On taking the helm at Anglo African Oil and Gas (LSE:AAOG) at the end of January, new CEO James Berwick immediately saw the potential. At the time of his appointment, the firm was reeling from a difficult first eight months on AIM. However, the foundation was in place to drive the company forward. Although there were missed operational targets and drilling delays in 2017, and the company’s share price had fallen by more than half, Anglo African still had Tilapia. While the market mood was pretty grim, the company was in the process of restructuring the board and moving out the old operational team. The final part of the jigsaw was an experienced operator to execute on the plans. Berwick could well prove to be exactly what is needed and has taken the challenge in his stride, already delivering results.
In the last month, Anglo African has made significant steps toward increasing production and drilling at its Tilapia oilfield in the Republic of the Congo. We spoke to Berwick, who tells us he has never failed in anything he has been tasked with completing, to talk about Anglo African’s workover and drilling progress, its key contract with Schlumberger, its financials and, of course, that much anticipated drill.
Tilapia plans
Anglo African’s Tilapia oil field operates in the Congo adjacent to fields operated by several oil majors. The Congo is a mature, oil-led economy with 1.6bn barrels of proven reserves producing around 227kboe/d. Relative to its neighbouring countries, it has a somewhat stable and secure government and regulatory regime.
Tilapia is based 1.8km offshore. Production is trucked to a local refinery where an off-take contract is in place. Anglo-African is 56pc owner and operator of the field through a production-sharing contract and a joint-operating agreement with SNPC, Congo’s national oil company.
Anglo African’s initial work programme for Tilapia has been to workover two existing wells (TLP-101 and TLP-102) and drill two new wells (TLP-103 and TLP-104). It has now completed the workover of drill TLP-101. The well was first brought into production over 10 years ago and had a production of 38bopd at Anglo African’s IPO. Earlier this month, Anglo African announced that it had cleared a build-up of wax that had accumulated over a very long time.
Berwick described the build-up as ‘absolutely horrendous’: ‘At some points, the flow lines were producing through just 1cm in diameter. We have completely dismantled the entire flowline section. We cleaned through the separator, the flowlines, and the wellhead. The flowlines have now been welded back together ready to be brought back into production today.’
The company will now begin testing flow rate and pressure at different chokes to determine optimum flow rate. The results of these tests will be publicly announced at completion when Anglo African will decide whether more intervention is needed. Berwick believes the well has no reason not to produce at a better rate.
The firm expects to complete the workover of well TLP-102 by early April 2018, earlier than expected. It is currently working on an intervention at the well to remove any obstructions or clogging to the perforations
Berwick told us work is well on its way here: ‘We are completing a coiled tubing intervention with a jetting tool attachment, which we will run up and down the perforations until clean. Once we have cleared the perforations we will introduce acid to stimulate the well. On completion of the acid stimulation, we will complete a nitrogen lift. This will hopefully bring everything to the surface and kickoff the lift of any hydrocarbons. This will be very, very telling. If it is just a lifting problem then we will have to look at an engineering solution as to how to bring lifting in from a third-party source. If it is just the perforations that are clogged or blocked then the jetting and then acid, which will probably penetrate 12 inches into the rock, should hopefully stimulate that flow.’
When it listed last year, Anglo African said the workovers would take Tilapia’s total production to 250bopd. At this point, the business said it would be cash flow breakeven. It added that it would be profitable at just 300/bopd if the oil price was $50/bbl or more. For what it’s worth, the company even said it would be breakeven at 5,300/bopd if oil price was less than $5/bbl.
Berwick says these figures still stand one year on. This is particularly encouraging when you consider that the Brent oil price has increased to a strong $68.56/bbl at the time of writing. This is a significant move upwards from the $55.90 it stood at when the firm listed. Using the 300bbl profitability scenario, although production following the workovers is predicted to sit at 250/bopd, current oil prices sit far above the stated $50. With this in mind, profits could arrive sooner than expected if the company hits even the lower range of its targets.
Prudent costs
At listing, Anglo African said that of the $10.9m raised from its IPO, $2.5m would be spent on acquiring Petro Kouilou, Tilapia’s operator, $300,000 would be spent on the workovers, $5m would be spent on drilling two more production wells, $1.2m would be spent on working capital, and $1.9m would be spent on listing costs. Berwick says the firm has stuck exactly to this budget despite a number of operational targets being missed under previous management.
So what? You may ask. But it is worth considering that within this expense, Anglo African has managed to enlist the services of Schlumberger.
Schlumberger is a world-renowned oil services player, whose services do not come cheap due to their quality. However, Anglo African has finalised a contract that will Schlumberger supply support services for the drilling of TLP-103. Schlumberger will provide mud logging, wire line, drilling and completion fluids, casing accessories and many more services. Furthermore, through a turnkey contract, Schlumberger is carrying out the previously mentioned intervention on TLP-102.
The fact that Anglo African has managed to stick to its budget while enlisting such a big name is a credit to both the company and its new management team. Things could have easily got very expensive.
As Berwick put it to us: ‘At TLP-103, there have been well design changes and modifications but it has had a minimal effect on the budget. The major changes are the identification of the rig, the rig contract costs and the Schlumberger contract award. We have got an agreement with Schlumberger to complete all of our auxiliary services. They are known as particularly expensive but we have managed to secure an attractive deal with them. We have managed to bring everything in under similar numbers predicted at the IPO. We have taken one of the best services companies in the world without hiking the budget.’
New horizons
Anglo African’s next focus will be drilling TLP-103. This will be a multi-horizon well targeting producing reservoirs containing 2m barrels and an 8.1m barrel gross contingent resource discovery. Anglo African will also test a deeper prospect with a 58.4m barrel resource. The business expects drilling to begin in June this year after suffering major delays last year as it struggled to obtain a drilling rig. This has now been resolved.
In a previous interview with ValueTheMarkets, Anglo African’s executive chairman David Sefton said that if TLP-103 is a success, the company plans to roll out a full-field development plan for Tilapia. It will then look at nearby assets that are complementary and can be brought into production in the near-term.
The plan is for this to ultimately take the business to its >1,000bopd production target. If this occurs, drilling on the Mengo and/or Djeno sands on Tilapia is successful, and oil prices are not less than $30bbl then the firm plans to distribute free cash to shareholders through regular dividends of at least 50pc of net profits. If production reaches 5,000bopd and oil prices are above $30/bbl, then the dividend will be at least 75pc of net profits.
Obviously, this all sounds great, and the story really began to get people excited around the 20p mark last year. But shares have struggled to break out beyond 15p for any considerable amount of time since falling from 26.8p to 13.9p in September last year. For a while, this was largely down to the operational issues, but with Berwick in place and significant steps being made, the shares are interesting at their current 13.5p price.
With Anglo African yet to carry out a fundraising despite delays and moderations at TPL-103, some have speculated that it will soon need to raise cash to fund operations. Berwick said this is not necessarily the case because these matters have had little impact on costs. Indeed, it remains fully funded for its share of the well.
Going forward, Berwick assured investors that they will not be sold short in any potential future fundraises: ‘As it stands, we are funded for our share of the well and for the work done at the other wells. We will ensure that all shareholders will have the opportunity to participate in anything we do going forward. We are not looking to upset any of our retail shareholders,’ he said.
What’s more, Berwick said the business already has contingency plans in place should there be a shortfall from SNCP in its contribution to TLP-103. He told us: ‘We have put in place various plans that we can activate when this position becomes clearer. As it stands in the current contract, SNCP is a paying partner of 44pc and we would expect them to pay their share of the well. We have scenarios in place to deal with any potential future changes or issues’
Licence replacement
Earlier this month, Anglo African announced that SNPC had proposed and unconditionally recommended the award of a new licence covering the Tilapia oil field for a 20-year term. The news was met with enthusiasm from investors, with shares leaping 25.3pc.
Tilapia’s current production contract legally ends in 2020, some commentators questioned the validity of SNPCs decision to “extend”.
Berwick points out that the application which has been submitted and recommended is for a new licence rather than extending its existing one.
He told us: ‘The Hydrocarbons Code allows for this. The law allows you to rescind your licence with the consent of the government and can be re-awarded either by tender or directly in exceptional circumstances. The exceptional circumstances in our case are that we are about to drill an expensive well with two years left on our current licence. We needed clarification from government that if we spent these large amounts of money then we would not be spending money for somebody else’s benefit two years down the line.’
Moving forward
In Berwick, Anglo African is being led by an industry veteran who has been working in oil and gas with a focus on Africa for 20 years. He made his name working for Ophir Energy (LSE:OPHR) and Impact Oil & Gas. During this time, he tells us he has built up strong relationships with governments on the continent, something that will no doubt help on the way to success.
Alongside Berwick is executive chairman David Sefton who was dealt some stick over the firm’s performance but stepped up when it was clear the company needed a board reshuffle. He handled this discretely and quickly, ensuring the business suffered no collateral damage. This could have been a serious issue for the company, but thanks to Sefton’s navigation of this thorny issue Anglo African now looks stronger than it ever has.
Ignoring last year’s performance, Tilapia remains a fantastic asset for the company, and with the completion of the workover on the horizon, the company could soon be in profit. The drilling and subsequent production of TLP-103 will only extend this profit over time if successful. With this long-term potential value in mind, the shares are trading at a significant discount to last year’s highs of around 33p. Of course, the speculation surrounding a placing is a natural dampener, but the market seems to have forgotten two points. First, there has been no further dilution since the IPO, meaning the value proposition remains intact. Second, if Berwick, Sefton and their new team can deliver the production increases at TLP-101 and 102 that alone could trigger a significant rerate.
For the time being, Berwick told us that he will remain focused on completing the work programme set out by Anglo African at listing. Beyond this, his plans are ambitious.
‘My full focus right now is on the drilling of TLP-103, but once this has completed we can look at what the best route is to grow, both in the Republic of Congo and elsewhere. That’s what I do, I was lucky to have been brought into Ophir where we grew the business from $10m to $3.2bn. I have contacts in the majority of large companies and if we do something interesting then I am pretty sure we could bring in a partner,’ he said.