Imminent drilling in Tanzania gives Solo Oil considerable upside potential

Imminent new drilling in Tanzania offers considerable upside potential to complement Solo Oil PLC’s (LON:SOLO) new found cashflows in the country, so says Shore Capital analyst Craig Howie.

The analyst – who sees Solo’s value about three times higher than the current price – fully expects the drilling of the Ntorya-2 appraisal well on the Ruvuma project to start within the stated schedule, i.e. late in the fourth quarter.

“With the majority of well services already contracted, a December spud date is being targeted, after which drilling is scheduled to take 45-60 days. We were very encouraged to see rig mobilisation underway and look forward to confirmation of spudding by year-end,” Howie said in a note.

Significantly the analyst highlights that the well has been estimated to have a 60% chance of success and that could go a long way to unlocking the project’s resource potential, estimated at some 1.1 trillion cubic feet of in-place gas across the whole area.

Ruvuma is expected to be complete by the second quarter of 2017.

It will be the first of two planned wells, followed by the unsurprisingly named Ntorya-3, which will be an exploration well designed to test what is thought to be test the thickest part of the main Cretaceous play.

Kiliwani North providing cash flows

Howie also highlights that Solo and its partner are now generating cash from Tanzania, following the recent start-up of the Kiliwani North gas field. He notes that the single well operation has been producing since mid-year at under commissioning conditions, ahead an official declaration that commercial production is underway.

“We understand that KN-1 (which originally tested at 40mmcfd) has continued to produce steadily at rates exceeding 15mmcfd and has been producing condensate at up to 150bcpd,” Howie notes.

Condensate production is going into storage, Howie points out, as the partners finalise offtake arrangements.

“In the meantime, although TPDC has yet to arrange a letter of credit and declare commercial operations, we understand that it has been relatively prompt in paying for Kiliwani North gas,” he added.

Horse Hill go-ahead expected in early 2017

Shore Capital anticipates a decision on planning permission for the next phase of work at Horse Hill, near Gatwick airport, will come in early 2017.

Solo has a 6.5% interest in the project, where the next phase is intended to include an extended production test on the most recent well, in addition to a side-track on the existing well and a separate new well.

The idea for this programme is to confirm commerciality and to establish the initial development for the field’s production operation.

Initial appraisal represents the immediate catalyst.

“Appraisal of the project and the generation of near term production revenues are contingent on a successful planning application, but we would highlight the successful receipt of approvals for earlier work (including drilling and flow testing) and the fact that feedback from a public consultation process has already been incorporated into the partners’ plans,” Howie said.

“We are therefore confident that the relevant planning approvals will be received and look forward to the confirmation of this prior to the commencement of the next phase of ground operations.”

Solo’s valuation seen as a multiple of current share price

Shore Capital gives an 0.8p per share valuation for Solo Oil, which compares very favourably with the AIM oil and gas firm’s current price of 0.26p.

The valuation is based on Kiliwani North producing at an average rate of 17.5mln cubic feet over the second half of this year and at the same rate through 2017 – as such it implies re-rating potential once ‘commercial production’ and a ramp-up in volumes materialises.

Based on the current assumptions Solo will, according to Howie, be generating £1.1mln of revenue from Kiliwani North in 2017.

“However, it remains the case that results from Ntorya-2 will be the principal share price driver in the shorter term, in our opinion.”

Other catalysts identified by the broker include the third Ruvuma well and an anticipated revision to the Kiliwani North reserves report.

Howie highlights that Solo’s stake in the Ruvuma project could be seen as ‘overweight’ and as such he sees good scope for industry deals which would boost the company’s financial position.