls on the East African rift, which has already yielded oil discoveries in Sudan, Chad, Kenya and Uganda. It is valid for four years.

Exploration on the DRC’s side of Lake Albert is being carried out by SacOil’s partner, Total. SacOil takes into consideration the success or otherwise of other oil companies in the area, mainly on the Ugandan side of the lake. Last year Uganda started commercially producing oil from the fields, with Tullow Oil, Total and China’s CNOOC as partners. “We’re quite confident of what we’ll find in the region,” says Vela.

All of this has led to an optimistic valuation by SacOil of its net asset value as 45,89c/share in the six months to August, and net tangible asset value as 32,06c. For the year to February investors can expect even more hopeful valuations.However, though management’s view of the company’s value seems to be growing, and despite former Reserve Bank governor Tito Mboweni’s recent appointment as nonexecutive chairman (see Comings & Goings page 23), the market has been consistently marking it down. The stock peaked at 257c/share in March 2011, before spiralling down to the current 27c/share.



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