Savannah Petroleum (LSE:SAVP) dipped slightly below 27p this morning after revealing that it has signed an agreement with the Republic of Niger to work together on the firm’s recent crude oil discoveries in the country. With the business boasting plenty of news flow and significant institutional backing ahead of its potential transformational acquisition of assets from Seven Energy, could this weakness provide a buying opportunity?
Today, Savannah said it has signed a Memorandum of Understanding with the Republic of Niger to affirm both parties’ commitment to the realisation of a proposed early production scheme at its recent discoveries. These are based in the R3 portion of the R3/R4 Production Sharing Contract area in the Agadem Rift Basin of South East Niger.
Under the agreement, the Republic of Niger has confirmed its intention to facilitate a crude oil marketing agreement between Savannah and the SORAZ oil refiner,connected to the Agadem Rift Basin. It will also facilitate an access agreement between Savannah and the owner of third-party crude oil processing and transportation infrastructure. Meanwhile, Savannah has committed to submitting a pre-feasibility study to the Republic of Niger within 90 days for its discovered crude oil resources.
Andrew Knott, chief executive of Savannah, said:‘Our Niger project team is highly focusedaround the delivery of:(1) near-term production and cashflowsfrom existing and future discoveries in the R3 area; and (2) further material reserve adds through our ongoing exploration and appraisal drilling program. The signature of the MOU provides a clear pathway in relation toour first objective and is a majormilestone. In relation tothe second objective, Savannah benefits from the large bank of drill-ready exploration prospects that our technical team has mapped within our PSC areas.
‘We believe the vast majority of these prospects have similar risk profiles to the ones we have already successfully drilled, and we thereforelook forward with confidence to the results of the wells still to come in the campaign. It is an exciting period for Savannah and our stakeholders andI look forward to providing further updates as our Niger project progresses over the course of the coming months.
While Savannah’s recent discoveries in Niger are no doubt encouraging, it is the business’s acquisition of Seven Energy’s assets on which investors appear to be more focused.
The $280m acquisition by Savannah is classed as a reverse takeover. The funding will be made up of $50m in cash, $145m in shares and the taking on of $85m of assumed debt. The long-term debt is expected to be paid back from future revenue generated. Savannah raised $125m at the turn of the year and is seeking to reinstate Seven’s existing debt facility with the Nigerian Sovereign Investment Authority. The placing was done in two tranches and priced at 35p, with subscribers entitled to 1-for-2 warrants, also at 35p – exercisable by February 2019.
Encouragingly, Seven has previously said it is only selling the assets in question due to several external issues it has encountered that have no effect on the assets themselves. What’s more, as we have written before, the figures associated with the transaction are impressive. The admission document submitted for the reverse takeover provides guidance on the company’s likely balance sheet post-acquisition as follows:
Cash – $52.7m
Net Asset Value – $379.6m
Net Current Asset Value – $36.4m
Savannah has also stated that it expects Seven’s assets to produce a net amount of 20,000 barrels of equivalent oil per day. Conservatively, using three-month figures from the business, this provides for an average production of 15,800 barrels of oil equivalent per day. At a WTI Crude price of $65 a barrel, the assets would generate an impressive $1,027,000 per day or $374,855,000 annually.
In today’s update, Knott said he expects the acquisition to complete by this quarter, adding that he ‘expect[s] to provide further announcements in relation to this shortly’. Given that shares are now sitting considerably below their last placing price, could Savannah be worth a punt now the deal is so close?
It is worth remembering that Savannah also has a great deal of institutional backing, with many of these investors taking part in December’s placing at 35p. Indeed, Capital Group holds an 8pc stake in the business while Miton holds 6.8pc, Standard Life Aberdeen holds 4.9pc, Fidelity International owns 4.1pc, and Legal & General Investment Management has 3.5pc. Even Knott himself owns a not-to-be-sniffed-at 3.2pc stake in the company, putting him among its top ten backers.