Cashflow Earnings from the Kiliwani North Gas KN-1 Well, Will Be A Major Value Catalyst for Solo Oil & Gas

Solo Oil plc (AIM:SOLO)

Patience Will Pay Off & Soon

Why the completed gas pipeline from the Songo Songo processing plant to the Kiliwani North Gas KN-1 well is such a significant value catalyst

Songo Songo Island sits 15 kilometres from Tanzania’s mainland. Gas was first discovered there in 1974 by the Italian oil company AGIP (now ENI). It took thirty years of huge investment by the government of Tanzania and its international financing partners including the World Bank, to help get the hydrocarbon processing, pipeline infrastructure, processing and power plant in place that laid the foundations to enable commercial gas production to start flowing in 2004 and served as a major catalyst in attracting a raft of international oil and gas companies to Tanzania.

Investment in Tanzania’s hydrocarbon processing and transportation infrastructure still continues to take place and at pace. The Chinese have recently completed the construction of a gas pipeline from Mtwara to Dar es Salaam, which will enable gas from the Mnazi Bay production area to be transported up to Dar es Salaam and where the large Ruvuma discoveries can now be monetised, given that the 36” diameter pipeline runs right through the onshore Ruvuma and Mtwara oil and gas fields.

This is good news for Solo Oil (AIM:SOLO) and AMINEX (LSE:AEX) who are the two partners in onshore Ruvuma and where the completed gas pipeline runs just 20 kilometres from the Ntorya-1 discovery well.  Ruvuma is the “BIG ONE” and it is just a matter of time to when the massive value of Ruvuma, with over 100 TCF in offshore discoveries to date, is unlocked.

But it is back on Songo Songo Island where Solo and AMINEX will begin to reap the rewards of over forty years of massive infrastructure investments by the government of Tanzania and its international financial partners. In just a matter of weeks, approximately 20 million cubic feet of gas per day will start flowing from the Kiliwani North KN-1 well to the Songo Songo gas processing plant. This is a facility that has a capacity to process between 1.98 MMcm/d (70 MMcf/d) and 2.97 MMcm/d (105 MMcf/d)

Gas from the KN-1 well, following processing, will flow through a 12 inch pipeline that runs 25 km (15 miles) from Songo Songo Island to the Somangafungu onshore processing facility where it is then transported another 207 km (129 miles) by a 36 inch pipeline to the Ubongu power plant in the Tanzanian capital, Dar es Salaam.

London listed AMINEX is the operator of the Kiliwani KN-1 well, Solo has a 6.5% interest but with an option to increase that interest by a further 6.5% to 13%.

For Solo, the company will initially be earning cash flow from sales of 39,000 MMBtu per month (39 million cubic feet of gas per month as part of their 6.5% stake) at a NYMEX price of 2.73$ MMBtu this would give Solo free cash flow of circa $106,470 per month. Should Solo exercise their option to increase their stake in Kiliwani to 13% (78,000 MMBtu per month) then this figure would double to $212,940 per month.

Solo will make the transition from explorer to producer in a matter of weeks and where these cash flows will have an immediate impact on the valuation of the company. For example if the option to increase their stake in Kiliwani is exercised by Solo, the cash flow earnings in the first year would increase the valuation of the company by at least 5.8% taking the market capitalisation to a figure closer to £32 million.

Clearly the markets are negative at the moment on oil and gas equities, but like the infrastructure in Tanzania, Solo and indeed AMINEX are as safe a bet as you can get. The current share price of Solo and AMINEX does not fully reflect the impending value increase from Kiliwani’s earnings and indeed the massive value of Ruvuma which like those early investors in Songo Songo, will at some point deliver alpha returns and where patience will eventually pay off.