Well-oiled plans for cash – Looking for acquisitions

SacOil, the oil exploration company listed on the JSE and on London’s AIM market, has taken a step forward with its funding arrangements by posting a US$25m performance bond in Nigeria. This is the latest in a series of financial initiatives the company has announced since last August, and helps secure its exposure to an oil concession in Nigeria’s Niger River delta.

It also takes the company closer to an important transition. The partners in the concession area can now go ahead with plans for an appraisal well in the area, which is known to contain oil. Data obtained by running the well over an extended period may enable SacOil to book proven resources. But the well is also expected to produce oil that could be sold and provide cash flow for SacOil and its partners.

By increasing its access to internally generated cash flow, the company will strengthen its funding capacity and may improve its prospects of acquiring new exploration or operating assets.

CE Robin Vela says management is aiming to acquire both types of assets but is particularly interested in those that produce cash, as these can help fund capital requirements or other acquisitions. Vela, who points out the stock is trading under a cautionary notice, says active discussions about possible deals are in progress.

This was the model applied successfully by Energy Africa, previously the exploration arm of Engen until it was acquired and delisted from the JSE by Ireland’s Tullow in 2004. Energy Africa’s former CE, John Bentley, joined SacOil as a nonexecutive director last May.

The share valuation could also benefit. SacOil has a mix of international and SA investors, the latter including several institutional investors such as the Public Investment Corp. SA investors have remained wary of small-cap resources stocks in recent years, and tend to look for cash flow when valuing counters in the sector. UK investors are more interested in the potential growth in value of exploration companies’ assets.

Since last October the share has traded around 55c, below the 86,6c NAV reported in the August interims. There have been several equity issues since the balance sheet date, including a R75m issue to Timtex, a company associated with SA’s Moseneke family.

In the long run investors’ attitudes to the stock, and the company’s ability to grow, will be influenced by the oil price. At present, uncertainty about the market outlook is unusually high. The price has been lifted this year by geopolitical factors, mainly the sanctions by the US and its allies against Iran, and by supply shortfalls in some regions.

The International Energy Agency said last week that small, minor oil field closures in the North Sea had affected the price of Brent, a global benchmark for oil. Exports from Nigeria, South Sudan, Syria and Yemen have also declined. But a gradual economic recovery in the US has supported demand.

At the same time members of the Organisation of Petroleum Exporting Countries (Opec) have increased production. Iraq’s output is rising steadily and Libyan production has recovered sharply. Saudi Arabian output has reached a three-decade peak. The Saudi oil minister, Saudi oil minister, Ali al- Naimi said recently that supply fears were overdone. In its April oil market report, Opec refers to “signs of adequate supply”.

Brent oil was trading this week at $118/barrel, down from a recent high above $126/bbl. However, SacOil appears to have good potential for growth through leveraging its present assets and by acquisitions. It should be seen as a long-term play on the scramble for energy in Africa.

Source: Interactive Investor