Anglo African Oil & Gas (LSE:AAOG) fell below its recent 8p placing price this morning after announcing its operational and financial plans following the suspension of drilling at its TLP-103 well in the Congo this week. As of writing, the firm was down 6.2ppc to 7.9p as investors wrestled with the news that it will take around 25 days to find a new location, move its rig, and re-spud TLP-103 before embarking on another 64 days of drilling.
Today’s news comes two days after Anglo African was hitby around 20pc when it suspended work at TLP-103 after its drilling contractor, SMP, said it has experienced a ‘topside issue affecting its rig’. In today’s update, the business said SMP had encountered numerous drilling challenges since spudding the well in August that had threatened the safe operation of its rig. These issues happened before the well had reached any of its target horizons, and, after attempting to overcome the problems, Anglo African and SMP have now decided to cease drilling and move the rig 100m away to re-spud.
Perhaps the most concerning element of the set back is the additional cost incurred to move the rig and re-start the process. In the announcement, Anglo African’s claims that it has offers of debt financing available to it that are sufficient to meet any cost over-runs due to the delay and the need to re-spud. Any debt financing would bein addition to contingencies in the firm’s drilling budget and potential offsets and claims under insurance policies,
Although the business should no doubt be congratulatedon the speed and at which it has conducted a review and solution to the issues at TLP-103 this reliance on debt funding could be a significantred flag. There is a strong possibility that the debt may take the form of a convertible loan or a loan note, and investors must now ask at what price any agreement will be executed or delivered. If the company does not handle this issuewith sensitivity, there could be dire consequences to sentiment.
As things stand, 8p represents a clear line in the sand for Anglo African. With the company still holding onto a market cap of £13.8m at 7.9p per share, it seems likely that any sustained period spent below this level will result in further weakness. Indeed, with 25 days to wait until TLP-103 is moved and re-spudded, it seems most likely that any new investors will keep a watching brief on the firm as they weigh up its situation before making any majormoves.
The fact remains that if Anglo African can get back on track with TLP-103 at the new location, then much of the potential remains on the table, minus the drilling delays and additional costs.
TLP-103, which has previously been described as ‘potentially transformational’ by Anglo African, will be 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, picture 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 Minsalaproduces 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.
If the issues repeat themselves then that could be more problematic, however as things stand now, the Mengo sands remain particularly compelling. It is perhaps best to keep some distance until Anglo African provides more clarity around the actual impact of this week’s delay.