CORRECTED – Chariot Oil & Gas – Farm-out or placing?

****UPDATE – In our original piece we incorrectly quoted CEO Larry Bottomley from yesterday’s shareholder call. The original budget estimate for Prospect S remains at $20m-$25m, of which Chariot’s share is 65%. We have edited the piece below to reflect this. The remaining analysis still stands****

Chariot Oil and Gas (LSE:CHAR) is currently sitting at 8.5p following the release of its H2 2018 figures yesterday. In the update, the company revealed steady progress in preparations for the drilling of its Prospect S well in Namibia later this year. However, comments made by CEO Larry Bottomley in a subsequent call with investors raised questions about the firm’s ability to fund itself beyond its current cash commitments. With a current market cap of £32.6m, the race is now on for Chariot either to secure a farm-out in Namibia or to raise money before it starts its next drilling campaign.

Revised estimates

ValueTheMarkets last reviewed Chariot’s finances in June, following the release of its full-year 2017 results. In our estimate, we subtracted $15m worth of Prospect S funding, $3.6m of restricted cash, and annual operating expenses of $4.2m from the company’s then cash balance of c.$31.7m, to give it a year-end cash balance of around $8.9m.

It is worth noting here that Chariot has not altered any publicly-available assessments of the costs associated with Prospect S. In our last review we used the $15m the business raised in February when it stated that the proceeds would be used ‘alongside [its] existing cash resources’ to fund Prospect S.

In yesterday’s results, Chariot said its cash balance as of 30 June sat at $28.4m, suggesting it has yet to spend much on the project over the first half of the year. Indeed, the drop between this H1 2018 cash figure and Chariot’s $31.7m cash balance as at 31 December 2017 closely mirrors its anticipated operating expenses for the period.

Taking into account the $2.8m of guarantees that have been released, Chariot’s best-case year-end free cash balance now comes in at c.$11.7m ($8.9m + $2.8m). Some might take comfort from this figure as giving the company enough runway to secure a farm-out, post the drilling of Prospect S, but we are not sure so sure. For the company to continue to advance its projects in 2019 it will need more money.

There seems to be two obvious solutions to this. The first is to farm-out part of its stake in Namibia to a third-party, something that it will need to do quickly given that the well is due to spud in Q4 2018. The business has a strong track record in delivering farm-outs. If it is successful again in the coming months, then this could prove to be a catalyst for the shares to move higher.

The other option is to raise cash in the market, most probably pre-drill. If you look at Bottomley’s record he has been careful to manage the company’s finances so that it is always funded in the event of one of its exploration wells failing to find oil. This has been a very smart strategy. It is possible the company might decide to gamble on Prospect S in the event of not securing another farm-out, but given its history this doesn’t seem likely.

Earlier this month, Chariot also appointed corporate broking and investment banking veteran Chris Zeal as an independent non-executive director. Could this be an indicator that it is preparing itself for the latter option?

Taking care

As we have written before, Chariot is a very well-run company, and chief executive Bottomley has an established track record of effectively marshalling the business’s finances.

This prudent approach is definitely a good thing. It means Chariot’s managers are not fly-by-night oil execs looking to make a quick buck by putting all their eggs in one basket. Instead, they are in it for the long run, and as part of this, they are likely to be considering the high chance that Prospect S will not succeed. After all, it is an exploration well with a 29pc probability of geological success.

However, on the other hand, the well is targeting gross mean prospective resource of 459mmbbls. If Chariot does find success in Namibia, it will mark a sea-change for its fortunes. If you are going to bet on a company one day making such a transformational discovery then Chariot offers decent odds, given how it is run.

However, should a placing be on the cards then the question becomes whether Chariot has learned anything from the last time it raised money. Two weeks before the spudding of the Rabat Deep 1 earlier in the year, the firm placed shares at 13p each, which was an eye-watering 36pc discount to the then 20.3p market price at the time. The timing of the placing and steep discount gave out the entirely wrong message about the company’s prospects and the fact it was conducted so close the spudding of Rabat Deep 1 meant there was nowhere near enough time for sentiment in the market to recover.

Unfortunately that placing managed to destroy all the positive momentum that had been flowing into Chariot from the retail market in the prior months. Shares collapsed by nearly 50pc in just two days and holders -placement participants included- ended up locked in.

If another placing is imminent, it is crucial that Chariot does not once again shoot itself in the foot just weeks before drilling. There are enough clichés out there about making the same mistake twice for it to know that such an error would likely be devastating. Far better to get the deal out the way as soon as possible to allow the market to recalibrate and then look forward to the exciting Prospect S drill.

Or better yet, just secure a farm-out!

 

Authors: Daniel Flynn and Ben Turney

Disclosure: The authors of this piece do not own shares in the company covered in this article.

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