Eland Oil and Gas
Following swiftly on from Heritage Oil ’s sizeable acquisition of producing assets in the Niger Delta, Alternative Investment Market (Aim) investors have welcomed Eland Oil & Gas (ELA) following a £118m placing which will fund the acquisition of more of Shell’s assets in the country. But this time there is a bit more risk – the assets have not produced a drop of oil for six years and require investment and time before they reach a good level of production again.
Shell exited production in some areas of the Delta in 2006 on safety concerns after attacks by militants became too frequent to justify remaining on the ground. But in recent years President Goodluck Jonathan has received the support of the majority of militants in the region and the unrest has abated somewhat. But nonetheless, investors in Eland need to trust the judgement and ability of its management and their local partners to see their strategy through.
The £118m is being partly put to use paying for 45 per cent of the OML40 licence from Shell, Total and Agip Oil which is being bought by the Elcrest joint venture between Eland, which owns 45 per cent of the JV and local Nigerian partner Starcrest. The licence will be operated by 55 per cent owner Nigerian National Petroleum Corporation (NNPC). The licence is being bought for $154m and brings with it 71.5m barrels of recoverable resources with a further 117m barrels of proven, probable and possible reserves. The exploration portfolio could hold 356m barrels based on 3d seismic data only.
The OML40 licence operated successfully from 1975 until 2006, during which time it produced 43 million barrels of oil and Eland’s management believe it has the infrastructure in place to produce 30,000 barrels of oil per day (bopd). This infrastructure will need to be brought back into service in the coming months with some repairs required to a pipeline. The licence comes with a number of potential exploration assets which will be drilled over the next two years and management believes it can get to 50,000 bopd within four years, starting with a more modest 2,500 bopd. The licence runs until 2019, with an option in place for a further 30 years although exercising this is not guaranteed.
Clearly there are risks with the Eland proposition, some of which are mitigated by the presence of experienced oil executives on its board such as chief executive Leslie Blair and finance director George Maxwell, both of whom served with frontier oil business Addax in Nigeria. Addax was bought by Sinopec in 2008. But there are also concerns about Eland’s ability to execute its business plan in the Delta and the admission document also details three pages of key claims and allegations, most of which have never been proven, against Nigerian businessman Emeka Offor, the founder of Starcrest’s parent company Chrome Group. Mr Offor is acknowledged to be close to senior government officials and a major donor to the ruling party in Nigeria.
IC VIEW:
If Eland dispels such concerns by returning the OML40 licence to production it could have a serious asset on its hands in one of the world’s most prospective oil producing regions with scope for further reserves growth through exploration. Indeed, if the reserves figures prove anywhere near accurate the price paid will appear very keen indeed. Management also wants to use its foothold to bid for more assets when appropriate. Investors reacted positively to Eland’s admission on Monday, bidding the shares up 9.5 per cent to 109.5p but we remain cautious for now. One to watch.
