African Potash – it’s not just the fertiliser which stinks here…

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


One early childhood memory of mine was trapsing around the countryside collecting ‘cow pats’ for composting with my late grandfather, he’d add some kitchen waste to his finds, a load of earthworms and a few months later he’d have some fertiliser for whatever he was growing in his garden that year. Unsurprisingly his garden always hummed.

So with bad smells and fertiliser in mind I turn to African Potash, which is attempting to establish an integrated fertilizer company in Africa and in African Potash’s case its fertiliser smells like roses compared to its corporate governance.

Tom Winifrith has covered this in detail here but I thought I would join in with my favoutite African Potash transactions, i’ve got four for your below which quite frankly stink…

Note – The following article simply contains facts and poses questions, I am happy for the company to address these or correct as it feels necessary.

#1 The loan from the Finance Director’s Better Half

Katrina, wife of the FD loans the company money, a related party transaction.

afpo loan

The effective annual interest rate I have calculated here including the arrangement fee is 29.59%! Tom claims this is the most expensive loan in AIM history, i’m not sure but it must be close.

As I’m a nice guy i decided to help out the board of African Potash, I have found a credit card for them to use for their future funding needs, it’s a few % cheaper than Katrina’s loan and furthermore as a bonus the more they spend the more the board will earn free air tickets and hotels, which they can use towards their next trips to Uganda or Zambia:

afpo credit

Jokes aside, as at August 30th 2016, the loan would have cost them around £150,000 to service, this assumes the loan does not default (I’m not suggesting it will). My questions are – Why was this source of finance used? Was there no other way to raise money?

#2 The Investment in Blenheim Natural Resources

Just two weeks later African Potash used 10% of its bridge loan, £69,000 to invest in a small AIM Investment company Blenheim Natural Resources at 0.8p a share. This company invests in companies associated with Natural Resources. Some questions: What has this investment got to do with fulfilling the strategy of African Potash? Are any synergies created? How does it create value for African Potash shareholders? The shares of Blenheim Natural Resources stand today at 0.35p, less than half the level that African Potash subscribed at, so I can answer the third question then myself – no value has been created.

#3 Mr Chris Cleverly becomes NED of Blenheim Natural Resources

As part of the same transaction noted above the CEO of African Potash became a Non Exec at Blenheim Natural Resources. The RNS from African Potash did not mention the details but Mr Cleverly was also granted 27.5m share options. The options are yet to be exercised due to the failure of the shares to reach 1.6p for a period of 7 days, the vesting condition. It looks unlikely this will be achieved now, but it will be interesting to see whether any further options are granted at any point.

In the interest of being balanced though, the director pay at African Potash was at the year ended June 2015 was not actually obscene:

afpo directors

However, was Mr Cleverly’s NED appointment and the investment in BNR an attempt for Mr Cleverly to get a source of income?

#4 What happened to the 20,000MT of Urea?

Saving the best (worst) until last, let me run through the timeline of AFPOs maiden revenue:

6th January 2016
Goody Gum Drops, $10m of revenue and payment expected 35 days max to a customer. No mention of profit but good to get some revenues. Letter of Credit too so this is pretty much guaranteed cash!

Iadpo rns 1

12th January 2016
A placing of shares to raise £825,000 6 days later. With the joy of its maiden revenues due then no problem getting the placing away.

9th February
33 days after the deal was done, no sign of the money yet… Perhaps it is just a minor hiccup…

afpo rns 2

22nd April 2016
It all goes quite for three months and then….

afpo rns 3

After all that, no customer. Why did it take so long for African Potash to clarify the position? Why did the letter of credit fail? At what point did African Potash learn there was no customer? Was this before or after the placing?

What’s the verdict then?

SELL – Target 0.15p

I don’t think I need to say anything more. There are some serious unanswered questions here and it is no shock to see that the share price has collapsed since the 22nd April RNS. This company in my opinion is not an investment without answering these questions, pure and simple. Look forward to hearing from African Potash…

Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

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Screening Oil Companies Resources vs. their Enterprise Value

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


The average private investor can find it most confusing trying to assess a company’s share price when looking at its resource base. This isn’t helped by wild claims by some junior resource stocks (which I won’t name) on billion barrel discoveries. So I’ll briefly explain each of the internationally approved reserve classifications to assist understanding.

We can also look at some of the more popular oil company’s enterprise values versus their resource base to illustrate how you can start playing with figures and building this into your appraisal of stocks.

The below summarises the Petroleum Resources Management System, and the different classifications of reserves:

reserve classes

Reserves

Hydrocarbons that are either already on production, approved for development or justified for development, i.e. commercial reserves. The most common way of assessing a company’s resources is using 2P reserves, i.e. reserves that are already on production and those reserves where a board FID case has been passed. As the reserves should be commercial in order to be recognised then this gives the investor some confidence of a viable production business. Note – commercial is a broad term though, Afren went into administration with 200mm Boe of 2P reserves!

Contingent Resources

These are resources that are discoveries, but development potential is on hold. This could because of sub commerciality or it could be the project is viable but further work is needed to get this to a FID. i.e. there are contingencies which need to be solved before they can be booked as reserves.

Prospective Resources

Exploration Plays, Prospects or Leads. Typically undrilled or not sufficiently appraised to move to contingent resources.

How are companies able to book reserves?

To stop companies quoting utter codswallop in their reserves, a Competent Person Report is required (CPR) before a company can recognise these reserves in its financial reports.

So let’s take a look at the bulletin boards favourite companies…

I’ve looked at Gulf Keystone, Genel Energy, UK Oil and Gas, 88 Energy and Sound Energy. I’m not going to analyse these companies in detail but just make brief comments about what the results show us.

2p reserve vs ev

Genel
Very low value assigned to each barrel. The overall OPEX Boe is low, however all contracts relate to Production Share Agreements which are less lucrative. That said this is potentially an attractive valuation and could be a buy signal.

Gulf Keystone
Very low value assigned to each barrel. The overall OPEX Boe is higher than Genel as its transport is through trucking rather than pipeline. Significant CAPEX also likely required to maintain production and access these reserves.

BP
Included as Benchmark, it is hard to value BP on this basis as it only publishes a 1P figure, it also as downstream and trading operations so the figure is likely lower than illustrated above when these factors are adjusted for.

UKOG
The favourite stock of the Bulletin Board. Based on its 2P reserves UK Oil and Gas appears hugely overvalued, with its 2P reserves valued at $60 a barrel this is well in excess of current oil price and thus the current valuation must be expecting material upgrades to reserves from its exploration plays. Let’s look at that next…

resources vs ev

The above chart combines reserves, contingent resources and prospective resources so low valuations here could indicate a buy signal and represent significant growth upside.

Genel and GKP
Both have lots of potential resource which could make them good longer term growth plays. Both operate in low CAPEX/OPEX environments, any oil price rise and the KRG payment situation sorted could help significantly. However, high risk too given where they operate. However, here is where you need to be cautious, I would though not buy GKP due to the distressed financial situation it finds itself in (I wrote about this here), this highlights the importance of using analysis like this as part of your research, not basing investment decisions solely on this analysis.

88E
A one trick pony company but with some promise. A recent CPR estimates 768m barrels net. It is also looking at conventional prospects expecting results of seismic soon, this could upgrade its resource bookings further. Again a good speculative play, close to infrastructure and planning permission unlikely to be an issue unlike UK Oil and Gas.

UKOG
Despite lots of media attention with its ‘Gatwick Gusher’ UKOG is unattractive to me. The Gatwick Gusher aka Horse Hill lead is not included in the reserves or resources classifications as it is too immature, and this is confirmed by its own RNS.

hh rns

UKOG does talk about 3.6bn barrels of OIP, however this is total oil in place and with today’s technology only a fraction will be recoverable. Taking a conservative recovery factor of 20% this gives 730m barrels, which granted if were to be included as prospective resources then it’s $ per Boe would be below that of Genel Energy, which I believe is a value stock. It is not clear to me when UK Oil and Gas will be able to firm up this lead to prospective resources and have a CPR on the figures though so I am very cautious.

Ultimately, for me I would not be considering an investment here until I see a clear timeline towards a booking resources or reserves on Horse Hill. To me one major bottleneck will be building the onshore facilities needed to extract the oil, this discovery with where it is located I cannot see extensive facilities gaining planning permission, at least without a lengthy process. Just look at how close we are at getting a third runway in the south east, extracting 700m barrels of oil in Sussex will be equally as protracted in my opinion.

Sound Energy
I have not included this company on the chart above as it is so far off the chart, its current resources are priced in at $586 per Boe! However, none of its recent discovery in Morocco is included in prospective resources or contingent resources, again I would be looking to understand when work can be done to move this discovery into these categories before jumping in here. Watch closely but not a BUY in my opinion.

Summary

You should never only look at Enterprise Value vs Reserves & Resources when making investing decisions but this screening method can identify over and undervalued companies, as long as you are prepared to understand what additional factors which may be behind valuations.

Disclaimer – I have a position equal to 2% of my net assets in Genel Energy. I have no further positions in any of the other stocks mentioned and to my knowledge nor do any close family, friends nor associates.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

Why I believe Gulf Keystone is 50% overvalued at 5p a share

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


The recent restructuring announcement is close to giving Gulf Keystone a potential fresh start without being saddled by a debt mountain. Once the darling of the AIM market with shares trading at around 400p at their peak, today though they sit at 5p. Is this though still too high? Also what does the recent DNO offer imply?

This share is heavily dominated by private investors and the complexity of debt for equity swaps and the effect on the investment is not straight forward. The full terms can be found at gkp restructure.

I’ve included some calculations below, allow me to talk through them.

GKP DE Calcs

Part a) simply show the expected number of shares to each party post the restructuring. This information is calculated based on the GKP restructuring RNS.

Part b) shows the enterprise value based on current share price.  I have calculated an effective price to retain the same enterprise value as 2.05p. So assuming no change in the Macro environment or any company specific news we can expect the price to fall to 2.05p all other things being equal on the date of the restructuring.

Part c) goes on to calculate the effective cost of 1 share assuming you buy at today’s price in the open market and fully exercise your open offer rights. This gives you an underlying cost of one share of 2.15p, this is below the expected enterprise value 2.05p so theoretically by buying today you are taking a punt on improved oil price etc.

Part d) this is the most interesting calculation. The noteholders can keep selling their shares all the way down to 0.86p and still be in the money, i.e. fully recover the debt that has been converted to equity. If the noteholders can sell a tranche of shares above 0.86p, they may well settle for selling tranches below 0.86p.

How low will this share go?

The above is purely theoretical but does set the context. Bondholders are unlikely to want to hold equity investments for very long, you can imagine they are already working behind the scenes to look for buyers. These shares won’t hit the open market, they will be negotiated with a series of equity investing institutions or perhaps more likely a rival oil company, as mentioned above I see DNO have already made an approach.

Here is the important part, all that has to be offered is to the noteholders is an offer > 0.86p and the buyer can obtain 65% of the company. Under UK Takeover law they need 75% of shareholder support to force through a takeover, so only another 10% is needed….enter the convertible bonds owners with 20% of the company. Their breakeven point is 5.75p a share, however these bonds have been trading as low as $13, i.e. a 13% return on initial investment, this represents 0.74p a share. If they were offered 1p and it could well be enough to get these guys to sell too…The DNO offer on 29th July offered just that, in fact a little over 1p.

The verdict

Those buying in the secondary market today are risking a potential 50% loss. The only thing which would justify this risk is if a rival bidder came in. This to me is highly unlikely, Kurdistan is not a place where I can see new entrants to the market, which leaves Genel as the only other possible bidder. This company if anything is probably looking to decrease its exposure to Kurdistan, even if it had  $300m+ to spend on assets (it doesn’t) then I imagine this will not be spent on increasing its Kurdish exposure.

My belief therefore is the DNO offer will be accepted after the restructure. This sadly means the dreams of riches from the Gulf Keystone private investor base will be extinguished forever. RIP.

SELL – Target 1.5p

Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.

88 Energy – Who were the Institutional Investors?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


On 22nd April 2016, 88 Energy raised A$25m (£14m) through a placing of some 715 million shares. This was an increase to total the number of shares in issue by 22%. 88 Energy took delight in informing us of the ‘high calibre of the proposed investors’. I have highlighted the parts from the RNS on that day:

88e Placement Extract 1

88 Energy went even further by specifically mentioning institutional investors:

88e Placement Extract 2

Let me ask a question, what does the phrase ‘institutional investor’ mean to the typical private investor? Are you picturing BlackRock, State Street or some other ‘high calibre’ long term investor? Did you think ‘Great! If these guys backed this placement then that should give your typical private investor some confidence right?’

So why then in the four months since the placement have we seen no ‘TR-1’ forms filed as RNSs? The share capital has increased by 22%, you would therefore naturally assume that if any institutions had taken part and retained their holdings then at least one would have surpassed a 3% holding, whereby a TR-1 should be filed. A quick check of the shareholder register (Source: 88 Energy Website) confirms my suspicions:

Capital Structure

Top 20 Shareholders as at 13th May 2016

Rank Name Balance % of Total Units%
1 HARGREAVES LANSDOWN (NOMINEES) LIMITED 276,948,113 7.11
2 BARCLAYSHARE NOMINEES LIMITED 238,282,131 6.12
3 HSDL NOMINEES LIMITED 201,774,421 5.18
4 HARGREAVES LANSDOWN (NOMINEES) LIMITED 185,512,950 4.77
5 HARGREAVES LANSDOWN (NOMINEES) LIMITED 172,012,530 4.42
6 TD DIRECT INVESTING NOMINEES (EUROPE) LIMITED 170,569,345 4.38
7 HSDL NOMINEES LIMITED 115,265,654 2.96
8 HSBC CLIENT HOLDINGS NOMINEE (UK) LIMITED 91,418,190 2.35
9 INVESTOR NOMINEES LIMITED 88,304,241 2.27
10 TD DIRECT INVESTING NOMINEES (EUROPE) LIMITED 82,519,208 2.12
11 SHARE NOMINEES LTD 77,535,063 1.99
12 INVESTOR NOMINEES LIMITED 73,687,281 1.89
13 NATIONAL NOMINEES LIMITED 51,697,564 1.33
14 J P MORGAN NOMINEES AUSTRALIA LIMITED 51,575,912 1.33
15 CHASE NOMINEES LIMITED 46,703,299 1.2
16 JIM NOMINEES LIMITED 44,827,954 1.15
17 CITICORP NOMINEES PTY LIMITED 43,022,753 1.11
18 ELOTEN GROUP LTD 40,000,000 1.03
19 CHASE NOMINEES LIMITED 36,546,860 0.94
20 LAWSHARE NOMINEES LIMITED 34,264,399 0.88

The major shareholders are all nominee accounts, i.e. private shareholders using a third party broker.

So using the terms ‘high calibre’ and ‘institutions’ looks to me like nothing more than PR guff. The ‘institutions’ that took part in this placing, which was at a 14% discount to the share priced on 22nd April, i.e. 1.90p placing vs 2.20p market price we must assume to have flipped their subscriptions straight into the open market. I can’t see any evidence of intuitions in the top 20 shareholders, note ELOTEN GROUP took place in a prior placing and appears to be a BVI registered vehicle

The questions I have therefore are: 1) Were PIs suckered in to buying based on ‘institutional investors’ to support the share price whilst these ‘institutions’ flipped the stock? 2) Did 88 Energy have awareness that those taking place in the equity raise were flippers? 3) If so why did it use the misleading language above? 4) Why were existing shareholders not able to participate in this discounted issue through open offer?

I actually like 88 Energy as a company and I believe it is probably one of the best speculative resource stocks on AIM at present. CEO Dave Wall comes across well and there is an exciting news flow due over the next 12 months.

I’m not going to give an overall verdict on this stock but it would be nice to see a much fairer and clearer approach to 88 Energy’s next fund raise.

IGas – in trouble?

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


IGas is currently 17p a market cap of £51m, off the recent lows of circa 10p and I’m curious as to why this stock has bounced of late.

The driver I believe was based on some comments made from the government around giving more direct benefit to those in the community affected by fracking. Theoretically a supportive government should make things a lot easier for iGas once it is able to start sweating its assets.

IGas problem though is that it is years away from monetizing its shale assets, indeed its first exploration shale wells are not expected before 2017. Whilst it does have $255m of carries on its development pipeline it is operating very close to its financial covenants on its bonds. Cash was around £22.5m as at the end of April, but note 2016 CAPEX guidance of £10m and a further £10m of Interest payments due. With limited cashflow generated from operations then IGas could be out of cash by the end of the year or perhaps Q1 2017, based on my calculations.

IGas does have options which don’t involve the secured bondholders, 1) M&A, i.e. the whole company or individual assets and/or 2) an equity raise. Taking option 1 – IGas has £255m of Assets on the balance sheet, however buyers for UK oil and gas assets are limited and unconventional exploration I view as being unattractive at present. An equity raise I think is the more likely of the two options, this equity raise should partly be used to pay down a good chunk of the debt. Given the current market cap is £51m then a huge equity raise would be required, this would have to be at a discount to current market price to get it away.

With all of the above in mind it is no surprise to see the bonds trading (albeit illiquidly) at 78c in the $. There is also the mystery bond buyer, someone has been building a stake in the bonds which means we shouldn’t be surprised to see some sort of hostile move if and when the financial covenants are breached. The likely outcome is a debt for equity swap and in this scenario, equity is worth little or nothing, a token gesture could be offered to shareholders to ensure orderly proceedings. Look at Petroceltic or Gulf Keystone for an example of what is likely to happen.

SELL
Target <5p

Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.