We’ve been big supporters of Anglo African Oil & Gas (LSE:AAOG) on ValueTheMarkets.com. However, the second half of 2017 has made for a miserable time for shareholders. A number of operational setbacks and apparent own goals have seen the company’s share price halve from the 20p IPO price. The mood is understandably grim and the market deserves some answers. Last week we asked shareholders to submit their questions to Anglo’s Executive Chairman, David Sefton and no punches were pulled. Here is his response.
VTM: AAOG’s IPO was one of most favourably received on AIM during 2017. However, since then the Company has stumbled, the share price has halved, and operational targets have not been met. Why has your operational performance been so poor and who do you think is responsible for this?
DS: Operationally we have disappointed. There is no denying that, not least in relation to the failure of the workovers and the delays in delivering a rig for TLP-103. Ultimately, the operational team must bear responsibility for this and accordingly, in consultation with our major stakeholders, we have moved to effect change in this area.
We have taken significant steps in fixing what needed to be fixed and I am confident we can move into 2018 as a much better business. Despite what has happened this year it is important to remember that we listed with capital to exploit the potential of an exciting opportunity in the proven and prolific Lower Congo Basin. That asset opportunity is unchanged.
The workover of existing wells can still deliver plenty of production upside for the company, while the drilling of TLP-103 has potential to transform AAOG. Our primary short-term goal remains to drill this multi-horizon well targeting producing reservoirs plus testing the deeper prospect, which has an assigned 58.4m barrels of gross prospective. In summary the forthcoming drill will target:
The existing producing horizon of R1/R2;
The proven horizon of the Mengo, which contains an 8.1m barrel gross contingent resource discovery; and
The unexplored horizon of the Djeno, where neighbouring operators have drilled and encountered flow rates in the thousands of barrels of oil per day.
The results of the drilling, in combination with the new licence, will determine the real value of Tilapia and thereby AAOG. Development of the Mengo would very significantly increase the value of the asset as compared to today, and development of the Djeno would be a complete game-change. As a result, I am completely focused, as is the new team we have put in place, on ensuring the new well is drilled and determined that it will take place as soon as possible after the New Year.
VTM: What steps have you taken and are you taking to remedy 2017’s poor operational performance so that the company experiences a much better 2018?
DS: Most fundamentally, we have changed the key personnel responsible for delivering our strategy. Alain Guiraud, whose CV is set out in our recent RNS, is charged with delivering TLP-103 and is, we consider, a driller whose experience and skill will give AAOG the best chance of success.
We are working closely with personnel from the largest shareholder, who have deep connections in country and are now actively assisting us in negotiating the new licence. Additionally, we are looking to bring in an experienced operating CEO to take the company forward in the longer term.
We have learnt from the mistakes and believe we have the right personnel in the right places, in order to execute.
VTM: The Company failed to hit its target of producing 400bopd by 30 June 2017, however the average price per barrel of oil sold by the company must have been >US$35. By what percentage has the board deferred the remuneration of directors “to ensure the financial stability of the company”, as described in the Admission Document? How many of the directors has this percentage deferral been applied to?
DS: All the executive directors have had their salaries maintained at the reduced rate set out in their contracts because production targets have yet to be met. No other ex gratia payments have been made, and outstanding consultancy fees of £90,000 each have been deferred indefinitely pending a substantial increase in production. Further, and in addition to the large cash deferrals, the management options only kick in when production reaches thresholds of 1,000, 2,500 and 5,000 barrels per day. This means there is both a large stick and a large carrot ensuring that the team will get on with TLP-103.
The further reduction from the already reduced rate referred to in the admission document is triggered on both production numbers and the oil price. The oil price has remained above $35 and so this trigger has not been met, however the board keeps salaries under close review as part of its overall strategy to keep costs carefully under control.
VTM: Assuming that TLP-103 proves to be successful, could you describe AAOG’s future strategy and any planned dividend structure if the company hits its >1,000bopd production target.
DS: On TLP-103 being a success, which would be the case on either the Mengo or the Djeno being brought in to production, the strategy is to roll out a full field development plan for Tilapia, as well as looking at nearby assets which are complementary and can be brought into production in the near term. In such circumstances, AAOG will look to acquire scale and cashflow on a rapid basis, while maintaining a focus on the Republic of the Congo and keeping all options open as regards the delivery of value to shareholders.
The intentions on dividends have not changed from those set out in the offering circular which is that, should the drilling from the Mengo and/or the Djeno be a success, then the Company would distribute free cash to Shareholders through regular dividends once production reaches a sustained level of 1,000 bopd and if oil prices are not less than US$30. In such circumstances, the level of the dividend will be at least 50 per cent. of net profits (subject to the availability of distributable reserves).
If production reaches 5,000 bopd and also provided that oil prices are not less than US$30, the level of the dividend will be at least 75 per cent. of net profits (subject to the availability of distributable reserves).
VTM: How confident is the board of securing the rig for drilling TLP-103 in Q1 2018? What alternative plans does the board have if it cannot secure its preferred rig? Why weren’t such contingency plans in place previously and not already acted upon? Why is the company so determined to secure the one specific rig?
DS: AAOG has identified the rig which it considers to be most suitable for drilling TLP-103. This rig is new and has been further upgraded by the current client, a major international E&P company. We have been assured by both the rig company and the client that it will be available in January. However, we are also working on contingency plans to bring another rig into the country should our preferred rig not be available. We cannot allow further delay. I agree that such plans should have been put in place by the operational team last summer.
VTM: Why have the flowlines between the wellhead and separator at TLP-101 not been replaced? This was promised to be done by the end of October. Does the company have sufficient working capital to complete the workovers at TLP-101 and TLP-102?
DS: Work to replace the flowlines for TLP-101 is still on-going. Additionally, further work on TLP-102 will require the use of a drilling rig to re-enter the well. Accordingly, it will take place after TLP-103 is drilled.
VTM: It appears that AAOG has had significant management and board level problems. Oleg Schkoda left the board in late September and it appears that Alex MacDonlad has been demoted. Will Alex MacDonald return to work after his sick leave? Why were the issues with the board not identified and resolved before the IPO? How can shareholders now trust that the company has the right management team in place to move the business forward?
DS: I believe that a review of the biographies of Alain Guiraud and the others now more actively involved, should go a considerable way to reassuring shareholders that the right team is now in place. As I have mentioned we have acted and believe the team is in place to deliver the plans set out previously. The quality of asset remains the same and we are confident we can build value through execution.
VTM: Having received such enthusiastic backing from retail investors at the IPO, the company has squandered this goodwill. What plans does the board have to restore trust with private shareholders? Will the board appoint an independent non-executive director to help this process?
DS: Ultimately trust will only be restored through positive operational performance, in particular in extending or renewing the licence and through drilling TLP-103. Our focus is therefore on executing on these tasks. With regards to the Board we are in the process of reviewing its composition. There are currently two independent non-executive directors, but we are open to potential new additions.
VTM: What do you expect SNPC will contribute financially towards the drilling of TLP-103? Please could you also describe how the relationship with SNPC currently is and the extent to which they remain supportive, or otherwise, of the company?
DS: Under the operating and production agreement for Tilapia, Société nationale des pétroles du Congo or (‘SNPC’) (the National Petroleum Company of the Congo) is not carried and has to contribute a share of the drilling costs equivalent to its percentage share of the production that accrues to the operators. This is 44%. We have a very good relationship with SNPC and they are supportive of AAOG and its plans for Tilapia.
VTM: In the Admission Document the company expected to renew/extend the TLP-103 license after drilling the well. Why has the company changed this position and decided to seek the renewal/extension pre-spud? How long do you hope to extend the license for?
DS: While getting a new licence in place before drilling is a better strategy, the original plan had drilling of TLP-103 taking place quickly and before we could expect to obtain a new licence. However, with the delays in drilling we have moved to advance the new licence and aim to have that in place in the very near future. Specific terms of the new licence will be announced at the relevant time.
VTM: AAOG recently declared, “It has sufficient capital to meet its share of the costs of drilling TLP-103.” However, with all the delays in drilling TLP-103 & ongoing cash burn there is expectation in the market the company will have to raise money again. Shareholders are concerned that the board might wait until after the spud of TLP-103 before seeking to raise money on the back of any share price rally in anticipation of the final drill result. In general terms please could you outline your strategy for securing sufficient working capital so that AAOG can operate as a business after completion of the TLP-103 drill.
DS: In our recent RNS we confirmed the working capital position, with enough capital allocated from the IPO to drill TLP-103 and cannot really add to that here. Any specific announcement would have to come via RNS.
What I can confirm is that we have small revenues, a low cash burn rate, a performance related remuneration structure and a cost-conscious Board. On the medium term it is worth reminding that unlike many small O&G companies, we are an existing producer, with all topside infrastructure in place and a working offtake agreement with the local refinery. Our oil is in high demand, and the oil we already produce is being turned into cash within a reasonable timeframe. We can therefore turn increased production into increased revenues with a very small time lag. There is, therefore, not the same need for working capital that other small E&P companies often have.
VTM: If the company does need to raise money again via an equity placing, will it commit to giving existing shareholders the opportunity to manage their dilution by participating in the deal?
DS: We recognise the importance of all shareholders and we look at all eventualities to engage with them, and if funding were required, we would look to make it available to all, following the assessment of the option deemed most suitable.
VTM: You recently claimed, “the company has managed its cash resources carefully, and continues to do so.” Please could you add some colour to this statement, explaining what steps the company has taken, what the current cash burn rate is and how much cash the company currently has?
DS: We have always looked at keeping the G&A at low levels as well as put a remuneration structure in place to align it with performance milestones associated with production. As we said in the most recent RNS we have cash to drill, but in terms of cash management we have actively looked at all aspects of the business, from travel expenses to ending the London office lease.
VTM: To finish, could you please explain why you believe AAOG might be a worthy investment to make for 2018?
DS: We have what I believe to be a genuinely great asset. What sets it apart from others is its combination of existing production, the opportunity to develop proven reserves and the significant exploration upside, targeting a horizon that is producing oil at value-changing rates in neighbouring licenses. All existing topside facilities are already in place, meaning that the road from drilling to cash is a very short one. With all this in mind and our commitment to dividends, I believe AAOG remains an exciting investment opportunity which we believe is superior to most other small O&G companies.