Gray Puts Some Questions To Rheochem On Their Plans

10th Mar '11 by Gray Woods

13 comments 6406 reads

There has been a lot going on at Rheochem (LON:RHEP) lately, with them acquiring a number of licences in the UK’s 26^th licensing round, and the continued progress towards production of Athena, which will give them production of an initial 2,000 bopd by the year. But there were questions about whether they could finance their part of the large capital spend at Athena, as just recently in their interims they stated that they required a further US$14m, which was more than many were expecting. But they also stated they were conduction a review into their current business, with this review just being released. With the results being that they have decided to sell their mud oil service business, providing them with A$45m (about £28m, but only A$23.45m will be paid up front, the rest will be performance based), meaning their financing issues finally appear to be solved.

By selling their mud business though Rheochem are turning themselves into a completely different business, as rather than being an oil services company with a E&P business, they will become a full out E&P company. Because of this they have decided to change their name to Lochard Energy. But all these changes, and the many things going on led me to feel that a little bit more information was needed about what was going on, with me putting some questions to them, which their CEO, Haydn Gardner very kindly answered:

DGW: I note in your interims, you state you still require US$14m in regards to the capex spend on Athena. Could I just ask why so much is required, as from my calculations using the total capex figure given by Ithaca Energy ($220m), having a 10% stake would put the total requirement at $22m, therefore only $8m would be needed. So has the capex been increased? Or is the rest of the money needed for something else? If so could I ask what thanks? (I note you mention it funds could be used towards impending court costs)

HG: The original cost was around $210 million which assumed a rented subsea bundle of pipes and umbilical cables. A final decision was made to purchase this equipment rather than rent it. This pushed the capex up to $280m but reduced corresponding operating costs

DGW: I note also in your interims that you are conducting mapping on a…

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djpreston

10th Mar '11

An interesting discussion Gray.

On the face of it RHEP is one to watch given the portfolio and cash but if I recall there is still a legal battle ongoing with regard to Zeus:

As previously announced, Zeus Petroleum has a legal dispute with Senergy Limited; a UK based drilling company, claiming US$11.907m and £1.822m in respect of contracted works not carried out in accordance with the terms of an alleged contract with Zeus. Since initial contact was made by Senergy, informing Zeus of Senergy's position, a claim has now been lodged in the High Court and Zeus intends to rigorously defend this claim. A court date has been set for 10 October 2011.

It is that which makes it a one to watch for me rather than anythign else.

Gray Woods

Right you are djpreston, that is what the last question was in regards to, to try to get an idea for the length of time before it is resolved:

DGW: Finally can I ask, in regards to the court case which starts on October 2011, how long do you expect this court case to last, are you expecting a swift conclusion or is it more likely to be drawn out?

HG: We expect the court case to take about 8 days. If found in our favour we expect a quick resolution otherwise we could appeal which may drag it out longer. In that scenario, we would expect Athena revenues and the second tranche of proceeds from the sale of the fluids business to pay any settlement. We still maintain our position on resolving this issue in our favour.

It is of course an issue, and is one of the reason's for the low share price, and I should of mentioned it in my conclusion, and apologise for not doing so, as it is an important factor to take not of, as though the company is confident in its defence, and it does sound like they have a strong reason to be confident, there can never be a gaurentee of a good outcome. This is why I see them as a risky play, as without the court case at their current price they would like be a value buy, but with it, they are a high risk high reward play.

Ah yes, sorry about that Gray, somehow I missed your question on the court case when I read through.

Agree with your conclusion though, no case = value play, court case = high risk/reward.

Once again, apols for being a numpty.

Darron

safetyfirst

13th Mar '11

Broker note below:

http://www.rheochem.com.au/cms/index.php?option=com_content&task=view&id=68&Itemid=78

emmany

That link says you need to be logged into to access it, could you show what is says over here please? Thanks.

Sorry didn't check the link. Go to the investor relations section on website and then broker notes. Works for me from there.

Thanks for that, very interesting read, and to see how they come to their value of 25p. Also their prospects from the exploration wells looks even greater than I orginally thought, as if even one comes good it could be truly transformational. Its just to bad about this court case lingering over them. Just to note heres there website for anyone wanting to read it, just go to investor relations, then broker reports and click on the top one:

http://www.rheochem.com.au/

No problem. I have dipped my toe in here and will look to add on weakness and after I've got my head around the court case. Worth noting the relinquishment report below for a better scope on 'thunderball' prospect:

https://www.og.decc.gov.uk/UKpromote/relinqs/P731.pdf

5th Apr '11

Well, RHEP have announced an interesting farm out on six of their N Sea blocks with PGS.

Extract:

.........100% owned subsidiary Zeus Petroleum Limited ("Zeus")has entered into a Heads of Agreement with PGS Exploration (UK) limited ("PGS") or its designated affiliate to transfer a 40% stake in six North Sea blocks (16/8c, 3/5, 3/10c, 9/17b, 9/22b and 14/17) in return for the access to 3D seismic data and associated seismic interpretation and engineering expertise over these blocks.

Its certainly one to watch but with the legal case outstanding, its no more than that at the moment, for me anyway.

1st Sep '11

Revisiting this old thread (with RHEP now known as Lochard Energy Group (LON:LHD) )

Lochard Energy Group (LON:LHD) has just announced a possible offer for the company.

They also announced their figures this morning

Interesting time for a potential bid with Athena approaching first oil (by end of the year). Wonder if it is any of the Athena partners? Woudlnt suprise me if it was Ithaca....

jseth123

Agreed that it is interesting DJP. IIRC Ithaca's McKendrick spoke about wanting an acquisition to add 4000bopd to Ithaca's production.

Zeus (Lochard) have 10% of the licence and Ithaca Energy (LON:IAE) currently 22%. I think that the expected flow rates would mean Zeus having ~2200bopd and Ithaca ~4400bopd.

One would have thought any potential suitor would want closure on the court case before deciding however...

One would have thought any potential suitor would want closure on the court case before deciding however...

Oh yes - that case is the one thing that led to me holding off as it did look cheap with the Athena stake, the sale of the Reochem business and the other assets but lawyers being lawyers.......

15th Dec '11

Just following up on this thread.

Lochard have now announced the result of the Senergy UK/Zeus Litigation.

The proceedings in this case have now been heard and judgment for liability has been handed down in Senergy's favour. The court has still not ruled on the amount of costs or damages that will be payable and a further hearing will be required in early 2012 to determine the amount of costs. There is likely to be a period where further evidence will be submitted prior to a final hearing on the amount of damages the date for which will be set by the court. The Company estimates that subject to any successful appeal by Zeus the damages payable by Zeus could range between $3.5m and $12.2 m plus costs and interest.

The damages payable will be paid from the cashflow resulting from the Athena production, due to come on stream in Q1 2012, and depending on timing, from the earn out payment due from the sale of the Company's fluids business. The Company has previously announced that the maximum residual earn out figure is A$19.25 million.

Lochard is considering its options (may appeal) and will announce further in due course.

Gray puts some questions to Rheochem on their plans

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Gray Woods

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