There are two ways to value an oil or gas company, one is varying degrees of estimation of the quantity of oil or gas there is in the ground (and the costs to get it to market) and the other is the speed with which they can get it out of the ground once in production. This week, Aminex and their subsidiary Ndovu announced that Tanzanian government approval had been received for the Ruvuma farm out.
They are no doubt dotting the i's and crossing the t's on the legal documents relating to transfer of 50% of the PSA and operatorship to ARA. Aminex started the week with a 75% working interest in Ruvuma, and may end next week with 25% and some cash. Some of this cash will be used to pay back the $5m they've borrowed from ARA over the last 12 months.$2m of this was needed to pay capital gains tax to the Tanzanian Government.
As part of the farm out Aminex will get $5m and will be able to repay ARA and be back to where they started the year. They will also get a total of £1.97m in regular payments over the next 6 months.
Doesn't sound like much so far for selling 2/3 of your gas field does it. Well, as an upstream gas company Aminex are not really geared up to take such a field into production themselves. These projects take years, and looking at a similar one in Tanzania near to the island of Songo Songo there are 100's of millions of costs to get production started. Not least giving two separate $100m contracts to an Indian construction firm Larsen & Toubro, with one of the contracts awarded in 2003. Songo Songo has proven the model for Tanzania and no doubt developed a local gas market. Orca Exploration Group listed on the Canadian Venture Exchange runs operations on Songa Island.
As part of the farm out Aminex will also have their share of the first $140m of costs ($35m) paid for. This sounds a bit like a mortgage in reverse; building something for $140m and owning a quarter of it until 2035. What's the value of that today? I would go so far as to say probably at least $35m, but I'm sure Aminex have some fairly detailed discounted cash flow spreadsheets that show revenues building up in a year or three and a more accurate picture of that value in net present terms.
Valuing an asset like Ruvuma requires access to this data, and hopefully we'll see some of that start to be shared upon signature of the farmout. In the meantime, I thought it would be interesting to look at the value of a future quarter share of Ruvuma in comparative pricing terms with a company such as Orca.
A couple of years ago there was a report published that showed the reseves available to Orca until the end of their licence. This is summarised here, and is 554 billion cubic feet of gas (261+293).
Ruvuma has gas reserves of 3.074 trillion cubic feet of gas according to slide 5 of this presentation
As such on a very simplistic basis and in a year or three when production has got under way, Aminex will have access to 0.25 x 3074 bcf = 768.5 bcf of gas. This represents about 64% more than Orca.
What is Orca worth today? 251m Canadian dollars (£147m).
Using the current Aminex share price of 1.45p and marcap of £55.09m I make a comparative valuation of 6.36p per Aminex share for Ruvuma. Workings [1.64 x £147 = £241.6m. Then, (241.6/55.09) x 1.45 = 6.36p ]
This is of course a simplistic overview of the Ruvuma farm out, I've only been following Aminex for a few weeks. I've no doubt that there is more to Aminex than the 768 billion cubic feet of gas available to them until 2035 in Ruvuma.
As more detail appears, it will be interesting to watch their evolution. I first bought into Aminex at around 0.9p a few weeks ago, then some more around 0.45p. I've bought more in the 1.2p to 1.5p range. Please do your own research, this is not investment advice.
nice write up thank you
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