Gray puts some questions to Rheochem on their plans

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 number of your exploration fields, so can I ask when you expect this to be completed?  Also what are you hoping to gain from this mapping process, possible drilling targets, or just more information to try to get some partners to invest?

HG:  Some of the blocks contain previous discoveries . Mapping of these will help to understand why these wells did not flow as expected or were not tested. This process will involve the  purchase of existing seismic and some new seismic. The previous discoveries are the highest priority. The plan is to see what the new information tells us and then decide which blocks to keep, farm out and drill.

DGW:  Will the sale provide the money to meet all of your current plans on the exploration front?

HG:  The money from the sale meets the current plans for the Athena development and acquisition of previously shot seismic to further evaluate the other blocks. It also provides working capital to run the company until we have revenues from Athena production.

DGW:  What are you plans for the money, if you have more than you need at current?

HG:  Excess funds will be held in reserve whist we evaluate the existing portfolio. The decision to shoot new seismic or drill will be made after the initial evaluation of the blocks.

DGW:  Also, being an exploration company do you see yourself requiring more funds anytime soon, or is it too early to say?

HG:  We should have sufficient funds to develop Athena and evaluate our other blocks. Athena production revenues in conjunction with the anticipated earn out should provide sufficient funds to shoot more seismic and/or drill an appraisal well should we choose to do so. Ideally we would prefer to farm out some of the exploration and appraisal blocks to reduce our cost exposure. More funds would only be required if we wished to escalate an aggressive drilling campaign involving several wells. This is not a current plan.

DGW:  Can I ask when you require the US$14m by?

HG:  We require $14m over the next 8 months with costs biased towards the end for major equipment items. The sale of the fluids business will cover the cost estimates for Athena

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.

END

Conclusion

To conclude, with the financing secure, and Athena still on track, just on Athena they seem good value on a market cap of £40m, and if any of their exploration assets come good then the upside could be enormous.  Therefore they still warrant a place in the potential company changing news section of Grays Stocks to Watch.