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SacOil rebirth continues as it eyes vertically integrated business

Published: 22:52 07 Jul 2016 AEST

A drill rig
Drilling for the black stuff. SacOil's re-jigged portfolio now boasts revenue-generating production and oil trading

SacOil Holdings Ltd (LON:SAC) today and the company two years ago are completely different animals.

Gone are risky, expensive exploration assets in Nigeria, requiring a financial commitment of US$60mln.

The re-jigged portfolio now boasts revenue-generating production and oil trading.

There is a coherent plan to turn SacOil into a vertically integrated business.  The intention is to add in downstream activities; indeed the firm is looking at refining and retail opportunities in South Africa.

There is also a little blue sky in the form of its partnership in the Democratic Republic of Congo with France’s Total, which could end up transformational.

And of course SacOil is still sitting on other exploration licences in Malawi, Botswana and Equatorial Guinea.

The author of this blueprint is Thabo Kgogo, a former executive with South Africa’s national oil company PetroSA, who has some big plans.

“We have put together quite an aggressive strategy to grow the business,” he told Proactive Investors.

Lagia is first foray into production

The Lagia development lease in Egypt, acquired in 2014 for US$14mln, represents the company’s first foray into production.

Host to an estimated 11mln barrels of heavy oil, 6.9mln of which are in the 2P category, Lagia was producing a paltry 20 barrels a day when SacOil took it over.

After using hydraulic and thermal recovery processes its 10 wells churned out 1,000 barrels a day in February. At the current oil price the acreage breaks even.

But as costs fall and the oil price rises above US$50 a barrel, so the economics of the operation improve radically.

The plan is to choke back Lagia’s output to 600-850 barrels until the crude price starts to nudge decisively above its current levels.

Kgogo and his team are looking for producing assets in West Africa including Gabon, Ghana and Nigeria, and East Africa including Tanzania to augment the output from Egypt.

Sellers becoming more realistic 

The SacOil boss says sellers are becoming more realistic with their valuations, meaning the list of opportunities is growing.

At the last results it had US$6.8mln on the balance sheet. But it has some heavyweight backing in the form of the Public Investment Corporation, South Africa’s biggest institutional investor, and SacOil’s major shareholder with 42%.

“Their vision is the same as ours - to create a big oil and gas company. They have the resources and they are ready to back us,” said Kgogo.

Also, being debt free, SacOil could arrange reserve-based lending facilities to fund deals. So there is plenty of headroom to grow.

In Nigeria it is part of an oil trading joint venture with a local partner that was awarded its first oil allocation by the country’s national petroleum corporation NNPC.

A 950,000-barrel consignment should generate around $1 per barrel for the partners. “It’s a margin business where there is no risk as we on-sell to the market,” said Kgogo.

The transformation to fully integrated oil company will occur when the company acquires downstream assets such as refining and petrol retail businesses. As mentioned above the focus of the search is South Africa.

“We know some of the IOCs [international oil companies] want to sell,” said Kgogo.

A sleeper in the portfolio

The sleeper in the portfolio (and an asset inherited by the current SacOil management) is the company’s 12.5% stake in Block III in the Democratic Republic of Congo.

There, the operator is Total and the licence is a continuation of the rift play just over the border in Uganda that is host to an estimated 1.5bn barrels of oil.

Progress is being made that could unlock milestone payments of up to US$29mln from the French giant.

A programme of 2D seismic was recently completed. The data is being worked on along with other historic information in order to identify the most promising drill targets.

It is hoped Total will have a list of prospects to present to the DRC government by the end of this year with a view to drilling a well at some point in 2017.

The discovery of oil will trigger the first of two windfalls for SacOil, with the second coming at the point Total makes its final investment decision to develop Block III.

“There is potentially big upside for investors, which is why we are in the block for the long term,” said Kgogo.

Broker restarts coverage

The company’s broker, finnCap, recently restarted its coverage of SacOil with a 2.7p a valuation – roughly triple the current share price.

Analyst Dougie Youngson has been impressed with the strides made by Kgogo and his fellow directors in a relatively short space of time.

“SacOil’s new management team has delivered on its new strategy over the past two years: the company has successfully developed its first production project, which has the ability to generate substantial value as the project is expanded further,” he said.

“It has also built up an extensive exploration portfolio across three countries.  Furthermore, SacOil is active in the downstream and is examining multiple project-led opportunities to expand its presence and ability to create value.”

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