Shares in Anglo African Oil & Gas (LSE:AAOG) dropped by nearly a quarter this morning to 8.8p after the firm announced that drilling has been temporarily suspended at its highly-anticipated TLP-103 well in the Congo. SMP, the drilling contract, has informed the business that it has experienced a “topside issue affecting its rig”. As a result, Anglo African has decided to suspend drilling at TLP-103 temporarily while a specialist review of various potential solutions takes place. The market has reacted with dismay, with the shares dropping 25% to 8.5p as of writing, but it looks too soon to make a firm judgement on what is going on here.
In its update, Anglo African said it is working to determine the optimum solution to this topside issue and hopes to restrict any delay to a ‘matter of weeks’, with further updates planned in due course. While this review takes place, it is putting in place contingencies that aim to recover any costs related to the delay.
The drill so far
TLP-103, which has previously been described as ‘potentially transformational’ by Anglo African, is a multi-target well that is being drilled on its 56pc-owned, producing Tilapia field in the Lower Congo Basin in the Republic of the Congo. The well, which can be seen in the diagram below, targets multiple horizons, beginning with the shallow R1/R2 sands that are already producing at Tilapia.
Beyond R1/R2, Anglo African will target the undeveloped discovery in the lower Mengo sands with an 8.1MMbbls gross contingent resource that is expected to produce c.500bopd per well. This is an appraisal well and perhaps the most attractive of the three targets.
Finally, the company will drill to a deeper exploration prospect in the Djeno sands interval, where an adjacent field called Minsala produces at a rate of 5,000bopd. Depending on results from these three horizons, the well may also be extended down to test another area called the Vanji Horizon.
What next for TLP-103
Today’s news is no doubt disappointing, but there remains some comfort to be had in the fact that Anglo African’s shares remain above the 8p they placed at in May. It is also somewhat reassuring that it has not decided to plug and abandon the well. This could still happen, but for the time being the delay has been driven by a topside issue – something above the ground – rather than a problem deeper below surface, that could be harder to overcome.
Although the RNS is light on detail, this could reflect the fact that the company simply doesn’t yet know enough about the issue to be able to release more information. It is worth noting Anglo African’s active efforts this year to improve shareholder communications. This, coupled with the speed and frankness with which today’s news was delivered – even if it was a bit thin on information for some investors’ tastes – suggest it will provide more updates on the delay as and when it receives them.
So although today’s news is an obvious cause for concern, it is not necessarily as catastrophic as the market’s reaction suggests.
Indeed, with TLP-103 spudding on 15 August and completion expected to take 64 days, it seems reasonable to assume that SMP has yet to even hit the Mengo and Djeno sands. With that in mind, if we are to take today’s news at face value, TLP-103’s underlying fundamentals do not appear to have been damaged. That being said, with Anglo African raising £7.4m in June and its need to fund the entire cost of drilling TLP-103, which is expected to come in at $8m (c.£6.2m), it would probably pay to be mindful of the firm’s cash position.
Assuming the topside issue at TLP-103 can be resolved relatively speedily then much of the potential remains on the table. If the issue turns out to be more serious that could be more problematic, but as things stand now this is not a dry well and the appraisal of the Mengo sands remain particularly compelling.
Authors: Daniel Flynn & Ben Turney
Disclosure: Daniel Flynn does not hold positions in any of the stocks mentioned above. Ben Turney does hold positions in the stock mentioned above.