Victoria Oil & Gas Plc (AIM: VOG) today provides shareholders with an update on trading and operations. The text of a letter from Kevin Foo, Chairman and Interim CEO, is set out below.
Last week was a challenging one for VOG and its shareholders. Like many shareholders, I am concerned about the weak share price which I believe grossly undervalues our business. In less than four years, our Company, backed only by its shareholders, has succeeded in drilling two complex wells, installing gas processing facilities for 20mmscf/d, laying 22km of pipeline, selling gas and collecting revenue.
I would like to take this opportunity to remind you again of the key fundamentals of the Company and the reasons why we believe that your long term support of the Company is justified:
- Our key objective is to build our business and cash flow from our flagship Logbaba gas deposit in Cameroon to fund further expansion and acquisitions in Africa;
- We are a producing natural gas and energy company that is generating revenue which we expect, in November 2013, to be profitable at an operating level. This places us as a mid-stream business - we are no longer an exploration company;
- The Company’s Logbaba natural gas and condensate field is estimated to hold sufficient proven and probable reserves to supply an average 20 mmscf/d for the next 30 years to industrial customers;
- We have been supplying gas on a continuous basis since June 2012 without interruption and we currently have 19 customers on line;
- We are in the fortunate position of being neither demand nor supply constrained and as we have said before, VOG was the first ever commercial onshore gas producer in Cameroon and we currently have no competition in country;
- We have the full support of the Government of Cameroon at all levels and are working actively with our partners and our customers to accelerate the demand for additional energy and power into Cameroon industry. Ninety five percent of our total workforce of 128 people is Cameroonian; and
- We are at the forefront of an energy revolution in Cameroon and the Central African region. Customers now have the choice to switch to a lower-cost, cleaner source of fuel for the first time. Being first mover is hard and we still have much to do before the gas market in Cameroon matures, but we are in the enviable position of owning and operating not only the supply, but also the transmission network.
I acknowledge and take responsibility for missing a number of deadlines and targets. This was due to numerous factors, many of which were beyond our control, but we have also made mistakes along the way.
Nevertheless, we set these targets and a salient lesson we have learned is to expect hurdles and to allow lots of time to overcome them. As pioneers, blazing a trail to consistent gas supply and revenue generation in Cameroon has been a hard and extremely complex one.
With the departure of John Scott, we are taking the opportunity to restructure VOG and make a number of project management and operational changes. I shall be taking over as interim CEO until such time as we have found a suitable replacement. We have engaged a highly respected Executive Search firm to help find us a CEO and two non-executive directors to balance and strengthen the board.
We are going forward with some traditional business principles:
1. Quickly turn revenue into profits. We need to turn current revenue streams to substantial cash generation. As part of this we will be maximising efficiency and lowering costs by reducing use of rental equipment and processing plant, streamlining procurement and reducing administrative personnel.
2. Aggressively build our market. Our internal studies show the industrial customer base within reach of our planned pipeline could grow rapidly to very large consumption within the next five years. We need to secure this potential.
3. Our hard earned expertise is invaluable. To our knowledge, no other independent company in the region has brought a gas project through from drill bit to burner tip. This knowledge base can be replicated across the region and provide us with an immediate advantage in undertaking similar projects. In this respect we are in discussions with several large gas generator set suppliers who share this vision and are willing to form strategic alliances with us in Cameroon and other African countries.
4. Preserve the highest standards of safety, environmental compliance and corporate governance. Pursuing economic targets at the cost of lower standards is unsound and wrong.
These pillars will underpin our strategy for the coming year. We will also be improving communications with shareholders to keep you regularly updated with our progress. Many of you have requested more information, and we will supply this, subject to AIM Rules, starting from the release of this report. We shall also revamp our web site and embrace Social Media as appropriate. We shall of course be extra careful in our production and profit projections!
LOGBABA GAS PROJECT OPERATIONAL UPDATE
A. New Chief Operating Officer and Senior Executives
Mr. Mark Wilson has joined the Rodeo Development Limited (“RDL”) team as Chief Operating Officer and is primarily tasked with ensuring delivery of gas to customers as a priority. Mark is a very experienced operations officer with over 35 years’ experience in the resources and energy sector. Our pipe laying performance this year has been poor but during the short time Mark has been in Douala, he has achieved many goals, including:
- Operating 3 augers simultaneously in the pipe laying process to expand the pipeline network and reach to new customers including SABC brewery;
- Laying minimum of 400 metres of pipe on a weekly basis which has been achieved for the past 3 weeks. Mark has challenged his team to lay this quantity every week as the pipeline rolls out; and
- Restructuring RDL and its operations, including empowering and motivating staff through the simplification of reporting lines and reorganizing departments. This has resulted in a significant number of redundancies, 15% in cost savings so far and focused support of construction.
RDL has also made new appointments of Chief Financial Officer, Director of Marketing and Head of Procurement.
B. Pipeline Rollout
Our 400mm diameter pipe is being laid in a functioning industrial city of 2.5 million people, and there are many challenges in terms of unmarked utilities and permitting requirements.
At current productivity levels, up to 5.6km of pipeline is expected to be laid within the balance of 2013. This will bring the RDL gas pipeline network in Cameroon to 27.6km in total.
The plan was for the pipeline to go under the Wouri River in Q4 of this year but we have experienced delays in completion and approval of the Environmental Impact Assessment (”EIA”). As soon as permits are received, the team will install 1.2 km of pipeline in a “single shot” 15m under the river bed and then a further 16.3km of piping north of the Wouri River.
Currently RDL has 19 customers. Due to delays in pipeline rollout and delivery of gas fired generators (“Gensets”), there has been a delay in connecting more customers. These issues have now been resolved and we have seen a marked improvement in performance. We have strengthened our sales team who are actively seeking more customers along the existing pipeline.
The planned pipeline network (which will shortly be available on the Company’s website) shows the existing pipeline network of 22 km and 21 km of proposed pipeline network. We are confident that as the network spreads through Douala, more customers will be added, given the reliability and savings to be achieved using gas fired power generation.
Five Gensets with a capacity of 1.5MW each have arrived in Douala, and are expected to clear customs after some permitting delays. These have been allocated to Guinness, Icrafon, part of the Toyota Group and SCTB (a flour mill). All units will work 7 days a week and have a relatively flat load. The next batch of 4 units will also be ordered and are scheduled to be installed by year end. Customers have been identified for the first 14 Gensets, providing over 20MW of power, which VOG has already sourced and contracted from Energyst.
The RDL business development team is identifying various industries where the use and supply of gas could be increased in Cameroon. One of these areas is the conversion of natural gas to compressed natural gas (CNG) for use in the transportation industry. This allows gas to be delivered to markets out of reach of our pipeline.
D. Gas Distribution and Production for 2013
Achievement of our 12mmscf/d target has slipped into next year. That forecast was largely based on four significant projects that will consume 9.66mmscf/d but are delayed for various reasons as detailed below.
1. A large foundry: Ongoing plant expansion needing 0.4mscf/d for thermal and 10MW of base load power will not be completed before the year end. The foundry will go offline in December as it reorganizes its facilities and is planned to be back on line in January 2014. RDL has completed the pipeline network to this site.
Deferred Production: 2.5 mmscf/d
2. Cement Plant construction to use 10MW of power: This company has undertaken significant construction work and RDL has commenced the 1.6km pipeline to connect them to the network. This pipeline also takes us to the Wouri River crossing launch site. Our pipeline will be constructed by the end of November however the cement plant is now expected to be operational in Q2 2014.
Deferred Production: 2.16mmscf/d
3. Wouri River crossing and access to Bonaberi customers: Completion of the EIA and local consultation process to obtain regulatory approval to install the gas pipeline under the river bed is ongoing. We targeted this to be available by late October with customer access by the year end but it is unlikely that we will receive all approvals in that timeframe and therefore the pipeline may not be laid under the river until Q1 2014.
Deferred Production: 0.7mmscf/d
4. 20MW power station 1.6km from our gas plant: Discussions with Government Ministries and the operator have been ongoing. We aim to install 20MW of temporary power at this substation for 12 months whilst the existing underutilized diesel generating capacity is converted to gas. This will result in cost savings and a quick increase in the country’s generating capacity ahead of the dry season ending in March. Given the existing infrastructure it will only take 8 weeks to construct and commission this plant. With some extra effort and support from the Government there is a chance that this project could be online by late 2013.
Possible Production: 4.3mmscf/d
Ongoing power outages in Cameroon, resulting in plant stoppages and shutdowns and unauthorized use of waste oil by some customers has also eroded our targets.
New Projected Production Ranges 2013
Based on current consumption of 2.4mmscf/d and further scheduled connections between now and year end, the forecast daily consumption of gas is expected to increase to between 3.6 and 4.8mmscf/d year end. If the Power Station project is completed this year, this will add a further 4.3mmscf/d to daily consumption for a total of 8-9mmscf/d.
E. Revenues & Cash
Production has increased from 2.0mmscf/d in July to 2.4mmscf/d currently and will increase to 2.9mmscf/d in a matter of weeks when a brewery comes on line. At this point RDL will be operationally cash positive. We have also undertaken a number of cost saving measures and other cash generation initiatives across the Group.
As RDL production passes through 4.8mmscf/d of gas, revenue will increase to about US$1.84 million per month net of royalties. With an average monthly operational “burn rate” of US$1.1 million per month, this will render RDL a profitable business.
We believe that the Company will then be in a position to grow organically through cash-flow, rolling out its pipeline network and connecting new customers without having the need for further equity funding. In due course, the Board will seek additional funding for expansion plans and further exploration to secure additional reserves beyond the Logbaba project.
F. RDL and RSM Arbitration Case
The ICC has advised us that they expect to hand down the Award in the RSM vs. RDL arbitration by the 31st of October 2013. We remain confident that we will prevail but in the unlikely event that the Tribunal were to find in favour of RSM such that its interest were not forfeit, RSM would then be contractually obliged to:
- Pay all outstanding debts and cash calls to RDL, currently this figure stands at approximately US$20 million;
- Pay all future cash calls for the project or risk forfeiture; and
- Permit RDL to recoup approximately $65million of drilling costs before RSM can claim its share of profits. This is projected to be in late 2016.
WEST MEDVEZHYE OIL AND GAS PROJECT, RUSSIA
Our 100% owned West Medvezhye (“West Med”) block lies adjacent to the Yamal Peninsula in North West Siberia. It is one of the most prolific oil and gas producing regions in the world and neighbours the giant Medvezhye and Urengoy fields. West Med covers 1,224 km², and has a discovery well, Well-103, with “C1 plus C2” reserves of 14.4 million barrels of oil equivalent (“boe”) under Russian resource classification system.
In addition, the West Med acreage is assessed to have best estimate prospective resources of 1.4 billion boe comprising 670 million barrels of oil and 730 million boe of gas and condensate.
In August 2012, the Company received approval from the Russian Ministry of Natural Resources for its development plan for an early production scheme for Well-103 and the surrounding area. Based on our geotechnical work and a seismic attribute analysis from wells in adjacent acreage carried out by Mineral LLC, the Company believes that Well-103 was drilled on the edge of a significant structure. The next drilling campaign, if in line with management expectations, would be expected to lead to a significant reserve upgrade in the Upper Jurassic as well as the Lower Cretaceous Achimov layers.
Our updated work programme was presented to the Yamal District regional petroleum authorities in Salekhard on 20 February 2013. We have chosen to delay the next drilling campaign which we expect to target the Jurassic discovery horizons successfully encountered by Well-103 and also new hydrocarbon potential horizons in the Achimov layers identified as part of the study carried out by Mineral LLC.
Early this year the Company announced the appointment of Renaissance Capital (“Rencap”) to assist it in evaluating its various strategic options in relation to its 100% interest in West Med. Having completed this exercise with Rencap, the Company has proceeded to run a “limited auction” process to a selection of pre-screened companies. A number of these companies continue to review and work with the West Med data.
DEBT FACILITIES AND OTHER FINANCING OPTIONS
We are in the final stages of credit approval for a new working capital facility. In addition a bridge funding solution using a bank guarantee and an equipment finance house is also in the approval stage. The Societe Generale Reserve Based Lending facility remains a viable long term debt option for the Company as sales increase.
The Preliminary Announcement of the Company’s annual results for the year ended 31 May 2013 is scheduled to be released in the week commencing 21 October 2013.
I would like to thank all shareholders for their attention and support.
Chairman & Interim CEO
9 October 2013
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