Lansdowne Oil & Gas (LON:LOGP) finished a massive 26% up today. The company confirmed in a morning announcement that they had found a farming-out partner (APEC consortium – a privately owned Chinese co.) and that the partner would be willing to fund all drilling of their main asset – Barryroe Oil field. Investors were clearly happy with the news and by the end of the day the market cap of the company had closed at roughly ~£12.5m. The deal appears to be a good one, but can the company survive to realize the value of the deal?
Lansdowne Oil and Gas has interests in 2 standard exploration licenses in the North Celtic region. The company’s main asset is the Barryroe oil field of which the company has a 20% stake. The overall license duration of Barryroe is until July 2021. The other 80% of Barryroe is owned by Providence Resources PLC (market cap ~£66m)
Let’s dig into the deal that was announced today though to determine if the deal is truly one of value and a game-changer:
The Deal
It appears that the APEC consortium has agreed to provide financing for the all costs associated with the drilling of Barryroe as a resource. However, APEC’s stake in the asset after the deal is inked would be 50%; the other 50% would be split between Providence Resources (40%) and Lansdown Oil & Gas (10%). With this in mind, APEC would be responsible for 50% of the costs of drilling/bringing Barryroe into production whereas Providence + Lansdowne would be response for the other 50%. In Lansdowne’s case, the cost would be 10% of total costs, and APEC has agreed to supply a loan to Lansdowne so that Lansdowne does not have to worry about supplying the cash upfront.
Loan terms
Interest rate of Libor +5% – a bit high – but not entire unreasonable
Repayable from production cashflow
APEC being entitled to 80% of production cashflow from SEL 1/1 until the loan is repaidT
The loan terms are interesting. The loan to Lansdowne is to be repaid via the production cashflow of Barryroe, meaning that there is no real risk to Lansdowne if the oil field does not ever come into production; at least, this appears to be the implication. As more details of the deal is revealed, the actual terms of the loan will become known. In short though, at this early stage, it appears that APEC may be taking on most of the risk of the drilling.
However, it should be noted that the deal is not done and dusted. The deal is expected to occur in Q3 2018 and is subject to approval of both the Minister of State at the Department of Communications, Climate Action and Environment and the Chinese government.
Nevertheless, the Lansdowne CEO is definitely talking up the deal vs the company’s valuation in saying
“The third party funded Drilling Programme will look to convert a sizeable amount of these resources in to proven and probable (2P) reserves ahead of subsequent development and production. With a current market cap of just US$10M, Lansdowne’s valuation equates to less than US$0.3 per contingent barrel for its 10% ownership.”
The Risks
The deal sounds great, but my main question is – does Lansdowne have enough cash to see through the next few years in order to realize the gains from the deal? At this time, the answer appears to be no.
It’s no secret that the largest stakeholder (Brandon Hill Capital Limited) lent £350,000 to the company last year. The company was clear in its guidance that the £350K would have been enough to fund it to the end of Q1 2018. Well, we are at the end of Q1 2018 now, so where is the cash going to come from to continue running the company? BHCL have signalled their willingness to lend further cash to the company but this is not a certain thing. If the company does not secure a loan, it may need to issue shares – diluting current shareholders. This may not be such a bad thing if the valuation stays around the current £12m market cap. The company has confirmed a burn rate of about £30,000 a month and issuing £1m worth of shares would allow the company to continue to run for the next few years with less than a 10% dilution of existing shareholders.
There is one other red flag I’m not happy with though. A quick look at the interim results for June 2017 shows that the majority of the assets for the company were intangible assets (£14.5m). Current assets only totalled £57k vs on the current liabilities at roughly £2.2 mln, £57k vs £2.2 mln. Not good. How can a company fund its liabilities with such a mismatch?
If guidance comes out in the near future suggesting where future cash will be coming from, it would give much comfort to investors. But as it is now, the cash position leaves much to be desired. In many cases in the stock market, low cash positions have brought many a large company to abrupt ends. After all, with the last financial crisis, banks ran into trouble not because they weren’t asset rich, but because they just didn’t have enough cash to weather the storm.
As the saying goes, Cash is king.
Summary
I believe that this deal is a great one for Lansdowne, but my concern here is the lack of cash. Until confirmation is given about cash, I’m a bit wary of the prospects of the company. If cash had to appear however, I believe that the upside potential for Lansdowne is significant.
As always though, please do your own research before buying/selling this share; the opinions above are only my personal views.
