HOIL Nigeria

6th Aug '12 by davjo

14 comments 7707 reads

Re the OML-30 acquisition, prospectus published today...downloadable here together with presentation :-
http://www.heritageoilplc.com/news/pressRelease12.cfm

Shoreline Natural Resources(Shoreline), partnership between Heritage and Shoreline Power, indigenous Nigerian company, pay $850m for 2P 347mmbbls. What intrigued me was HOIL apparently stumping up all the cash for a 45%:55% JV. However, the deal is structured initially with HOIL benefitting from 97.5% of profits with SP having an option (expiring 6 months after execution of the sale agreement) to acquire 30% Class A shares at a cost £135k plus a loan to the Shoreline JV equal to 30% of the amount then owing by Shoreline to Heritage.

There are two points to note here. Firstly, the 347mmbbls net to HOIL quoted above, assumes SP take up their option...if they don't, reserves jump 30%. Secondly, if SP do take up their option, HOIL is relieved of something like 30% of the acquisition price. Net net, that means HOIL is paying a good bit less than $2 per producing barrel. Furthermore, the tax regime appears to be softening with this sort of acquisition, buying assets off IOCs(Shell Total ENI) via indigenous companies. Part of the problems with IOCs working these sort of assets in recent years has been local opposition and turmoil created. HOIL seem very well placed to hook into the new local thinking and build on Nigerian relationships. I think this deal looking forward to reviving the assets, potentially to 200k+ bopd will be very well received by the market. Looking for a big uptick when trading resumes tomorrow.

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rhomboid1

7th Aug '12

Hi Davjo

I like this deal a lot for some of the reasons you allude to, it seems an intelligent solution to the challenges of doing business in Nigeria to have a security savvy E&P partner with a local independent with the range of contacts that implies.

The cashflow here should fund Kurdistan, Malta etc in a way that the Russian asset , stuck in first gear as it was, couldn't .

In an ideal world we would have seen a successful conclusion to Uganda tax at the same time but I'm sure we'll get there in the end.

Cheers

davjo

Hi Rhomboid

I like this deal a lot for some of the reasons you allude to, it seems an intelligent solution to the challenges of doing business in Nigeria to have a security savvy E&P partner with a local independent with the range of contacts that implies.

Absolutely! ...particularly set in a background where the authorities are intent on encouraging indigenous companies. However, I would be a little concerned if Shoreline Power don't take up their option to increase their 2.5% economic interest. I'm not sure why they haven't done so from the outset. Perhaps they are finding it difficult to raise the loan monies needed?

The cashflow here should fund Kurdistan, Malta etc in a way that the Russian asset , stuck in first gear as it was, couldn't .

AIUI, Russia was put on the back-burner as low priority set against Kurdistan opportunities. As we know, HOIL were forecasting something like 15,000 bopd 3 or 4 years ago for Russia but given the cash inflow from Uganda, I don't see why they spent large chunks on share buybacks in preference to reviving Russian production....unless Russia has disappointed geologically. And that presents a worry for investors whether fancy Nigerian forecasts might also bite the dust? I don't suppose it's a fair comparison but it will leave a question mark for some.

In an ideal world we would have seen a successful conclusion to Uganda tax at the same time but I'm sure we'll get there in the end.

Yes. You'd have thought that arbitration in London would have concluded ages ago but I guess that process won't be finalised until after the appeal has been ruled upon in the Uganda High Court.

Evening Davjo

My take on Russia is that it was a cheaply acquired asset that failed to achieve the best case scenario and didn't merit undue investment in maximising when there were other bigger fish to fry in less challenging areas.

As you know all too well you have to put yourself "out there" in various locales as an E&P and when you scent a potential "company maker" chase it down like a rabid dog on heat..I just get a sense that Heritage understand that better than many!

Cheers

Isaac

8th Aug '12

Sold out of Hoil @ £1.81

Hi Isaac

Brevity is almost always a virtue but it would be mildly interesting for readers if you were to explain the "why" as well as the "what"

Cheers

Fangorn

9th Aug '12

I guess he took advantage of a near 50% rise since return from suspension to crystalise some profits. still have my core holding but have traded several slices |I bought on the day of the return from suspension. Am waiting for a bit more before dumping my core as I don't like anything to do with Nigeria. whilst the deal is transformational, seeing a surge in both production and reserves, the move is fraught with many concerns - primarily the less than honest behaviour of the locals whether it be in the form of government, their JV Shoreline partners, or the locals generally. Shell is pulling out for a reason -Nigeria is a major Oil & Gas player so why is such a significant company such as shell pulling out - clue is in the constant pipeline vandalism,the general tardiness and lack of honesty of the indigenous population imo.

Disclosure. Have plenty of experience of living in Africa and the old man has very recently spent five years working in Lagos.

Hi Fangorn

All true re conditions in Nigeria but that is why the deal is so attractive.

Mr Buckingham has decades of experience in providing security in these conditions or worse , what makes this deal more compelling is that he is partnered with a local company, one of the most corrosive issues in Nigeria is the sense that local resources were being "stolen"from under the feet of the indigenous populace by distant faceless multinationals . This deal looks to be structured to avoid that perception and legitimise the process of oil extraction as a result.

Hopefully Mr Buckingham's judgement on security issues will prove shrewd , as it has in the past , to the benefit of all - including crucially the local people.

Cheers

13th Aug '12

Rhom, Agree with all that you say. I'm pretty sure Mr Buckingham wont be so concerned with Hoil's global brand reputation as Shell clearly is,and his mercenary background will help enormously when dealing with wayward locals.

Whilst the corrosive issue of foreign companies exploiting national resources is mitigated through the use of the local JV it still doesn't get around the lack of honesty and tardiness of Nigerians in general. This is my main fear that Hoil are biting off more than they can chew..Time will tell that's for sure but I suspect I will have moved on - I only invested for Kurdistan. :)

21st Aug '12

Annoying that I sold out.....!

http://www.investegate.co.uk/Article.aspx?id=201208210700084317K

"We believe this sale and loan financing crystallises significant value for shareholders, demonstrating our ability to invest in and monetise assets at an appropriate stage. The proceeds provide significant financial flexibility allowing us to fund the proposed acquisition of OML 30 without any rights issue or other additional capital requirement from, or potential dilution to, our existing shareholders."

What a cleverly constructed deal, early monetization in Kurdistan with a new and I believe politically favoured heavyweight partner , optionality on the remaining stake, rights issue requirement sidestepped and the Uganda settlement monies still to play for. A very elegant solution all round. Let's see what awaits in Nigeria and elsewhere.

Cheers

macrus

Mr Atherton has been hard at work

Indeed. And I couldn't help but notice that the remaining stake in Miran(49% circa) is intended to pay off the loan at maturity - so an effective departure from Kurdistan into a riskier political climate(albeit one with significant production of Oil on the table)

so an effective departure from Kurdistan into a riskier political climate

That's a matter of opinion of course. I'd say operating in Nigeria under the umbrella of a large indigenous company (Shoreline) with all it's local and national relationships and Heritage's undoubted long established African experience, the risks are somewhat less in Nigeria than Kurdistan. As to effective departure from Kurdistan, that's by no means a certainty, otherwise HOIL would have sold out completely now. My guess is that HOIL wanted a back-up through the exchangeable loan option to cover for the possibility that Shoreline Power doesn't exercise its option to increase its economic interest in OML 30 to 30%, thus leaving HOIL carrying 100% of the Nigerian based debt. HOIL have assumed that SP will exercise their option but I imagine they might have trouble raising what I think will be a minimum of $165m to do the deed?

In very rough terms, the effect of these two deals is :-

HOIL sells 366mmboe Kurdish gas contingent resources for $450m and buys 501mmbbls of producing Nigerian oil reserves for $850m (347mmbbls at $685m if SP exercise their option)

That strikes me as excellent business :-)

22nd Aug '12

In very rough terms, the effect of these two deals is :-

HOIL sells 366mmboe Kurdish gas contingent resources for $450m and buys 501mmbbls of producing Nigerian oil reserves for $850m (347mmbbls at $685m if SP exercise their option)

That strikes me as excellent business :-)

Certainly can't dispute that. In terms of transaction specifics, it's a steal. Swapping gas in the ground for a significant ramp up in Oil production is a no brainer. My only concern is with the destination we are expanding so significantly into(and will incidentally become so reliant on particularly as I invested here for Kurdistan)

When a major such as Shell pulls out all the stops to get out of not just this,but several OML licences one has to ask why a large major, with significant political "influence" is in such a rush to retreat and offer up an asset at such a favourable price. Nigeria is,after all, a significant Oil producer.

Perhaps it's something to do with

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/9486599/Shell-paying-tens-of-millions-to-Nigerian-security-forces.html

So, 40pc of its almost $1bn worldwide security budget between 2007 and 2009 consumed by Nigeria ALONE. Pity there are no recent costings as this relates to 2007 -2009. No reason to expect things to have changed either way frankly.

AND

Special Report on Nigeria Oil & gas in todays FT:
http://media.ft.com/cms/8e5383b2-d458-11e1-a5c2-00144feabdc0.pdf
Focuses on Oil theft and legislation issues.

In relation to your comment that operating under the umbrella of a large indigenous company with all its local and national relationships reduces the operational risk compared to Kurdistan I'd have to disagree

Firstly having a local partner wont stop the thieving and vandalism (in fact the local partner will "most likely" have their hand in the till to some degree, as will the government. This partnership wont protect them from local tardiness or vandalism as both qualities are base characteristics of the populace)

Nigeria has a reputation, well justified for corruption,back handers, brown envelopes and theft, as anyone with experience of working there will know (My father works in Lagos FYG)

It will be interesting to see how the project develops, and whether they use their remaining Miran stake to pay off Genel's loan. As I've said elsewhere, if anyone can tame Nigerian's default positioning it is Buckingham - a ex mercenary after all is unlikely to be as concerned as Shell when it comes to dealing with theft and vandalism.

I'd personally trust a Kurd far more than a Nigerian. Hence why, despite seeing some opportunity in Hoil's ambitious move, the pitfalls are too great, and the destination on my avoid list.

HOIL Nigeria

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Davjo

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