- Farm-out in Morocco close to concluding
- Drilling on nearby Loukos licence to start early 2024
- $19mn equity raise at 14p in July 2023
The key take from Chariot’s (CHAR:14.75p) interim results is that the Africa-focused energy group is close to concluding 'farm-out' negotiations on its flagship Anchois gas development project in Morocco.
Around 40 companies are interested and Chariot has received multiple offers from significantly larger exploration and development (E&P) companies. The offers are based on an upfront cash payment and Chariot retaining a material stake in both the offshore Lixus and Rissana licences, in which the Anchois project is based.
Analyst James McCormack at house broker Cavendish believes that “any farm-out may provide the financing of the capital expenditure to first gas, materially reducing the risk of dilution to shareholders”. However, to provide optionality for the project financing, the directors have lined up a debt consortium of European and Moroccan banks with investment bank Societe Generale.
Importantly, the front-end engineering design (FEED) phase of the project has now been completed, and the environmental social impact assessment is close to being finalised for submission to the Moroccan authorities for approval. It means it is nearing the point of the final investment decision.
Bearing this in mind, Chariot’s management team has been progressing discussions with Office National de l'Electricité et de l'Eau Potable (ONEE) to supply gas directly into the gas-hungry domestic market. The signing of a binding gas sales agreement (GSA) with ONEE to supply up to 60mn standard cubic feet per day (scf) of gas over a 10-year period on a take-or-pay basis is critical. That’s because it not only underpins project financing, but it allows additional expansion as the project develops.
Within Lixus, significant volumes of gas can be unlocked through further drilling. Three key prospects have been identified, all of which could be potential future development hubs and have tie-in capabilities with the planned Anchois infrastructure. At Rissana, Chariot’s team has mapped giant prospective plays with 2U estimates of 7Tcf, independently assessed by Netherland Sewell and Associates.
Chariot’s directors are also in discussions with European entities interested in signing export agreements. That’s because Anchois has an additional 45mn scf of spare ullage, of which some of the spare capacity could be used for export into the European gas market through Spain.
End game of Anchois farm-out process
Admittedly, it has taken time to reach this stage, but an imminent 'farm-out' announcement could be a game-changer for shareholders. It would enable the group to recoup some of the $50mn (£39.2mn) spent on the project and materially de-risk its retained interest.
A successful farm-out is likely to be the catalyst for a major re-rating given that Chariot’s market capitalisation of £148mn is less than 25 per cent of Auctus Advisers’ unrisked valuation of $839mn (£676mn) for the Anchois project. The valuation is based on Anchois’ 1C contingent resources of 365bn cubic feet (bcf) and 2C contingent resources of 637bcf. Both Cavendish and Auctus have a 60p per share core net asset value (NAV) valuation, or four times the current share price.
Drilling programme to start at nearby licence
A farm-out of the Anchois project is not the only newsflow on the horizon. Early next year, Chariot plans to commence a four-well drilling programme on a new onshore Moroccan licence, Loukos.
Located in a conventional, shallow gas play in a basin with a high historic success rate of 80 to 85 per cent and low development costs, it has geological similarities to Chariot's offshore licences, close to existing infrastructure, processing facilities and onshore pipelines for the Anchois gas project. Loukos is well located to supply the industrial offtake market, too, thus offering rapid monetisation of production through Chariot’s recently announced gas-to-industry partnership with Vivo Energy.
Targeting high-graded prospects ranging from 8-18bn cubic feet (Bcf) of best estimate prospective resource potential (Chariot preliminary internal estimates), each well will cost $3mn to drill. A $19mn equity raise in July provides the funding and one that advised supporting at the time (‘A fundraise worth backing’, 12 July 2023). It could be money well spent as McCormack at Cavendish estimates that a 10bcf onshore prospect at an industrial gas price of $11-$12 per million British thermal units could generate gas revenue of $100mn.
Although Chariot’s share price has flatlined since my last article – albeit the holding is showing a 390 per cent gain in my 2017 Bargain Shares Portfolio – it could easily double on a successful Anchois farm-out. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
