Savannah Petroleum - acquisition looks good value. A speculative buy says Gary Newman

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Whenever a relatively small oil and gas company manages to raise a substantial amount of money it gets my attention, especially when you consider what the market has been like for this sector in recent times. Last week Savannah Petroleum (SAVP) secured approval from its shareholders at a general meeting to go ahead and complete a placing for $125 million – a substantial amount considering that prior to this it had been valued at around £95 million or so.

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The money was raised via a placing of 266 million shares at 35p, and such was its size that it constituted a reverse takeover under AIM rules, as the proceeds are being used to fund the acquisition of oil and gas assets in Nigeria, from Seven Sea Energy. Previously the focus for this company had been on its licences in Niger’s Agadem rift basin, where the potential prospective resources figures are very large – gross risked recoverable of nearly 1.7 billion barrels for the R1/R2 permit, and over 1.1 billion barrels for the R3/R4 area. Whilst that is all very exciting for a company of this size, it is extremely early days and the company so far has only identified exploration drilling prospects from the fairly limited seismics that it already has. There is no doubt that it definitely appears to have some potential, given the amount of successful drilling in this part of the world – but as we all know, a neighbouring field finding large amounts of extractable oil doesn’t mean that the same will be true on an adjacent licence area.

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We should soon start to find out though if it has real potential, as part of the money raised will be used to fund a three well exploration drilling campaign at R3, at a cost of $6-8 million per drill. This is expected to get underway any time now, so we should see some excitement from investors and traders, based on the size of the targets – each of the three locations being drilled has total unrisked mean recoverable resources in the 35-39mmbbls range. Whilst the Niger assets have always had the potential to be huge for a company of this size, they have also proven to be incredibly expensive and Savannah has burnt through cash at a pretty alarming rate in the past – as is often the case with companies at this stage. The acquisition of the Nigeria assets completely changes the structure of the company, and it will now be a producer which also has exploration interests – so proven reserves underpin the value, and there is plenty of bonus upside from any significant discoveries that subsequently lead to increases to resources. The transaction means that Savannah will now own a 40% interest in the Uquo field; a 62.5% interest in Universal Energy Resource, which holds 51% of Stubb Creek (so 31.875% of the field effectively), plus 20% of the Accugas pipeline business. Whilst some of this acquisition took place in cash, I think it was also encouraging that a fair chunk of it was covered by shares in Savannah. A total of $42.5 million was paid in cash along with $109.5 million worth of shares for the senior secured note holders. Additionally $3.5 million in cash and $9.2 million in shares was used to settle the second bilateral facility loan, and a further $26.7 million in shares was exchanged for a new capital contribution from the senior secured note holders.

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Basically that all equates to the deal being done with $50 million cash, $145 million in shares, and $85 million of assumed debt, so $280 million in total, which works out at a price of roughly $3.1/boe of 2P reserves. When it comes to those reserves, they stand at a net figure of 92mmboe of 2P, and a further 44mmboe of 2C resources, and estimated net production for 2018 is in excess of 20,000boepd. Savannah is expecting to quickly increase net production to around 30,000boepd, and take net free cash flow from the two producing fields from an expected $58.9 million this year, to over $102 million by 2021. There isn’t enough space here to go into minute detail on the operations of these two fields, plus the pipeline business, and over the coming months we will get a much clearer picture as to whether they are performing inline with expectations – I see no reason why they shouldn’t be. Perhaps a far more pertinent question though is, why, if the assets are so good, has Seven Sea allowed them to be acquired, and at a price which appears to be fairly cheap – the current CPR valuation for them is $663 million, and with material upside. Like so many other oil companies, Seven Sea had been hit badly by lower commodity prices and this had led to its debt getting out of control – it was in default of $900 million in loans. But under the deal with Savannah, only $85 million has been kept on the balance sheet, and at new improved terms (ten years at 8%), with the remainder being reduced to $470 million and being separated out of the rest of the business and into Accugas, and in turn secured by a private equity group.

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So in conclusion, to me it looks like Savannah have made a deal at a price which offers plenty of upside and looks to be good value – basically buying up decent assets which were distressed as a result of the debt burden, and then restructuring that debt in a way which gives it a very good chance to succeed. The fundraising took place at a share price of 35p, and institutions were happy to take part at that level – as was CEO Andrew Knott who bought $1 million worth of placing shares – so I see the current ask of 32.5p as offering long term value. There is always some risk in countries such as Nigeria and it is a one of the OPEC members which will have to look at managing its supply in order to comply with agreed caps, but plenty of companies do operate there very successfully, and there is no reason why Savannah can’t also. Not only are you now getting a company which should be showing strong levels of cash build moving forwards, but also one which still has lots of exploration upside for those of you who like something a bit more speculative that can cause some fireworks. So at the current share price I would view it as a speculative longer term buy.

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Filed under: Savannah Petroleum, SAVP, Carillion, Andrew Monk, AIQ, Carclo, UKOG, Greatland

2018-01-15 13:39:47

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